Chapter 10:SECURITIES MARKETS Trading Financial Resources 1
LOOKING AHEAD What are the different types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments? 2
SECURITIES MARKETS Investors Funds Stocks & Bonds Primary Securities Market Debt & Equity Securities Corporations Returns to Investors: Dividends, Interest, Capital Gains Additional Funds Support: Expansion of facilities Research and Product Development Adoption of New Technologies Other strategic initiatives Long term financing 3
COMMON STOCK: A SHARE OF CORPORATE OWNERSHIP The basic form of ownership is a corporation Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets 4
PREFERRED STOCK Stock that gives its holder preference over common stockholders. No Voting Rights Claim on Assets Payment of Dividends Cumulative Feature 5
THAT S SOME CLASSY STOCK! Some corporations issue more than one class of common stock. Google has two classes of common stock. Class A stock is actively traded Class B shares are not traded and are all held by a small group of investors, including Google s chief executive officer and co-founders Class A stock has 1 vote, but each share of Class B stock has 10 votes. 6
BONDS: A FORMAL IOU Long-term debt issued by a corporation or government Maturity Date Par Value Coupon Rate 7
CHARACTERISTICS OF BONDS Most bonds are secured with a pledge of specific assets Methods of retiring bonds: Serial bonds have unique maturity dates and help spread out repayments Companies may establish sinking fund to assist in repayment Callable bonds have provisions for early redemption Convertible bonds allow bonds to be transferred into shares of common stock 8
JUNK BONDS Junk bonds are bonds that are rated Ba or lower in Moody s classification Junk bonds offer a higher rate of interest. In December, 2006, Delta Airlines, Ford Motor Company, and General Motors all had bond issues that were in the junk bond category. The Wall Street Journal tactfully refers to these securities as high yield bonds. 9
TRADING SECURITIES: THE PRIMARY MARKET Public Offering Initial Public Offering (IPO) Select an Investment bank Prepare paperwork Arrange for financing Carry out the offer Private Placement Quicker, simpler, less expensive Investment bank assistance No SEC registration Only available to accredited investors 10
INVESTMENT BANKS Financial Intermediary Assists firm with IPO Planning Marketing Assessment Determining how to structure the IPO is key role of Investment Banks 11
THE COLORFUL LANGUAGE OF THE STOCK MARKET Red Herring: a preliminary Prospectus that contains a disclaimer printed in bold red ink stating that it does not represent an offer to sell the securities. Pink Sheet Stocks: stocks in very small companies that are publicly traded. In the past, the prices of these stocks were printed on pinks sheets of paper. Green Shoe Option: an arrangement allowing an investment bank to issue more shares during a public offering than originally authorized. Black Tuesday: October 29,1929, stock prices crashed, ushering in a prolonged slump in the performance of stock prices. 12
TRADING SECURITIES: THE SECONDARY MARKET Security Exchanges New York Stock Exchange Traditionally an auction market NASDAQ Electronic exchange Over the Counter Market Electronic Communication Networks 13
NEW YORK STOCK EXCHANGE The largest securities exchange in the United States. It is typically referred to as NYSE. 14
HYBRID MARKET NYSE Hybrid Market - a new trading system to allow investors to execute trading through an automated trading system as well as on the floor. Response to customer demands, new regulations and growth in transaction size Brokers can participate both physically and electronically on the trading floor NYSE+ Direct is the technology that has been expanded for the Hybrid Market 15
NASDAQ A major stock exchange that handles trades through a computerized network 16
COMPARING THE EXCHANGES 17
REGULATIONS OF SECURITIES MARKETS: State Regulations Federal Legislation Securities Act 1933 Require firms to file registration when issuing stock Securities Exchange Act of 1934 Securities and Exchange Commission Established report filing Registration of brokers and dealers Prosecution power Individual and Company Fraudulent Activity (i.e. insider trading) 18
PERSONAL INVESTING! What are your short-term and long-term goals?! How much are you able to invest?! How concerned are you about the tax implications?! How much tolerance do you have for risk? 19
FULL SERVICE VS DISCOUNT BROKERS Individuals must use a broker to trade stocks on the organized exchanges and OTC market Full Service Brokers Provide a range of services like research, advice and tax planning Discount Brokers Basic buy/sell capabilities The competition between brokers is intense and both attempt to offer more services. 20
DIRECT STOCK PURCHASE PLANS Many Corporations offer Direct Stock Purchase Plans Purchase stock direct from company Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock 21
BUYING SECURITIES Market Orders buy or sell a security at the current market price Limit Orders Place limits on the price at which orders are executed 22
STRATEGIES FOR INVESTING IN SECURITIES Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding 23
OTHER SECURITIES-RELATED INVESTMENTS: MUTUAL FUNDS Diversification Relatively Low Cost Professional Management Variety Liquidity 24
OTHER SECURITIES-RELATED INVESTMENTS: ETFS ETFs are a hybrid investment Combines characteristics of a stock with characteristics that are similar to a mutual fund Represents ownership in a market basket of securities You can buy and sell ETFs any time of the day, unlike Mutual Funds 25
KEEPING TABS ON THE MARKET: STOCK INDICES Stock Index tracks how the prices of a specific set of stocks have changed. Standard and Poor s 500 tracks 500 stocks and weighs the total market value of each stock. Dow Jones Industrial Average (DJIA) most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors. 26
STOCK QUOTES ONLINE 27
LOOKING BACK What are the three types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments? 28