Chapter 21


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  • Equity securities, commonly called stocks, represent shares of ownership in a corporation . A share of stock is issued for each unit of ownership and the stockholder gets a stock certificate to prove ownership . Bonds are long-term debt obligations (liabilities) of corporations and governments. A bond certificate is issued as proof of the obligation.
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  • Treasury Bills < 1 Year, $1,000 denomination Treasury Notes = 10 years, $1,000 or $5,000 Treasury Bonds = 30 years General Obligation Bonds-Backed by full faith and credit of issuing government Revenue bonds based on a project—toll booths, parking structures, etc.
  • Investors can use bond ratings, letter grades assigned to bond issues to indicate their quality or level of risk. The two best-known rating agencies and Moody’s and Standard & Poor’s. This exhibit lists the letter grades assigned by Moody’s and S&P.
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  • Mutual funds appeal to investors for three main reasons: They are a good way to hold a diversified, and thus less, risky portfolio. Buying shares in a mutual fund lets them own part of a portfolio that may contain 100 or more securities. Mutual funds are professionally managed. Mutual funds may offer higher returns than individual investors could achieve on their own.
  • On an average day, individual and institutional investors trade billions of shares of stock in more than 10,000 companies through securities markets. Individual investors invest their own money to achieve their personal financial goals. Institutional investors are investment professionals who are paid to manage other people’s money. Two types of investment specialists play key roles in the functioning of the securities market. Investment bankers help companies raise long-term financing. These firms act as intermediaries, buying securities from corporations and governments and reselling them to the public. This process, called underwriting, is the main activity of the investment banker, who acquires the security and hopes to resell it at a higher price to make a profit. A stockbroker is a person who is licensed to buy and sell securities on behalf of clients. These investment professionals work for brokerage firms and execute the orders customers place for stocks, bonds, mutual funds, and other securities. Improvements in Internet technology have made it possible for investors to research, analyze, and trade securities online. Lower transaction costs are a major benefit.
  • Securities markets can be divided into primary and secondary markets. The primary market is where new securities are sold to the public, usually with the help of investment bankers. Later transactions take place in the secondary market where already issued securities are bought and sold, or traded, among investors. The vast majority of securities transactions take place in secondary markets. You’ll see tombstones, announcements of both primary and secondary stock and bond offerings, in the Wall Street Journal and other newspapers.
  • The two types of securities markets are organized stock exchanges and the over-the-counter market. Organized stock exchanges are organizations on whose premises securities are resold. They operate using an auction-style trading system. The over-the-counter market is a sophisticated telecommunications network that links dealers throughout the US. The National Association of Securities Dealers Automated Quotation (NASDAQ) is the first electronic-based stock market.
  • The oldest and most prestigious U.S. stock exchange is the New York Stock Exchange, located on Wall Street in New York. About 3,000 corporations are listed on the NYSE, and on a typical day, more than 1.3 billion shares of stock are trade. The American Stock Exchange (AMEX) lists the securities of about 700 corporations. Most firms traded on the AMEX are smaller and less well know.
  • The NYSE trading floor is where all NYSE transactions occur. Each of the companies traded at the NYSE is assigned to a trading post on the floor. When an exchange member receives an order to buy or sell a stock, the order is transmitted to a floor broker at the company’s trading post. The floor brokers then compete with other brokers on the trading floor to get the best price for their customers. Exhibit 21.2 illustrates this process.
  • Improved communications and the elimination of many legal barriers are helping the securities markets go global. Stock exchanges also exist in foreign countries, such as those shown on this slide. The number of big U.S. corporations with listings on foreign exchanges is growing, especially in Europe.
  • NASDAQ National Association of Securities Dealers Automated Quotation system Not a specific institution like NYSE or American Stock Exchange. Examples of securities listed on the Nasdaq exchanges include Apple Computer, Dell Computer, Microsoft, Intel, Nordstrom, and Starbucks. Nasdaq is different from an organized exchange because a number of dealers handle a security and compete, improving an investor’s ability to get a good price.
  • Securities prices rise in bull markets. These markets are normally associated with investor optimism, economic recovery, and government action to encourage economic growth. In contrast, prices go down in bear markets. Investor pessimism, economic slowdown, and government restraint are all possible causes.
  • In 1934, Congress established the Securities and Exchange Commission (SEC) as the main federal government agency responsible for regulating the securities industry. The SEC has five commissioners who are appointed by the president of the United States. The SEC can order that trading of a stock be suspended when a company is under investigation.
  • The Securities Exchange Act of 1934 formally gave the SEC power to control the organized securities exchanges, and in 1964 was amended to give the SEC authority over the OTC market as well. Securities industry violations that lead to SEC investigations are shown on this slide.
  • In response to “Black Monday”—October 19, 1987, when the Dow Jones Industrial Average plunged 508 points and the trading activity severely overloaded the exchange’s computers—the securities market instituted corrective measures to prevent a repeat of the crisis. Under certain conditions, circuit breakers stop trading for a short cooling-off period to limit the amount the market can drop in one day. For instance, NYSE circuit breakers stop trading for an hour if the DJIA drops 250 points and two hours if it falls another 150 points.
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  • Company financial statements. All publicly traded companies are required by the SEC to file regular statements about their current financial status. Economic and financial publications. See next slide for list. Online information resources. “Buyer beware” is appropriate advice when using investment information from the Internet. However, a list of valuable investment resources are shown on slide 30. Security price quotations. Quotes in the Wall Street Journal and other financial media provide a wealth of current information, such as the previous day’s trading activity. See slide 32 and 33. Market averages and indexes. See slide 34.
  • In addition to newspaper and magazine publications, subscription advisory services also offer investment information and recommendations. Mergent, Standard & Poor’s, Morningstar, and Value Line Investment Survey are among the best known.
  • The Internet has many valuable investment resources, such as those listed in Exhibit 21.5.
  • Prices are quoted in decimals. Exhibit 21.6 shows a portion of the stock quotations for NYSE-listed stocks, from Wall Street Journal on March 28, 2003. These quotations show the most recent close price, the highest and lowest price paid during the previous 52 weeks, the annual dividend, the dividend yield, the price/earnings ratio, the day’s trading volume, and the change from the previous day’s closing price. The Price/earnings (P/E) ratio is calculated by dividing the current market price by annual earnings per share. A company’s P/E ratio should be compared to those of other companies in the same industry.
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    1. 1. Chapter THE FUTURE OF BUSINESS Gitman & McDaniel 5 th Edition Understanding Securities and Securities Markets 21
    2. 2. Stocks and Bonds <ul><li>Common </li></ul><ul><li>Preferred </li></ul><ul><li>Corporate Bonds </li></ul><ul><li>Government Securities </li></ul>1 Bonds Stocks Securities Investment certificates that represent either equity or debt.
    3. 3. Stocks 1 Preferred Stock Common Stock <ul><li>Dividends set at issuance, and are paid before common stock dividends </li></ul><ul><li>Ownership does not allow voting rights. </li></ul><ul><li>Ownership that allows voting rights. </li></ul><ul><li>Can be bought and sold (liquidity). </li></ul><ul><li>May pay dividends </li></ul>Historic Stock Market Return (since WWII): 12%
    4. 4. Microsoft Stock Price
    5. 5. Intel 5-yr Stock Price
    6. 6. Intel 20-Year Stock Price Intel 5-Year Stock Price
    7. 7. Government Securities 2 Municipal Bonds Treasury Bonds U.S. Treasury Treasury Notes Treasury Bills Revenue Bonds General Obligation Bonds
    8. 8. Moody’s and Standard & Poor’s Bond Ratings 2
    9. 9. <ul><li>Bonds : </li></ul><ul><li>Long-term debt obligations (liabilities) of corporations & governments </li></ul><ul><li>issuers must pay back: </li></ul><ul><ul><li>principal ( par value ) at maturity (due date) </li></ul></ul><ul><ul><li>plus interest ( coupon rate ) </li></ul></ul><ul><li>Like stock, bonds may be bought and sold on the securities market </li></ul>
    10. 10. Other Types of Securities 3 Mutual Fund Futures Contracts Options Financial-services company that pools investors’ funds to buy a selection of securities Legally binding obligations to buy or sell commodities or financial instruments at later date Contracts to buy or sell quantities of common stocks or financial instruments at later date
    11. 11. Appeal of Mutual Funds <ul><li>Good way to hold a diversified, less risky, portfolio </li></ul><ul><li>Professional management </li></ul><ul><li>May offer higher returns </li></ul>3
    12. 12. Securities Market 4 Help companies raise long-term financing, a process called underwriting Investment Bankers A person licensed to buy and sell securities on behalf of clients Stockbroker
    13. 13. Types of Markets 4 Secondary Market Old (already issued) securities are bought and sold, or traded, among investors Primary Market New securities are sold to the public
    14. 14. Buying and Selling at Securities Exchanges 5 Types of Securities Markets Over-the-Counter Market Organized Stock Exchanges
    15. 15. U.S. Stock Exchanges 5 American Stock Exchange (AMEX) New York Stock Exchanges (NYSE)
    16. 16. Anatomy of a Stock Trade 5
    17. 17. Global Trading and Foreign Exchanges 5 NYSE NASDAQ London Toronto Montreal Paris Sydney Zurich Buenos Aires Tokyo Frankfurt Hong Kong Taiwan
    18. 18. The Over-the-Counter Market 5 A telecommunications network that links dealers throughout the U.S. and enables them to trade securities Over-the-Counter (OTC) Market The first electronic-based stock market and the fastest growing part of the stock market. NASDAQ
    19. 19. Bull or Bear Market? 5 Bull Market Bear Market Prices rise. Better returns. Prices go down. Low, or negative, returns.
    20. 20. Regulation of Securities Markets 5 Securities and Exchange Commission The main federal government agency responsible for regulating the U.S. securities industry. Insider Trading The use of information that is not available to the general public to make profits on securities transactions.
    21. 21. Securities Industry Violations 5 <ul><li>Insider trading </li></ul><ul><li>Misrepresenting or omitting information </li></ul><ul><li>Stealing customer funds or securities </li></ul><ul><li>Violating responsibilities to treat customers fairly </li></ul><ul><li>Selling securities without proper SEC registration </li></ul>
    22. 22. Circuit Breakers 5 Measures that stop trading in the securities markets for a short period to limit the amount the market can drop in one day. Circuit Breakers
    23. 23. Securities Exchanges: NYSE <ul><li>To prevent a fast crash, the New York Stock Exchange has several “ trading breakers ” </li></ul><ul><ul><li>a 1,100-point drop stops trading for 1 hour if it occurs before 2:00 pm </li></ul></ul><ul><ul><li>a 2,250-point drop stops trading for 2 hours if it occurs before 1:00 pm </li></ul></ul><ul><ul><li>a 3,350-point drop stops trading for the rest of the day </li></ul></ul>Source: Associated Press in The Arizona Republic, Jan. 3, 2000, pg. D3.
    24. 24. Popular Sources of Investment Information 6 Company financial statements Economic and financial publications Online information resources Security price quotations Market averages and indexes
    25. 25. <ul><li>Wall Street Journal </li></ul><ul><li>Barron’s </li></ul><ul><li>Business Week </li></ul><ul><li>Kiplinger’s Personal Finance </li></ul><ul><li>Forbes </li></ul><ul><li>Fortune </li></ul><ul><li>Smart Money </li></ul><ul><li>Worth </li></ul><ul><li>Money </li></ul>Economic and Financial Publications 6
    26. 26. <ul><li>CBS Marketwatch </li></ul><ul><li>CNN Money </li></ul><ul><li>EXCITE </li></ul><ul><li>Yahoo! Finance </li></ul><ul><li>Morningstar </li></ul>Online Information Sources 6 See Exhibit 21.5 for more sources
    27. 27. Stock Quotations 7