Only prepared from in(slide share) for teach. Not for business

1. Investment Management
Chapter 2-Buying and Selling
Securities
Lectured by : Mr. HENG Leangpheng (MBA)
Tel: 095 433 369 / 081 895 695
E-mail: leangpheng.heng@yahoo.com
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2. Learning Objectives
1. Describe how stocks are bought and sold and
how to select a brokerage firm.
2. Explain how to order securities transactions and
read newspaper price quotations for stocks,
bonds, and mutual funds.
3. Understand how to obtain and use investment
information.
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3. 4. Given the risks associated with an investment,
determine whether one’s required rate of
return is exceeded by its potential return.
5. Recognize the risks associated with the trading
techniques of margin buying and selling short.
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4. Introduction
Brokerage Firm – specializes in facilitating the
purchase and sale of negotiable securities, such
as stocks, bonds, and mutual fund shares.
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5. Securities Markets and Brokerage Firms
Primary Market – exists anywhere issuers and
buyers of new offerings of stocks and bonds are
bought together.
Secondary Market (or Aftermarket) – where the
trading of previously purchased securities takes
place.
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6. Primary Markets
Initial Public Offerings (IPOs) – new issues of
stock.
Investment Banking Firms – serve as
intermediaries between companies issuing
stocks and bonds and the investing public in the
primary markets.
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7. Figure 2.1: Flow of Stocks and Bonds in
Primary Markets
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8. Secondary Markets
Stockbroker (or Account Executive) – licensed to
buy and sell securities on behalf of the
brokerage firm’s clients.
• Stockbrokers arrange the transactions between
buyers and sellers.
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9. Figure 2.2: Flow of Securities in
Secondary Markets
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10. Organized Stock Exchanges
Organized Stock Exchange (or Stock Market) – a
market where agents of buyers and sellers bring
together supply and demand for securities.
Listed Securities – securities that have been
approved by the exchange for sale on its
trading floor.
Member Firms – have purchased a seat on the
exchange, which gives them the legal right to
buy and sell securities on the exchange.
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11. New York Stock Exchange
 Founded in 1792, this by far, the largest exchange in the
world with the most stringent requirements for listing
 Corporations must have the following to list on the NYSE
• minimum earnings of $2.5 million before taxes
• net assets of at least $16 million
• minimum of 1.2 million shares publicly held
• market value of outstanding stocks of no less than $18
million
• minimum of 2000 shareholders owning at least
100 shares each to be listed
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12. American Stock Exchange
The American Stock Exchange (ASE or AMEX), is
the second-largest exchange in the United
States
The AMEX lists primarily smaller and younger
companies than the NYSE Its listing requirements
are less stringent than those of the NYSE
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13. Regional Stock Exchanges
Regional Stock Exchanges trade securities
mainly of interest to investors living in certain
geographic areas.
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14. Over-the-Counter Market
Over-the-Counter (OTC) Market – buyers and
sellers negotiate transaction prices through a
sophisticated telecommunications network
connecting brokerage firms.
NASDAQ – provides prices on securities offered
by more than 4000 small domestic and foreign
companies.
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15. Electronic Communications Networks
Electronic Communications Networks (ECNs) –
look for matching buy and sell orders and
execute the trades, eliminating the need for
most middlemen from transactions.
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16. Full-Service General Brokerage Firms
General Brokerage Firm – offers a full rage of
services to customers.
Cash Account – requires an initial deposit and
specifies that full settlement is due to the
brokerage firm within three business days after a
buy or sell order has been given.
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17. Broker’s Commissions and Fees
A brokerage firm might charge 2.8 percent on a
transaction amounting to less than $800, 1.8
percent on transactions between $800 and
$2500, 1.6 percent on amounts between $2500
and $5000, and 1.2 percent on amounts
exceeding $5000.
Round Lots – standard units of trading of stock
and $1000 or $5000 par value for bonds.
Odd Lots – transactions of any number of shares
that is less than its normal trading unit.
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18. Discount Brokers
Discount Brokers – charge commissions to
execute trades that are about 40 to 80
percent less than the fees charged by full-
service brokers.
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19. Day Trading
Day Trading – occurs when an investor buys and
sells stocks quickly throughout the day with the
hope that the price will move enough to cover
transaction costs and earn some profits.
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20. The Process of Trading Stocks
Specialist – a person on the floor of the
exchange who handles trades of that
particular stock in an effort to maintain a
fair and orderly market.
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21. Figure 2.2: Flow of Securities in
Secondary Markets
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22. Types of Stock Orders
Market Order – instructs the stockbroker to
execute an order at the prevailing market
price.
Limit Order – instructs the stockbroker to
buy or sell a stock at a specific price.
Stop Order – instructs a stockbroker to sell
your shares of stock at the market price if
a stock declines to or goes below a
specified price.
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23. Time Limits
Fill-or-Kill Order – instructs the stockbroker
to buy or sell the stock at the market price
immediately or else cancel the order.
Day Order – valid only for the remainder
of the trading day during which it was
given to the brokerage firm.
Week Order – remains valid until the close
of trading on Friday of the current week.
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24. Month Order – effective until the close of
trading on the last business day of the
current month.
Good-till-Cancelled (GTC) Order (also
called open order) – remains valid until
executed by the stockbroker or canceled
by the investor.
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25. Reading Newspaper Price Quotations
Stock Quotations
Bond Quotations
Mutual Fund Quotations
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26. Figure 2.3: How Stocks Are Quoted26

27. Figure 2.4: How Bonds Are Quoted27

28. Figure 2.5: How Mutual Funds
Are Quoted
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29. Securities and Market Indexes
Securities Market Indexes – measure the
average value of a number of securities
chosen as a sample to reflect the
behavior of a more general market.
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30. The Dow Jones Industrial Average
The (DJIA) is the most widely reported of all
indexes, having been used continuously since
1884.
In determining the DJIA, the prices of only 30
actively traded blue-chip stocks are followed.
“Points” changes in the index are not actual
dollar changes in the value of the stocks.
The average is calculated by adding the closing
prices of the 30 stocks and dividing by a number
adjusted for splits, spin-offs, and dividends.
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31. Standard & Poor’s Indexes
The popular Standard & Poor’s (S&P) 500 index
reports price movements of 500 stocks of large,
established, publicly traded firms.
It includes stocks of 400 industrial firms, 40
financial institutions, 40 public utilities, and 20
transportation companies.
Although not as popularly reported as the DJIA,
the S&P 500 more accurately reflects daily
transactions of the investing public thanks to its
greater breadth of representation.
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32. New York Stock Exchange Composite
This index includes all stocks traded on the NYSE.
It provides a comprehensive measure of the
price movements and value changes of those
stocks.
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33. NASDAQ Composite Index
The NASDAQ Composite Index takes into
account virtually all U.S. stocks (about 8000)
traded in the over-the-counter market in the
automated quotations system of the National
Association of Securities Dealers.
It provides a measure of companies not as
popular or as large in size as those traded on the
New York Stock Exchange.
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34. Wilshire 5000 Index
The Wilshire 5000 index represents the total
market value (trillions of dollars) of the more
than 6500 most actively traded stocks.
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35. Nikkei Dow
Japan’s best-known barometer of stock prices
represents the activity of 300 stocks.
Because this market is open at night in the
United States, U.S. investors often check the
Nikkei Dow in the morning to gain a hint of what
might happen that day.
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36. General Economic Conditions and
Financial News
It is vital that one stay abreast of the economic
conditions and current financial events.
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37. Information about Industries
Economic events can significantly influence
entire industries, such as aerospace, apparel,
automobiles, beverages, chemicals,
construction, pharmaceuticals, electronics,
finance, foods, machinery, and metals.
They may even depress the stock of a very
profitable company.
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38. Industry-Oriented Investment
Publications
 You can find Industry Information in the following
investment publications and advisory services
• Industry Surveys
• The Outlook (published by Standard & Poor’s)
• Value Line Investment Survey (Value Line Publishing)
• The Monthly Economic Letter (Citibank)
• Industrial Manual (Moody’s).
 These publications can be found in large libraries
(especially at colleges) and in brokerage firms.
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39. Information about Specific Companies
and Funds
 Investors should buy only when they have a clear, simple
understanding of why the value of their investment is
likely to rise
 Before buying any securities, one should thoroughly
research a company
 The focus of the analysis should be on the company’s:
• quality of management
• financial stability
• earnings stream
• competitive position
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40. Annual Reports
Companies issue an annual report once a year
that summarize the firm’s financial activities for
the year.
It includes information on sales, earnings, profit,
legal problems and it offers a forecast of it
future.
Investors use these reports to compare results
from recent years and to find out about
management’s views of the immediate future
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41. Prospectuses
When a company issues any new security, it
must file a prospectus with the Securities and
Exchange Commission.
It describes the corporation’s:
• management team
• financial status
• any anticipated legal matters that could affect
the company
• potential risks of investing in the firm
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42. Online Investment Information Is
Extensive
Basic Investment Information websites
• The Motley Fool (www.fool.com)
• Morningstar (morningstar.com)
• Bloomberg (bloomberg.com)
• Electronic Data Gathering and Retrieval (Edgar)
project (www.edgar- online.com)
• Standard & Poor’s Financial Information Services
(www.standardandpoors.com)
• Value Line (www.valueline.com).
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43.  Online Investment Screening – One can conduct in-
depth research on stocks, bonds, and mutual funds
using screening tools on the Internet such as
www.quicken.com and www.kiplinger.com
 Portfolio tracking – permits you to enter the symbol of
the stocks you own and the number of shares held that
you wish to follow and the software automatically
updates the value of your portfolio.
• Valuable websites include www.quicken.com,
www.moneycentral.com and www.investorguide.com
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44. Financial Calculators – available on various
websites including www.financenter.com and
www.usatoday.com.
Beware of On-Line Investment Scams – see the
Securities and Exchange Commission website
(www.sec.gov) for suggestions to avoid
investment scams.
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45. Investors Should Begin with the Return
on U.S. Treasury Bills
Real Rate of Return – a zero return on investment
after inflation and income taxes.
Alpha – statistic that quantifies the difference
between an investments expected return and its
actual recent performance, given its risk.
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46. Use Beta to Estimate the Risk of the
Investment
Beta – value that is a measure of an
investment’s volatility compared with a broad
market index for similar investments.
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47. Estimate the Market Risk
Market Risk (or Systematic Risk) – the risk
associated with the effects of the overall
economy on securities markets.
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48. Calculate the Required Rate of Return
Estimate of the required rate of return on an
investment = T-bill rate + (beta [x] market risk)
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49. Calculate the Potential Rate of Return
on the Investment
Potential Rate of Return – calculates the
approximate compound yield.
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50. Compare the Required Rate of Return with
the Potential Rate of Return on the
Investment
The potential return for any investment over a
period of years can be determined by adding
anticipated income (from dividends, interest,
rents, or other sources) to the future value of the
investment and subtracting its original cost
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51. Margin Buying and Selling Short are
Risky Trading Techniques
This estimate involves the estimate of the
required rate of return on an investment given its
risk to the investment’s potential projected rate
of return.
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52. Margin Trading is Buying Stocks on
Credit
Margin Account – requires making a deposit of
substantial cash or securities and permits the
purchase of other securities using credit granted
by the brokerage firm.
Margin Buying – allows the investor to apply
leverage that magnifies returns.
Margin Rate – the percentage of the value (or
equity) in an investment that is not borrowed.
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53. A Margin Call Makes Matters Worse
Margin Call – a representative of the firm tells
the investor to immediately either provide more
collateral (money) or face having the
investment liquidated.
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54. Selling Short is Selling Stocks Borrowed
From Your Broker
Buying Long – buying a security with the hope
that it will go up in value.
Selling Short – investors sell securities they do not
own (borrowing them from a broker) and later
buy the same number of shares of the security
at a lower price (returning them to the broker).
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55. Golden Rules of Personal Finance
1. Use a discount broker to pay the lowest
brokerage fees on securities transactions.
2. When trading stocks, use limit and stop orders
to protect your profits and reduce your losses.
3. Stay abreast of general economic conditions
and financial news so you can use that
information to your advantage when buying
and selling securities.
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56. Golden Rules of Personal Finance
4. Use on-line investment screening software and
portfolio tracking services to help make good
buying and selling decisions.
5. Before putting money in an investment, always
calculate your required rate of return given its
risk as well as the investment’s potential rate or
return.
6. Do not engage in the risky practices of day
trading, short selling, and margin buying.
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