CB12e Basic PPT Ch18

8/14/2019 CB12e Basic PPT Ch18

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Securities Financial instrument such as stocks and bonds.

PRIMARY VERSUS SECONDARYMARKETS

Primary market Market in which new security issues are first sold to investors;

issuers receive the proceeds from the sale.

Initial public offering (IPO) The first sale of a companys stock to the general

public.

Investment bankers Financial specialists who handle the sales of most

corporate and municipal securities.

Underwriting Process of purchasing an issue from a firm or government andthen reselling the issue to investors.

Secondary market Market in which existing security issues are

bought and sold by investors.

Examples: New York Stock Exchange, Nasdaq
http://www.nyse.com/http://www.nasdaq.com/http://www.nasdaq.com/http://www.nyse.com/


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TYPES OF SECURITIESMoney Market Instruments

Money market instruments Short-term debt securities issued

by corporations, financial institutions, and governments.

Generally low-risk securities and are purchased by investorswhen they have surplus cash.

Bonds

Through bonds firms obtain long-term debt capital.Claims of bondholders are satisfied before those of stockholders in cases ofbankruptcy.


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Quality Ratings for Bonds

Two factors determine the price of a bond: its risk and its interest rate.Bond rating A rating of a bonds level of risk.Higher interest rates bring higher bond prices.Market interest rates also influences bond prices.Retiring BondsFirms must have necessary funds to pay bonds at maturity.Some firms issue serial bonds, an issue of bonds that mature at different rates.Call provision Allows the issuer to redeem the bond before its maturity at a

prespecified price.


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Stock

Common stock Shares of ownership in a corporation.

Holders of common stock vote on major companydecisions.

In exchange for their investment, they receivedividends and/or benefits of increased stock price.

Preferred stock Stock whose holders have priority over

common stockholders in the payment of dividends but

usually have no voting rights.

Convertible Securities

Feature of bond or preferred stock that gives the holder the right to exchange thebond or preferred stock for a fixed number of shares of common stock.

Convertible bonds pay a lower interest rate than those without a conversionfeature.


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Investment Motivations


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Taxes and Investing

Interest from government and corporate bonds is income taxed at the investorsmarginal tax rate.

Dividends are taxed at a lower rate.Profits from stock sales are taxed as capital gains.Tax considerations are an important factor in investment decisions.


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SECURITIES EXCHANGESStock exchanges Financial market where stocks are traded.

Exist throughout the world, and most countries have at least one.New York Stock Exchange

Lists more than 3,000 common and preferred stocks with market value of morethan $13 trillion.

Worlds largest, as measured by total value of stock traded.The Nasdaq Stock Market

A computerized communications network that links member investment firms.

Worlds largest intranet.Lists approximately 5,000 stocks.


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Other U.S. Stock Markets

American Stock Exchange, or AMEX, in New York.Daily trading volume around 60 million shares.

Regional stock exchanges include Chicago, Pacific (San Francisco), Boston,Cincinnati, and Philadelphia Stock Exchanges.

Foreign Stock Markets

Most countries have at least one stock exchange.One of largest outside U.S. is the London Stock Exchange.

Lists 2,900 companies.Handles two-thirds of all cross-border trading worldwide.

ECNs and the Future of Stock Markets

Electronic communications networks (ECNs) Fourth marketin which buyers and sellers meet trade directly with one another.


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Stock Indexes

Examples include the Dow Jones Industrial Average, Standard & Poors 500,and the Nasdaq Composite indexes.

Dow Jones Industrial Average, started in 1884, has served as a general measureof overall stock prices and a reflection of the economy.

Only original remaining member is General Electric.
http://www.standardandpoors.com/http://dynamic.nasdaq.com/services/indexes/ViewIndexes/Nasdaq_composite.aspx?symbol=IXIChttp://dynamic.nasdaq.com/services/indexes/ViewIndexes/Nasdaq_composite.aspx?symbol=IXIChttp://djindexes.com/mdsidx/index.cfm?event=showAverageshttp://djindexes.com/mdsidx/index.cfm?event=showAverageshttp://dynamic.nasdaq.com/services/indexes/ViewIndexes/Nasdaq_composite.aspx?symbol=IXIChttp://dynamic.nasdaq.com/services/indexes/ViewIndexes/Nasdaq_composite.aspx?symbol=IXIChttp://www.standardandpoors.com/


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MUTUAL FUNDS AND EXCHANGE-TRADED FUNDS

Mutual fund Financial institution that pools money from purchases of its shares

and uses the money to acquire diversified portfolios of securities consistent

with the funds investment objectives.Mutual Funds

Investors become part owners of large number of securities, lessening individualrisk.

Total mutual fund assets exceed $8 trillion.55 million American households own mutual fund shares.


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Exchange-Traded Funds

Raises funds by selling shares to investors and then uses those funds to purchasea portfolio of securities.

Sells a fixed number of shares to investors in what is effectively an initial publicoffering.

Then ETF shares trade on stock exchanges much like shares of individualcompanies.

Almost 200 ETFs with total assets of around $250 billion.Two main appeals:

Shareholders are charged little or nothing for annual operating expenses.

Can be more tax efficient because they dont generate a lot of taxable capitalgains.


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LEGAL AND ETHICAL ISSUES INSECURITIES TRADING

Government Regulation of the SecuritiesMarket

SEC requires registration of all new public issues of corporate securities.Full and fair disclosure Requirement that investors should be told all relevant

information by stock or bond issuers so they can make informed decisions.

Insider trading Use of material, nonpublic information to make investor profits.

Industry Self-RegulationRules of conduct established and updated by the National Association of

Securities Dealers

Markets use surveillance for spotting possible violations of trading rules orsecurities laws.

NYSE St k W t h t fl l i d l ti it

CB12e Basic PPT Ch18

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