Securities and InvestmentsGateway to Business

Fall 2007

Topics

• Securities• Common Stock, Bonds, Mutual Funds

• Securities Markets• Primary, Secondary

• Investment Banking• Mutual Funds• Risk and Return

What is a Security?

• An instrument for personal protection

• Legal claim on corporate assets and profits

Corporate Securities

• Issued (sold) by corporations to investors

• Represent legal claims against the corporation’s assets and profits

• Most common examples:• Common Stocks• Bonds

Corporate SecuritiesAssets Corporate

BondsDebt(Borrowed Money)

Common StockEquity(Owners’ Money)

Corporate Assetsare financed byDebt and Equity

Common Stocks and Corp Bonds

• Corporate Bonds are Debt Securities• money borrowed by the corporation• money invested by lenders to the corporation• provide fixed income to bondholders

• Common Stocks are Equity Securities• money invested by owners of the corporation• provide variable (residual) income to stockholders

Common Stocks and Corp Bonds

• Corporations pay Interest to Bondholders• Failure to pay interest results in default

• Corporations pay Dividends to Stockholders• Firms have no obligation to pay dividends

• When would they pay dividends?• When wouldn’t they pay dividends?

How do Corps Issue (Sell) Stock?

• Initial Public Offering (IPO)• Initial sale of a corporation’s stock to the “public”• Known as “Going Public”

• Google IPO August 19, 2004• Issued 22.5 million shares of stock at $85 per

share• GOOG raised $1.9 Billion from Equity Investors in

the Primary Market.

GOOG Stock Price in the Secondary Market

Price-Earnings (P/E) Ratio

• P/E ratio is Stock Price divided by EPS

• It is what investors are willing to pay for $1 of current Earnings• i.e., it is the Market Value of $1 of current

earnings

• How does Google’s stock price and P/E ratio compare to a more mature company like Proctor and Gamble?

Google valuation data

Proctor and Gamble valuation data

Wal-Mart or Dicks Sporting Goods?

Wal-Mart (WMT) vs. Dick’s (DKS)November 9, 2007

WMT

DKS

Stock Price $42.90

$27.50

Shares Out (million)

4,068

110

Market Cap ($billion)

174.5

3.1

Sales ($billion) 348.6

3.1

Assets ($billion) 151.2

1.5

Net Income ($million)

11,280

112

EPS $2.99

$1.28

P/E Ratio 14.5x

22x

WMT or DKS?

Growth Jan-07Jan-

06Jan-

05Jan-

04 AvgRevenue 10.5 9.6 11.3 4.9 9.1%Net income 0.5 9.4 13.4 12.6 9.0%EPS 1.1 11.2 16.4 14.4 10.8%

Growth Feb-07Jan-

06Jan-

05Jan-

04 AvgRevenue 18.6 24.4 43.4 15.6 25.5%Net income 54.3 5.9 30.5 38.0 32.2%EPS 50.4 3.8 23.8 12.2 22.6%

Wal-Mart & Dick’sSince January, 2003

A recent check-in on Dick’s vs. Wal-MartOctober 2008 – October 2010

Wal-Mart & Dick’sEach had their growth phase

Mutual Fund

• An investment company (corporation) that invests in common stocks and bonds issued by other corporations• Allows diversification for individual investors• Professional investment management

• A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund, or a security can rise in value. A fund can also lose money and drop in value.

Risk and Return

Return

Risk

Short-term US Treasury securities

Long-term US Treasury securities

Corporate Bonds

Large company Common Stocks

Small company Common Stocks

Terms

• Market capitalization (market cap)• Price-earnings ratio• Common stock—ownership, residual income,

dividends• Corporate bond--debt security, fixed income,

interest• Investment bank• IPO, going public• Primary and secondary markets• Mutual Fund

Web References

• Wall Street Journal (www.wsj.com)• New York Stock Exchange (www.nyse.com)• NASDAQ Market (www.nasdaq.com)• Investment Company Institute (www.ici.org)• The Motley Fool (www.fool.com)• Investor Words (www.investorwords.com)