Jimmy Gentry presents "Teaching Markets" during the Reynolds Center for Business Journalism's annual Business Journalism Week, Jan. 4, 2014. Gentry is the Clyde M. Reed Teaching Professor at the University of Kansas' School of Journalism and Mass Communications. The annual event features two concurrent seminars, Business Journalism Professors and Strictly Financials for journalists. For more information about business journalism training, please visit http://businessjournalism.org.

1. Understanding
Markets
Business Journalism Professors
Jan. 4, 2014

2. Donald W. Reynolds National Center
For Business Journalism
At Arizona State University

3. n
n
n
n
n
James K. Gentry, Ph.D.
Clyde M. Reed Teaching Professor
School of Journalism and Mass Communications
University of Kansas
jgentry@ku.edu

4. Risk-Return Relationship

5. Basic Types of Risk
n
n
Systematic or market
Unsystematic or nonmarket. Also called
“business risk.” Can be diversified
away.
Strictly Financial

6. Specific Types of Risk
n
n
n
n
n
n
n
n
n
Financial risk, credit risk, default risk
Market risk
Interest rate risk
Purchasing power or inflation risk
Event risk
Exchange-rate or foreign exchange risk
Liquidity risk
Political or sovereign risk
Tax risk

7. Types of Businesses
n
n
n
Sole proprietorship
Partnership
Corporation
n
n
n
n
n
Limited liability
Greater access to capital
Permanency
Flexibility
Double taxation

8. Types of Structures
Private corporations
n Public corporations
n Non-profits
n

9. Types of Investments
n
n
n
Stocks
Bonds
Other
n
Options, futures, commodities, real estate,
collectibles, currencies

10. Types of Markets
n
n
n
Equity: Stocks
Credit: Bonds, debt or fixed income
Others
n
n
Derivatives (such as options and futures),
commodities, real estate, collectibles, currencies
Historically, the amount of long-term debt
financing issued in the U.S. greatly exceeds
the volume of equity financing
Strictly Financial

11. Stock
n
Stockholders want:
n
n
n
Stock price to increase
Dependable dividend stream
Increase in size of dividend

12. Types of Stock
n
n
Common stock
Preferred stock

13. Common Stock
n
n
Risk: Lose your money if company
falters
Reward: Owners share in success when
company does well
n
n
Appreciation
Dividends

14. Dividends
n
n
n
n
Represent a return on capital invested by
shareholders.
Board must declare dividend for it to be paid.
Dividend payment is not a business expense.
It is an after-tax expense.
Usually relationship between company’s age
and size, and the dividends it pays.

15. Preferred Stock
n
n
n
n
Reduced risk but reward may be limited
Dividend amount is stated and is paid before
dividends on common
If company is liquidated, holders are
preferred over common holders.
Dividends don’t necessarily increase if
company prospers.

16. Bond
n
n
n
n
n
n
Bond is debt a company owes
Individual or company “loans” money to the
company by buying a bond
Bond pays interest over a fixed period of time
Principal is repaid to the lender or holder of the
bond at end of the term
Interest rate is typically fixed when the bond is
sold (i.e., fixed income security)
Interest rate is comparable to what other
bonds, with that rating, are paying

17. Bond Terminology
n
n
n
n
Interest rate: Fixed percentage of the bond’s
purchase price that is paid annually to the bond
holder
Yield: Return on investment if bond is held to
maturity. Equals interest rate. If bond is traded
before maturity date, yield could change
although interest rate stays the same.
Par value: Dollar amount paid for bond at time
of issue
Maturity date: When bond comes due

18. Issuers Prefer Bonds
n
n
n
When companies need to raise money, they
can issue stock or sell bonds
They often prefer bonds, in part because
issuing more stock can dilute the value of
shares investors already own
Bonds also may have income tax advantages

19. A Quasi-Bond?
n
n
n
Is preferred stock debt (i.e., a bond) in
disguise?
Preferred holders have a “guaranteed”
dividend. Is that like the fixed interest rate of
a bond?
Why do investors pick common, preferred or
bonds?

20. Risk and Reward

21. Yield
Yield Curve
Maturity

22. Equity or Securities Markets
n
Primary market
n
n
n
Go public
Private placement
Secondary market

23. Going Public
n
n
n
n
Entrepreneurs have an idea. Company
grows with an investment from the
private equity market (venture capital).
Owners decide to “go public.”
Register with SEC to make an initial
public offering (IPO).
Investment bankers typically underwrite
the offering through a syndicate.

24. Going Public (cont.)
n
n
Company prepares a prospectus, which
is a detailed analysis of the company’s
financial history, its products and
services, as well as management’s
background and experience.
Prospectus should identify and assess
risk factors the company faces.

25. IPO Terms
n
n
n
n
Prospectus
Road show
Quiet period
Lockup period

26. Shelf Registration
n
n
Firm can file one registration statement
for a relatively large block of stock and
sell parts over a two-year period
This can reduce red tape and costs, and
because stock can be sold directly to
institutional investors, can eliminate the
underwriting fee

27. Private Placement
n
n
n
New issues can be sold in large lots to a small
group of buyers. Allows start-up firms to
show appeal by raising capital on their own.
Additional shares later can be offered through
an underwriter.
Many debt issues are placed privately, usually
to large buyers such as insurance companies.

28. Secondary Offering
n
If company already is public, it can sell
more stock through a secondary
offering.
n
n
Causes dilution
Major owners sell their shares. They get
the funds so no dilution.

29. Wall Street
n
n
Got its name from a wall of brush and
mud built by early settlers to protect the
city of New York from attacks (1609)
Site of New York’s first organized stock
trading

30. New York Stock Exchange
n
n
n
In March 1792, Wall Street leaders met
to establish an improved auction market
In May 1792, 24 men signed an
agreement to trade securities only
among themselves, maintain fixed
commission rates and avoid other
auctions
Considered the origination of NYSE

31. NYSE (cont.)
n
n
n
Until March 2006, was owned by 1,366
seat-holding members
Highest price ever paid for a seat was
$4 million
Price was determined by auction.

32. NYSE Members
n
Floor brokers
n
n
n
House brokers
Independent brokers
Specialists
n
n
n
n
n
Manage auction process
Execute orders for brokers
Serve as catalysts
Provide capital
Stabilize prices

33. In The Day, Buy or Sell Order
n
n
n
Tell your broker or “registered
representative” to buy or sell a stock at
the current price, or market price.
Called a market order.
If you name the price to buy or sell,
you’re making a limit order.
Tell your broker to buy or sell once the
price hits a specific price, you’re placing
a stop order at a stop price.

34. Trading on the NYSE Floor
n
n
n
Trading occurs in the “Big Room”
Numerous stations, each with a roughly
figure-eight shape, with counters and
screens above. Called “trading posts.”
Each counter is a “specialist’s” post

35. NYSE Floor (cont.)
n
n
n
n
Order comes to the booth that is rented by a
brokerage house
Floor broker takes order to appropriate
specialist’s post
Specialist keeps a list of unfilled orders.
Processes orders as prices move.
Specialist’s job is to maintain an orderly
market in the stock (match buyers/sellers)

36. NYSE Floor (cont.)
n
n
n
n
n
Stocks or groups of stocks are traded at
trading posts near the specialists’ positions.
Floor brokers can use a specialist or trade
between themselves, called trading in the
“crowd”
Terminals display the stock’s activity.
After every trade, a reporter records the stock
symbol, price and initiating broker.
Successful trades are confirmed.

37. NYSE Floor (Then & Now)

38. Round or Odd Lots
n
n
Round lots: Buying or selling stock in
multiples of 100 shares
Odd lots: Buying or selling stock in
other quantities

39. Who Holds Your Stock?
n
n
n
Virtually all investors leave shares in
their brokerage account in what’s
called the street name. Investor retains
beneficial ownership, though.
This offers safe storage.
You can get tangible certificates if you
want them. Typically, you must pay for
them.

40. Super DOT System
n
n
n
Designated Order Turnaround
Allows orders to be transmitted
electronic41ally to specialist.
Now makes up a substantial percentage
of NYSE trading, particularly smaller
orders

41. American Stock Exchange
n
n
n
n
n
Non-members of NYSE couldn’t afford
office space so traded in the street
1842: New York Curb Exchange
By late 1870s known as “curbstone
brokers” and their market was known
as the Curb.
Merged with NASDAQ in 1998
Acquired by NYSE Euronext in 2009

42. NASDAQ
n
n
n
n
National Association of Securities
Dealers Automated Quotations system
NASDAQ is a computer network with no
physical location for trading
Uses a multiple market maker system,
not the specialist system
About 4,000-plus companies

43. Trading on the NASDAQ
n
n
Trading is through an open market,
multiple dealer system, with many
market makers competing to handle
each transaction.
The computer network checks for
matches, which can be handled
instantly.

44. In Which Market?
n
In general, but with exceptions:
NYSE: Oldest, largest, best known
n AMEX: Smaller, younger
n NASDAQ: Youngest, least experienced
n Some of NYSE’s most actively traded
stocks are also quoted on the NASDAQ
n

45. ECNs
n
n
n
n
Electronic Communications Networks
Are basically Web sites that allow
investors to trade directly with one
another
Archipelago and Instinet were best
known
BATS Trading

46. NYSE - Archipelago Marriage
n
n
n
n
Merged in March 2006 to create NYSE
Group, Inc., a publicly-held company.
Largest merger ever between securities
exchanges.
Combined leading equities market with
most successful electronic exchange.
Archipelago: low fees, user-friendly
technology

47. NYSE Euronext
n
n
n
Merged April 2007
Operates world’s largest, most liquid
exchange with diverse products and
services
Six equities exchanges in five countries
and six derivatives exchanges

48. Deutsche Borse Seeks
To Buy NYSE Euronext
n
n
n
Been working on a deal since early
2011.
Would create world’s largest trading
entity.
European regulators are forcing the
companies to sell assets because of
competitive concerns.

49. NYSE and ICE
n
n
ICE or the Intercontinental Exchange
took over NYSE Euronext on Nov. 13.
ICE is a 13-year-old company based in
Atlanta. Derivatives in general and
energy futures in particular have fuelled
ICE’s rapid growth.
Strictly Financial

50. NYSE ‘Hybrid Market’
n
n
n
Floor trading and automated trading
Specialists or Archipelago strengths
Why? Customers’ desire for faster
access to liquidity and greater
anonymity

51. NASDAQ Response
n
NASDAQ acquired Instinet Group Inc.,
another ECN

52. Exchanges v. OTC Market
n
n
n
n
Stocks in almost 10,000 companies
aren’t listed on any exchanges.
They are traded “over the
counter” (OTC)
Typically handled by phone or computer
Generally, comparatively inexpensive
and infrequently, or “thinly,” traded

53. BATS Global Markets
n
n
n
n
n
n
Newer exchange, founded in 2005
Located in Kansas City
Competes on technology and cost
Developed its own software platform
Also offers an options trading platform
An ECN

54. Direct Edge
n
n
n
n
n
n
Another ECN with exchange status
Merging with BATS
Has DOJ approval; awaiting SEC
Expected to close Q1 2014
BATS-Edge combo will be No. 2 exchange in
market share
Some days BATS-Edge combo has exceeded
NYSE trading
Strictly Financial

55. Stock Market Participants and
the Role of an Exchange

56. U.S. Equities Market Share
n
n
n
n
n
n
n
n
NYSE Floor
11
NYSE Arca
12
Nasdaq
16
Nasdaq Bx
3
BATS BZX, BYZ
10
Direct Edge X, A 10
TRF
37
Other
3
November 2013

57. Dark Pools
n
n
n
n
n
Also “Dark Liquidity” or “Dark Pool Liquidity”
Lightly regulated trading not open to the public.
Mostly involves block trades by institutions away from
public exchanges so trades are anonymous.
Main advantage to institutional investors: Can buy or
sell in large blocks without other investors knowing
since neither size of trade or trader’s identity are
revealed. Prices are reported after trades completed.
Also means some market participants are
disadvantaged since they can’t see trades executed
and prices paid so this market is not transparent.
Strictly Financial

58. High-Frequency Trading
n
n
n
Also known as “high-speed trading.”
Electronic trading strategies driven by
statistics and algorithms.
WSJ reported in October 2012 that by some
measures, such firms make up 5 of every 10
stock trades in the U.S. each day.
Strictly Financial

59. High-Frequency Trading
n
n
n
Research has shown that algorithmic trading
broadly makes prices less volatile and reduces
the overall cost of trading.
These firms’ ability to buy and sell large
blocks of securities in fractions of a second
has raised fears that ordinary investors are
being left behind.
Is drawing criticism.
Strictly Financial

60. Cyclical, Income, Growth
n
n
n
Cyclical: Highly dependent on the state of the
economy. When things slow, earnings and
stock price fall. When economy recovers,
earnings and stock prices rise.
Income: Stocks that pay dividends regularly.
Growth: Pay little or no dividend while profits
are reinvested.

61. Stock Ownership
n
n
In 2011, 54% of Americans said they
had money in the stock market, either
in an individual stock, a mutual fund or
self-directed 401(k) or IRA
This was down from 56% in ‘10 and
57% in ‘09. High in the 21st Century
was 67% in ‘02 and 65% in ‘07.
Gallup, April 2011

62. Stock Ownership
n
n
n
n
87% of upper-income Americans ($75,000 or
more annually) own stocks.
83% of postgraduates and 73% of college
graduates own stocks.
64% of Republicans hold stocks, compared
with half of Democrats and independents.
Ages 50 to 64 are most likely to say they
have money in the stock market.
Gallup, April 2011

63. Institutional Investors
n
n
n
n
Organizations that invest their own assets or
pool those it holds in trust for others.
Examples: Investment companies (including
mutual funds), pension systems, insurance
companies, universities and banks.
Trade regularly and in tremendous volume.
Must buy or sell at least 10,000 shares for a
transaction to be an “institutional trade.”

64. Changing Attitudes
n
n
Institutional investors who own large
blocks of stock are increasingly
demanding a say in corporate
management.
Socially or environmentally conscious
individual shareholders also are
becoming more involved.

65. Stock Market Averages
n
n
n
n
n
Dow Jones Industrial Average: Best known
and most widely reported market indicator
Made up of 30 industrial companies
Dow Jones Transportation Average: 20
airlines, railroads and trucking companies
Dow Jones Utility Average: 15 gas, electric
and power companies
Dow Jones 65 Composite Average: all 65
companies in the other three averages

66. Stock Market Indexes
n
n
n
NYSE Composite Index: All stocks traded on
the NYSE.
Standard & Poor’s 500 Index: Broad base of
500 stocks. Considered benchmark for largestock investors.
NASDAQ Stock Market Composite Index:
Stocks traded through its electronic system.
Often more volatile because of types of
companies it covers.

67. Market Indexes (cont.)
n
n
n
n
AMEX Composite: Companies on the AMEX.
Russell 2000: Follows smallest two-thirds of
the 3,000 largest U.S. companies. Includes
many IPOs of past few years. Benchmark for
small-company stocks.
Value-Line: 1,700 common stocks.
Wilshire 5000: Broadest index, including
nearly all stocks traded in U.S. markets.

68. Reg FD, Disclosure
and Guidance
n
n
Regulation Fair Disclosure, October
2000
Bars public issuers from selectively
revealing material nonpublic information
to securities analysts, broker-dealers,
investment advisers, and institutional
investors, before disclosing it to the
public.

69. Blue-Chip Stock
n
Company with national reputation for
quality, reliability and ability to be
profitable in good or bad times

70. Bulls and Bears
n
n
Bulls: Persons who think prices or
values will rise. In general, being
optimistic.
Bears: Persons with a pessimistic
market outlook.

71. Margin
n
n
n
Buying on margin: Borrowing money
from broker to buy securities.
Federal Reserve regulates margin.
Today investor can borrow up to 50
percent of the price of the stock.
Broker requires a minimum balance and
can issue a “margin call” if stock’s
value declines.

72. Classes of Stock
n
n
Some firms have more than one class
Primarily done to assure control of the
firm by one group, such as Ford Motor
Company’s Class B, which isn’t publicly
traded (held by family) but has 40
percent of voting power, although it
represents less than 10 percent of total
shares outstanding.

73. Stock Split
n
n
n
n
If stock price increases significantly, a
company might do a split to lower the price,
which it expects to stimulate trading.
In a split, more shares are available but total
market value is still the same.
Price may move up after split, therefore
increasing the value of your stock.
Reverse split: Exchange more shares for
fewer, say 10 for five. To boost share price.

74. Stock Split
n
n
n
Number of splits is down notably. Just
10 split in ’13, compared with an
average of 48 annually since 1980.
Researchers say it’s partly because
retail investors are increasingly turning
investing over to professionals.
Cache in having high-priced stocks,
some say.
Strictly Financial

75. Arbitrage
n
n
Simultaneous purchase and sale of an
asset to profit from a differential in the
price. Usually takes place on different
exchanges or marketplaces.
Ex: Buy stock in company on one
exchange at one price and sell stock in
the same company on another
exchange at a different price.

76. Insider Trading
n
n
Buying and selling of company stock by
officers, directors, employees, family
members, etc. Person or trust owning
10 percent or more of a company's
stock also considered an "insider."
SEC calls them "insiders" because of
access to early and potentially key
company events.

77. Option
n
n
On an organized exchange, the right to
buy or sell securities, commodities, etc.
at some point for an agreed upon
amount.
In a company, stock options are
granted to corporate executives and
others as part of their compensation
packages.

78. Warrant
n
n
Type of security, usually issued with a
bond or preferred stock, that entitles
holder to buy a proportionate amount of
common stock at a specified price,
usually higher than the market price at
time of issuance, for a period of time.
Also called a Subscription Warrant

79. Global Marketplace
n
n
n
Stocks are traded around the clock,
around the world. There’s a market
open somewhere, 24 hours a day,
Monday through Friday.
Growing number of multinational
companies on several exchanges.
Tendency of investors to buy in many
markets, not just their own.

80. Owning International Stocks
n
Rewards
n
n
Diversification, capital gains, dividends,
country’s currency rises against dollar
Risks
n
Tax treatments differ by country,
accounting and trading rules can be
different, converting dividends can add
expenses, distance and language barriers

81. Credit or Debt Markets
n
n
n
Historically, the amount of long-term
debt financing issued in the U.S. greatly
exceeds the volume of equity financing
Short-term or “money market”
Bond market

82. Terminology
n
n
n
Bills – Maturity dates up to one year
Notes – Maturity dates of two to 10
years
Bonds – 10 years or longer

83. Who Issues Bonds
n
n
n
n
Issued by U.S. companies
Issued by the U.S. Treasury
Issued by federal, state and local
government agencies
Issued by overseas companies and
governments. When sold in dollars, are
sometimes called Yankee Bonds.

84. Issuers Prefer Bonds
n
n
n
When companies need to raise money,
they can issue stock or sell bonds
They often prefer bonds, in part
because issuing more stock tends to
dilute the value of shares investors
already own
Bonds also may have income tax
advantages

85. Treasury Issues
n
n
n
n
n
Life, or term, is fixed at time of issue
Treasury bill: One year or less
Treasury note: One to 10 years
Treasury bond: 10 years or more
Generally, the longer the term the
higher the interest rate

86. Uses of Bonds
n
Corporations use bonds:
n
n
U.S. Treasury uses bonds:
n
n
Pay for expansion or modernization, cover
operating expenses finance takeovers or other
changes in management structure
Finance government activities, pay off (refinance)
national debt
States, cities, counties, towns use bonds:
n
Pay for public projects, supplement budgets

87. How Bonds Are Traded
n
n
n
Most already-issued bonds are traded
over the counter
Bonds also can be purchased from the
inventory of a brokerage firm that might
make a market in the bonds
Commissions and markups

88. Bonds Then and Today
n
n
n
n
Until 1983, all bondholders received
certificates
Some of these Bearer Bonds had coupons
attached to the certificate
To collect interest, investor detached the
coupon and exchanged it for cash. Hence, the
bond interest rate is called the Coupon Rate.
Today most new bonds are called Book Entry
bonds and are registered electronically

89. Rating Bonds
n
n
n
n
Standard & Poor’s, Moody’s Investors
Services and Fitch are best known
Corporate, international and municipal
bonds are rated
Credit ratings influence interest rates
If a company’s rating is downgraded,
investors demand a higher yield

90. Bond Rating Code
n
n
n
n
n
n
n
n
n
Aaa/AAA: Best quality
Aa/AA: High quality
A/A: High-medium quality
Baa/BBB: Medium quality
Ba/BB: Some speculative element
B/B: Future default risk
Caa/CCC: Poor quality, default danger
Ca/CC: Highly speculative
C/C: Lowest rated, poor prospects