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Finacial Markets


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Finacial Markets

  1. 1. CHAPTER 20 Understanding Securities and Investments
  2. 2. Investment Banking <ul><li>Securities and Exchange Commission (SEC)  </li></ul><ul><ul><li>Federal agency that administers U.S. securities laws to protect the investing public and maintain smoothly functioning markets </li></ul></ul><ul><li>Investment Bank </li></ul><ul><ul><li>Financial institution engaged in issuing and reselling new securities </li></ul></ul><ul><li>Secondary Securities Market </li></ul><ul><ul><li>Market in which stocks and bonds are traded </li></ul></ul>
  3. 3. Investment Banking <ul><li>Provides three important services: </li></ul><ul><li>They advise companies on the timing and financial terms of new issues. </li></ul><ul><li>By underwriting (buying) new securities, they bear some of the risks of issuing them. </li></ul><ul><li>They create the distribution networks for moving new securities through groups of other banks and brokers into the hands of individual investors. </li></ul>
  4. 4. Stocks <ul><li>Common Stocks </li></ul><ul><li>Par Value:  Face value of a share of stock, set by the issuing company’s board of directors </li></ul><ul><li>Market Value:  Current price of a share of stock in the stock market </li></ul><ul><li>Capital Gain: Profit earned by selling a share of stock for more than it cost </li></ul><ul><li>Book Value:  Value of a common stock expressed as total shareholders’ equity divided by the number of shares of stock </li></ul>
  5. 5. Investment Traits of Common Stock <ul><li>Blue-Chip Stock </li></ul><ul><ul><li>Common stock issued by a well-established company with a sound financial history and a stable pattern of dividend payouts </li></ul></ul>
  6. 6. Preferred Stock <ul><li>Preferred stock is usually issued with a stated par value, and dividends are typically expressed as a percentage of par value. </li></ul><ul><li>Cumulative Preferred Stock </li></ul><ul><ul><li>Preferred stock on which dividends not paid in the past must be paid to stockholders before dividends can be paid to common stockholders </li></ul></ul>
  7. 7. Stock Exchanges <ul><li>Stock Exchange:  Organization of individuals formed to provide an institutional setting in which stock can be traded </li></ul><ul><li>The Trading Floor: Actual physical location trading may occur </li></ul>The floor is equipped with a vast array of electronic communications equipment for conveying buy-and-sell orders or confirming completed trades.
  8. 8. Brokers <ul><li>Individuals or organizations who receive and execute buy-and-sell orders on behalf of other people in return for commissions </li></ul><ul><li>Discount Brokers </li></ul><ul><li>Online Trading </li></ul><ul><li>Full Service Brokers </li></ul>
  9. 9. The Major Exchanges and the OTC Market <ul><li>New York Stock Exchange (NYSE) </li></ul><ul><li>American Stock Exchange (AMEX) </li></ul><ul><li>Regional Stock Exchanges (i.e., Chicago Stock Exchange and Pacific Stock Exchange in Los Angeles and San Francisco) </li></ul><ul><li>Foreign Stock Exchanges (i.e., London and Tokyo) </li></ul>
  10. 10. Differences Between Exchanges and the Electronic Market <ul><li>The most important differences between exchanges and the electronic market are </li></ul><ul><li>the activity of dealers </li></ul><ul><li>and </li></ul><ul><li>(2) the geographic location of the market </li></ul>
  11. 11. Over-the-Counter (OTC) Market <ul><li>National Association of Securities Dealers Inc. (NASD) </li></ul><ul><ul><li>Largest securities-regulation organization in the United States </li></ul></ul><ul><ul><li>Every broker/dealer in the United States who conducts securities business with the public is required by law to be a member </li></ul></ul><ul><li>National Association of Securities Dealers Automated Quotation (NASDAQ) system </li></ul><ul><ul><li>Organization of over-the-counter dealers who own, buy, and sell their own securities over a network of electronic communications </li></ul></ul>Organization of securities dealers formed to trade stock outside the formal institutional setting of the organized stock exchanges
  12. 12. Capitalization <ul><li>The dollar value (market value) of stocks that are listed on a stock exchange… </li></ul>
  13. 13. Bonds <ul><li>Bond:  Security through which an issuer promises to pay the buyer a certain amount of money by a specified future date </li></ul><ul><ul><li>Government Bond:  Bond issued by the federal government </li></ul></ul><ul><ul><li>Municipal Bond:  Bond issued by a state or local government </li></ul></ul><ul><ul><li>Corporate Bond:  Bond issued by a company as a source of long-term funding </li></ul></ul>
  14. 14. Interest Payment Registered & Bearer Bonds <ul><li>Registered Bond:  Bond bearing the name of the holder and registered with the issuing company </li></ul><ul><li>Bearer (or Coupon) Bond:  Bond requiring the holder to clip and submit a coupon to receive an interest payment </li></ul><ul><li>Secured Bond:  Bond backed by pledges of assets to the bondholders </li></ul><ul><li>Debenture:  Unsecured bond for which no specific property is pledged as security </li></ul>
  15. 15. The Retirement of Bonds <ul><li>Callable Bonds </li></ul><ul><ul><li>The issuer of callable bonds may call them in and pay them off at a price stipulated in the indenture, or contract. Usually, the issuer cannot call the bond for a certain period of time after issue. </li></ul></ul>Example: Most Treasury bonds cannot be called within the first 5 years. <ul><li>Sinking Fund Provisions </li></ul><ul><ul><li>The issuing company is required annually to put a certain amount of money into a special bank account. At the end of a certain number of years, the money (including interest) will be sufficient to redeem the bonds. Failure to meet the sinking fund provision places the issue in default. </li></ul></ul>
  16. 16. Serial and Convertible Bonds <ul><li>Serial Bond </li></ul><ul><ul><li>Firm retires portions of the bond issue in a series of different preset dates. </li></ul></ul>Example: A company with a $100 million issue maturing in 20 years may retire $5 million each year. Serial bonds are most popular among local and state governments. <ul><li>Convertible Bonds </li></ul><ul><ul><li>Can be converted into the common stock of the issuing company. At the option of the holder, payment is made in stock instead of in cash. </li></ul></ul>
  17. 17. Secondary Markets for Bonds <ul><li>Nearly all secondary trading in bonds occurs in the OTC market rather than on organized exchanges. Thus, precise statistics about annual trading volumes are not recorded. As with stocks, however, market values and prices change daily. The direction of bond prices moves opposite to interest rate changes. As interest rates move up, bond prices tend to go down. The prices of riskier bonds fluctuate more widely than those of higher-grade bonds. </li></ul>
  18. 18. Other Investments <ul><li>Mutual Fund </li></ul><ul><ul><li>Company that pools investments from individuals and organizations to purchase a portfolio of stocks, bonds, and short-term securities </li></ul></ul><ul><li>No-Load Fund </li></ul><ul><ul><li>Mutual fund in which investors pay no sales commissions when they buy in or sell out </li></ul></ul><ul><li>Load Fund </li></ul><ul><ul><li>Mutual fund in which investors are charged sales commissions when they buy in or sell out </li></ul></ul>
  19. 19. Commodities <ul><li>Futures Contract </li></ul><ul><ul><li>Agreement to purchase specified amounts of a commodity at a given price on a set future date </li></ul></ul><ul><li>Commodities Market </li></ul><ul><ul><li>Market in which futures contracts are traded </li></ul></ul><ul><li>Margin </li></ul><ul><ul><li>Percentage of the total sales price that a buyer must put up to place an order for stock or futures contracts </li></ul></ul>
  20. 20. Buying & Selling Securities <ul><li>The process of buying and selling securities is complex. First, you need to find out about possible investments and match them to your investment objectives. Then you must select a broker and open an account. Only then can you place orders and make different types of transactions. </li></ul>
  21. 21. Financial Information Services <ul><li>Stock Quotations </li></ul><ul><ul><li>Daily transactions for NYSE securities are reported in most city newspapers </li></ul></ul><ul><li>Bond Quotations </li></ul><ul><ul><li>Daily quotations on corporate bonds from the NYSE are also widely published </li></ul></ul>
  22. 22. Reading a Stock Quotation 20 -
  23. 23. Reading a Bond Quotation 20 -
  24. 24. OTC Quotations <ul><li>Most OTC (NASDAQ) stock quotations are reported in the same format as listed stock quotations. Some OTC trades, however, are reported in terms of “bid” and “asked” quotations. </li></ul><ul><li>Bid Price:  Price that an OTC broker pays for a share of stock </li></ul><ul><li>Asked Price:  Price that an OTC broker charges for a share of stock </li></ul>
  25. 25. Mutual Funds Quotations <ul><li>Selling prices for mutual funds are reported daily in most city newspapers. Additional investor information is also available in the financial press. </li></ul>
  26. 26. Reading a Mutual Fund Quotation 20 - Year-to-Date 4 wks. Latest 12 mos. 3 yrs. 5 yrs. Net Asset Value Company Fund Name Net Asset Value Change Fund Objective Annual Expenses Maximum Initial Sales Commission Total Return
  27. 27. Market Index <ul><li>Summary of price trends in a specific industry and/or the stock market as a whole </li></ul>Bull Market Period of falling stock prices Period of rising stock prices Bear Market
  28. 28. Bull and Bear Markets, 1972‑2000 20 -
  29. 29. Market Indexes <ul><li>“ The Dow” - Dow Jones Industrial Average (DJIA): Market index based on the prices of 30 of the largest industrial firms listed on the NYSE </li></ul><ul><li>“ The S&P 500” - Standard & Poor’s Composite Index: Market index based on the performance of 400 industrial firms, 40 utilities, 40 financial institutions, and 20 transportation companies </li></ul><ul><li>Nasdaq Composite Index: Includes not only domestic stocks, but non-U.S.–based common stocks listed on the Nasdaq market </li></ul>
  30. 30. The Dow and Interest Rates 20 - 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 1983 1990 1998 Dow Jones Industrial Average 12% 10 8 6 4 1983 1990 1998 30-Year Bond Yield
  31. 31. Placing Orders <ul><li>Market Order:  Order to buy or sell a security at the market price prevailing at the time the order is placed </li></ul><ul><li>Limit Order:  Order authorizing the purchase of a stock only if its price is equal to or less than a specified amount </li></ul><ul><li>Stop Order:  Order authorizing the sale of a stock if its price falls to or below a specified level </li></ul><ul><li>Round Lot:  Purchase or sale of stock in units of 100 shares </li></ul><ul><li>Odd Lot:  Purchase or sale of stock in fractions of round lots </li></ul>
  32. 32. Financing Purchases <ul><li>Margin Trading </li></ul><ul><ul><li>Stock sale in which the buyer puts down a portion of the stock’s price and borrows the rest their broker, who secures special-rate bank loans with stock </li></ul></ul><ul><li>Short Sale </li></ul><ul><ul><li>Stock sale in which an investor borrows securities from a broker to be sold and then replaced at a specified future date </li></ul></ul>
  33. 33. Securities Market Regulation <ul><li>Program Trading </li></ul><ul><ul><li>Large purchase or sale of a group of stocks, often triggered by computerized trading programs that can be launched without human supervision or control </li></ul></ul>
  34. 34. The Securities and Exchange Commission (SEC) <ul><li>Oversees many phases in the process through which securities are issued </li></ul><ul><li>Regulates the public offering of new securities by requiring that all companies file prospectuses before proposed offerings commence </li></ul><ul><li>Prospectus:  Registration statement filed with the SEC before the issuance of a new security </li></ul><ul><li>Insider Trading:  Illegal practice of using special knowledge about a firm for profit or gain </li></ul><ul><li>Blue-Sky Laws:  Laws requiring securities dealers to be licensed and registered with the states in which they do business </li></ul>