This document discusses securities markets and how companies and investors use them. It covers several key topics: 1. The roles of securities markets in providing financing for businesses and investment opportunities for private investors. 2. The differences between primary and secondary markets and how investment bankers and institutional investors are involved. 3. Major U.S. stock exchanges like the NYSE and NASDAQ, and how small companies can potentially raise capital through new exchange models. 4. The Securities and Exchange Commission and its role in regulating markets through requirements like prospectuses. 5. Financing methods for companies through issuing stock or bonds, including the advantages and disadvantages of each.

1. Chapter 19
Using
Securities
Markets for
Financing and
Investing
Opportunities
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter
Nineteen
LEARNING GOALS
1. Describe the role of securities markets and of
investment bankers.
2. Identify the stock exchanges where securities are
traded.
3. Compare the advantages and disadvantages of
equity financing by issuing stock, and detail the
differences between common and preferred stock.
4. Compare the advantages and disadvantages of
obtaining debt financing by issuing bonds, and
identify the classes and features of bonds.
19-2

3. Chapter
Nineteen
LEARNING GOALS
5. Explain how to invest in securities markets and set
investment objectives such as long-term growth,
income, cash, and protection from inflation.
6. Analyze the opportunities stocks offer as
investments.
7. Analyze the opportunities bonds offer as
investments.
8. Explain the investment opportunities in mutual funds
and exchange-traded funds (ETFs).
9. Describe how indicators like the Dow Jones Industrial
Average affect the market.
19-3

4. Profile
MARIA BARTIROMO
CNBC
• Emmy Award-winning
journalist, Bartiromo’s analysis
of day-to-day Wall Street has
made her the face of investing.
• Started as an overnight
producer for CNN before
moving to CNBC.
• She’s lead anchor at two of
CNBC’s biggest shows, has
written several books and
numerous columns.
19-4

5. Chapter
Nineteen
NAME that COMPANY
When the price of their stock rises to a certain
level, many companies will split the stock in
order to make the stock appear more
affordable. However, this company run by
America’s most successful investor has never
split its stock even when the price of the
company’s stock reached $150,000 a share
(that’s right $150,000 for one share.)
Name that company!
19-5

6. The Function
of Securities
Markets
The BASICS of
LG1 SECURITIES MARKETS
• Securities markets are
financial marketplaces for
stocks and bonds and serve
two primary functions:
1. Assist businesses in finding
long-term funding to finance
capital needs.
2. Provide private investors a place
to buy and sell securities such
as stocks and bonds.
19-6

7. The Function
of Securities
Markets
TYPES of
LG1 SECURITIES MARKETS
• Securities markets are divided into primary and
secondary markets:
- Primary markets handle the sale of new securities.
- Secondary markets handle the trading of securities
between investors with the proceeds of the sale going to
the seller.
• Initial Public Offering (IPO) -- The first
offering of a corporation’s stock.
19-7

8. The Role of
Investment
Bankers
INVESTMENT BANKERS
LG1 and INSTITUTIONAL INVESTORS
• Investment Bankers -- Specialists who assist in
the issue and sale of new securities.
• Institutional Investors
-- Large organizations such
as pension funds or mutual
funds that invest their own
funds or the funds of others.
19-8

9. Stock
Exchanges STOCK EXCHANGES
LG2
• Stock Exchange -- An organization whose
members can buy and sell (exchange) securities on
behalf of companies and individual investors.
• Over-the-Counter (OTC) Market -- Provides
companies and investors with a means to trade
stocks not listed on the national securities
exchanges.
• NASDAQ -- A telecommunications network that
links dealers across the nation so they can exchange
securities electronically.
19-9

10. Stock
Exchanges TOP STOCK EXCHANGES
LG2
• NYSE Euronext
• NASDAQ
• London Stock
Exchange
• Tokyo Stock Exchange
• Deutsche Borse
19-10

11. A PLACE for
SMALL COMPANIES to CALL HOME
(Spotlight on Small Business)
• Since the recent financial crisis, small businesses
have found it difficult to secure financing from
banks.
• David Weild wants a new stock exchange where
small companies can raise needed capital.
• Though this is a new idea in the U.S., China
established ChiNext which is designed for start-
up companies.
19-11

12. Securities
Regulations
and the SEC
The SECURITIES and
LG2 EXCHANGE COMMISSION
• Securities and Exchange Commission
(SEC) -- The federal agency responsible for
regulating the various stock exchanges; created in
1934 through the Securities and Exchange Act.
• Prospectus -- A condensed version of economic
and financial information that a company must file
with the SEC before issuing stock; the prospectus
must be sent to prospective investors.
19-12

13. Progress
Assessment PROGRESS ASSESSMENT
• What’s the primary purpose of a securities
exchange?
• What does NASDAQ stand for? How does this
exchange work?
19-13

14. How Businesses
Raise Capital by
Selling Stock
LEARNING the
LG3 LANGUAGE of STOCKS
• Stocks -- Shares of
ownership in a company.
• Stock Certificate --
Evidence of stock ownership.
• Dividends -- Part of a firm’s
profits that the firm may
distribute to stockholders as
either cash or additional
shares.
19-14

15. Advantages &
Disadvantages
of Issuing Stock ADVANTAGES of
LG3 ISSUING STOCK
• Stockholders are owners of
a firm and never have to be
repaid their investment.
• There’s no legal obligation to
pay dividends.
• Issuing stock can improve a
firm’s balance sheet since
stock creates no debt.
19-15

16. Advantages &
Disadvantages
of Issuing Stock DISADVANTAGES of
LG3 ISSUING STOCK
• Stockholders have the right to vote for a
company’s board of directors.
• Issuing new shares of stock can alter the control
of the firm.
• Dividends are paid from after-tax profits and are
not tax deductible.
• The need to keep stockholders happy can affect
management’s decisions.
19-16

17. Issuing Shares
of Common and
Preferred Stock
TWO CLASSES of STOCK
LG3
• Common Stock -- The most basic form; holders
have the right to vote for the board of directors and
share in the profits if dividends are approved.
• Preferred Stock -- Owners are given preference
in the payment of company dividends before common
stock dividends are distributed. Preferred stock can
also be:
- Callable
- Convertible
- Cumulative
19-17

18. Progress
Assessment PROGRESS ASSESSMENT
• Name at least two advantages and
disadvantages of a company’s issuing stock as a
form of equity financing.
• What are the major differences between common
stock and preferred stock?
19-18

19. Learning the
Language of
Bonds
LEARNING the
LG4 LANGUAGE of BONDS
• Bond -- A corporate certificate indicating that an
investor has lent money to a firm (or a government).
• The principal is the face
value of the bond.
• Interest -- The payment the
bond issuer makes to the
bondholders to compensate
them for the use of their
money.
19-19

20. Advantages &
Disadvantages
of Issuing Bonds ADVANTAGES of
LG4 ISSUING BONDS
• Bondholders are creditors, not owners of the
firm and can’t vote on corporate matters.
• Bond interest is tax deductible.
• Bonds are a temporary source of funding and
are eventually repaid.
• Bonds can be repaid before the maturity date if
they contain a call provision.
19-20

21. Advantages &
Disadvantages
of Issuing Bonds DISADVANTAGES of
LG4 ISSUING BONDS
• Bonds increase debt and can affect the market’s
perception of the firm.
• Paying interest on bonds is a legal obligation.
• If interest isn’t paid, bondholders can take legal
action.
• The face value of the bond must be repaid on
the maturity date.
19-21

22. Advantages &
Disadvantages
of Issuing Bonds BOND RATINGS
LG4
Rating
Moody’s S &P Fitch Description
Aaa AAA AAA Highest Quality
Aa AA AA High Quality
A A A Upper-Medium Grade
Baa BBB BBB Medium Grade
Ba BB BB Lower-Medium Grade
B B B Speculative
Caa CCC, CC CCC Poor
Ca C DDD Highly Speculative
C D D Lowest Grade
19-22

23. Different
Classes of
Bonds
DIFFERENT CLASSES of
LG4 CORPORATE BONDS
• Corporations can issue two classes of bonds:
1. Unsecured bonds
(debenture bonds):
not backed by
specific collateral.
2. Secured bonds:
backed by
collateral (land or
equipment).
19-23

24. Special Bond
Features SPECIAL FEATURES in
LG4 BOND ISSUES
• Sinking Fund -- Reserve account set up to
ensure that enough money will be available to repay
bondholders on the maturity date.
• Callable bonds permit bond issuers to pay off the
principal before the maturity date.
• Convertible bonds allow bondholders to convert
their bonds into shares of common stock.
19-24

25. Progress
Assessment PROGRESS ASSESSMENT
• Why are bonds considered a form of debt
financing?
• What does it mean if a firm issues a 9%
debenture bond due in 2025?
• Explain the difference between an unsecured and
secured bond.
• Why are convertible bonds attractive to
investors?
19-25

26. How
Investors Buy
Securities
BUYING SECURITIES
LG5
• Stockbroker -- A
registered representative who
works as a market
intermediary to buy and sell
securities for clients.
• Online trading services,
such as TD Ameritrade,
E*Trade, and Scottrade,
offer securities trading
services online to buy and
sell stocks and bonds. 19-26

27. MONEY GOING UP in SMOKE
(Making Ethical Decisions)
• You recently received news that your Uncle Alex
passed away after a long battle with lung cancer
caused by smoking. He left you $25,000 in his
will, saying you were his favorite nephew.
• Your friend Jack recommends that you buy stock
in a well-known multinational firm that’s primary
product is tobacco.
• Will you invest your inheritance in a company that
markets tobacco?
19-27

28. Choosing the
Right
Investment FIVE INVESTMENT CRITERIA
Strategy
LG5
1. Investment risk
2. Yield
3. Duration
4. Liquidity
5. Tax consequences
19-28

29. Choosing the
Right
Investment INVESTING 101
Strategy Things to Do Before Making Your First Investment
LG5
• Take an investing class.
• Attend a conference.
• Head to the library and pick up these books:
- The Big Short
- The Intelligent Investor
- The Myth of the Rational Market
Source: Money, November 2010.
19-29

30. Choosing the
Right
Investment
AVERAGE ANNUAL RETURN of
Strategy
LG5 ASSET CLASSES (Since 1926)
Source: Ibbotson Associates and Morningstar.
19-30

31. Reducing Risk
by Diversifying
Investments DIVERSIFICATION
LG5
• Diversification -- Buying several different types
of investments to spread the risk of investing.
• If diversifying, an investor may put:
- 25% of his/her money into U.S. growth stocks
- 25% in government bonds
- 25% in dividend-paying stocks
- 10% in an international mutual fund
- The rest in a savings account
19-31

32. The SUN NEVER SETS on
STOCK OPPORTUNITIES
(Reaching Beyond Our Borders)
• Suggestions for building your financial future:
- Invest in global companies you know and that have
solid performance records.
- Invest in global stocks listed on U.S. exchanges.
- Contact U.S. brokers about American Depository
Receipts (ADRs).
- Invest in global mutual funds that focus on specific
countries or regions.
- Use extreme caution if investing in unstable
countries!
19-32

33. Reducing Risk
PRIMARY INVESTMENT SERVICES
by Diversifying
Investments
LG5 CONSUMERS NEED
• Savings and investing advice
• Help with 401k plans
• Retirement planning
• Tax planning
• Estate planning
• Education expense planning
Source: Investment Company Institute.
19-33

34. Progress
Assessment PROGRESS ASSESSMENT
• What is the key advantage of investing through
online brokers? What is the key disadvantage?
• What is the primary purpose of diversifying
investments?
19-34

35. Investing in
Stocks PERCEPTIONS of the MARKET
LG6
• Bulls: Investors who
believe stock prices
are going to rise.
• Bears: Investors who
expect stock prices to
decline.
19-35

36. Investing in
Stocks BEAR MARKET DECLINES
LG6 in the S&P 500
Source: Stock Traders Almanac 2011.
19-36

37. Investing in
Stocks SELECTING STOCKS
LG6
• Capital Gains -- The positive difference between
the price at which you bought a stock and what you
sell it for.
• Investors can also choose stocks according to
their strategy:
- Blue-chip stocks
- Growth stocks
- Income stocks
- Penny stocks
19-37

38. Stock Splits
STOCK SPLITS
LG6
• Stock Splits -- An action by a company that gives
stockholders two or more shares of additional stock
for every share that they own.
• Splits cause no change in the firm’s ownership
structure and no change in the investment’s
value.
• Firms can never be forced to spilt their stocks.
19-38

39. Buying Stock
on Margin BUYING STOCK on MARGIN
LG6
• Buying Stock on Margin -- Borrowing some of
the stock’s purchase cost from the brokerage firm.
• M
a
r
g
i
n
i
s
19-39

40. Understanding
Stock
Quotations
UNDERSTANDING STOCK
LG6 QUOTATIONS
19-40

41. Understanding
Stock TOP FINANICIAL NEWS and
Quotations
LG6 RESEARCH SITES
• Yahoo Finance
• DailyFinance
• MSN Money
• Forbes
• Dow Jones & Co.
19-41

42. Investing in
Bonds IMPORTANT BOND QUESTIONS
LG7
• First-time bond investors generally ask two
questions:
- Do you have to hold a bond until the maturity date?
- How can I assess the investment risk of a particular bond
issue?
• Junk Bonds -- Bonds that are high-risk and
have high default rates.
19-42

43. Understanding
Bond
Quotations
UNDERSTANDING BOND
LG7 QUOTATIONS
19-43

44. Investing in
Mutual Funds &
Exchange- INVESTING in MUTUAL FUNDS
Traded Funds
LG8 and EXCHANGE-TRADED FUNDS
• Mutual Fund -- An organization the buys stocks
and bonds and then sells shares in those securities
to the public. The fund pools investors’ money and
buys stocks according to the fund’s purpose.
• Exchange-Traded Fund (ETF) -- Collections
of stocks and bonds that are traded on securities
exchanges, but are traded more like individual stocks
than mutual funds.
19-44

45. Investing in
Mutual Funds &
Exchange- WHAT MUTUAL FUNDS CAN
Traded Funds
LG8 LEARN FROM KaChing
1. Reform the ratings
system
2. Give information for
free
3. Cut out useless fees
4. Be transparent
5. Share insights
Source: Fast Company, March 2010.
19-45

46. Investing in
Mutual Funds &
Exchange- PERCENTAGE of HOUSEHOLDS
Traded Funds
LG8 OWNING MUTUAL FUNDS
Source: Investment Company Institute Factbook.
19-46

47. Investing in
Mutual Funds &
Exchange-
Traded Funds VARIETIES of ETFs
LG8
Source: Schwab and E*Trade.
19-47

48. Understanding
Mutual Fund
Quotations
UNDERSTANDING
LG8 MUTUAL FUND QUOTATIONS
19-48

49. Understanding
Mutual Fund
Quotations
COMPARING INVESTMENTS
LG8
19-49

50. Progress
Assessment PROGRESS ASSESSMENT
• What is a stock split? Why do companies
sometimes split their stock?
• What does buying stock on margin mean?
• What are mutual funds and ETFs?
• What is the key benefit to investors in investing in
a mutual fund or ETF?
19-50

51. Understanding
Stock Market
Indicators
KEY STOCK MARKET
LG9 INDICATORS
•Dow Jones Industrial Average -- The average
•Critics say the 30-company Dow is too small a
•S&P 500 tracks the performance of 400 industrial,
19-51

52. Riding the
Market’s Roller
Coaster MARKET TURMOIL
LG9
• The stock market has its shares of ups and
downs:
- October 29, 1929 - Black
Tuesday; the market lost 13%
of its value.
- October 19, 1987 - The
market suffered its worst one-
day drop when it lost 22% of its
value.
- October 27, 1997 - Fears of
an economic crisis in Asia
cause widespread panic and
19-52
losses.

53. Riding the
Market’s Roller
Coaster TURMOIL in the 2000s
LG9
• The market collapsed into a deep decline in
2000-2002 when the dot-com bubble burst.
- Investors lost $7 trillion in market value.
• Starting in 2008, the collapse of the real estate
market sent financial markets into panic.
- The U.S. government made significant investments in
private banks and offered a large stimulus package to re-
energize the economy.
19-53

54. Riding the
Market’s Roller
Coaster
The WALL STREET of NOW
LG9
Source: Bloomberg Businessweek, September 6, 2010.
19-54

55. Riding the
Market’s Roller
Coaster
The UPS and DOWNS
LG9 of the MARKET
• Program Trading -- Giving instructions to
computers to automatically sell if the price of a stock
dips to a certain point to avoid potential losses.
• Analysts believe program trading caused the
turmoil in 1987.
• The exchanges created mechanisms to restrict
program trading.
19-55

56. Riding the
Market’s Roller
Coaster
WHO’S at FAULT for the
LG9 ECONOMIC CRISIS?
• Wall Street - Issued exotic securities; paid excessive
compensation based on bonuses; and investment banks got
the SEC to relax capital requirements.
• Main Street - Americans lived beyond their means;
lenders gave favorable loans to homebuilders; greedy
homeowners took out equity loans; and teaser mortgage
rates let people live large.
• Washington - Gramm-Leach-Billey Act allowed
commercial and investment banks to partner; housing
interest rates were kept low; and Community Reinvestment
Act forced lending to people with bad credit.
Source: Fortune Magazine, www.fortune.com, accessed July 2011.
19-56

57. CLEANING UP the STREET
(Legal Briefcase)
• Congress passed the Dodd-Frank Financial Reform
and Consumer Protection Act into law on July 21,
2010.
• Gives the government power to seize and shutter
large financial institutions on the verge of collapse in
an effort to prevent further bailouts.
• Formed an independent consumer protection agency
housed within the Federal Reserve, protecting
borrowers against a host of financial abuses ranging
from payday loans to mortgages and credit cards.
19-57

58. Progress
Assessment PROGRESS ASSESSMENT
• What does the Dow Jones Industrial Average
measure? Why is it important?
• Why do the 30 companies comprising the Dow
change periodically?
• Explain program trading and the problems it can
create.
19-58