Understanding Securities and Securities Markets
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Transcript of Understanding Securities and Securities Markets
Understanding SecuritiesUnderstanding Securitiesand Securities Marketsand Securities Markets
Understanding SecuritiesUnderstanding Securitiesand Securities Marketsand Securities Markets
Chapter 22
Chapter 22 Learning GoalsChapter 22 Learning Goals
1.1. WWhat is the function of the securities markets?
2.2. HHow do common stock, preferred stock, and bonds differ as investments?
3.3. WWhat other types of securities are available to investors?
4.4. WWhere can investors buy and sell securities, and how are these securities markets regulated?
Chapter 22 Learning GoalsChapter 22 Learning Goals (cont’d.) (cont’d.)
5.5. HHow do investors open a brokerage account and make securities transactions?
6.6. WWhich sources of investment information are the most helpful to investors?
7.7. WWhat can investors learn from stock, bond, and mutual fund quotations?
8.8. WWhat are the current trends in the securities markets?
Learning Goal 1Learning Goal 1
• WWhat is the function of the securities markets?– Securities markets
• Allow stocks, bonds, and other securities to be bought and sold quickly and at a fair price
• New issues are sold in primary market• Securities are traded in secondary market
– Investment bankers• Specialize in issuing and selling new security issues
– Stockbrokers• Licensed professionals who buy and sell securities on
behalf of their clients
SecuritiesSecurities::
Investment certificates issued by corporations or governments that represent wither equity or debt
Types of Securities MarketsTypes of Securities Markets
• Primary– new securities sold to the public
– issuer gets proceeds
• Secondary– already issued securities are traded
– stock exchanges, commodities exchanges, over-the-counter market
Learning Goal 2Learning Goal 2• HHow do common stock, preferred stock, and bonds differ as investments?
Common StockCommon Stock Preferred StockPreferred Stock BondsBonds
Represents ownership in a corporation
Represents ownership in a corporation
Form of debt; may be secured or unsecured
Stockholders have voting rights
Stockholders receive a stated dividend
Bondholders are creditors of issuing organization
Riskier than preferred stock and bonds
Dividends must be paid before they are paid to common stockholders
Bond issuer must pay interest
Offer potential for increased value and dividend payment income
Usually bought for dividend income rather than price appreciation
Bond issuer must repay principal at maturity
Neither price increases nor dividends are guaranteed
Provide steady source of income
Stock: Equity FinancingStock: Equity Financing
• Common stock– represents ownership interest
– returns: dividends, stock-price increases
• Preferred stock– represents ownership interest
– receive dividends before common stockholders
– provides fixed income
BondsBonds::
Long-term debt obligations (liabilities) of corporations & governments
• issuers must pay back:–principal (par value)–plus interest (coupon rate)
Bonds: Debt FinancingBonds: Debt Financing
• Corporate bonds– secured vs. unsecured– convertible bonds
• US government securities– treasury bills, notes, bonds
• Municipal bonds
• Bond ratings– letter grades represent the risk
Learning Goal 3Learning Goal 3
• WWhat other types of securities are available to investors?– Mutual funds
• Financial service companies that pool the funds of many investors to buy a diversified portfolio of securities
• Offer a convenient way to diversify• Professionally managed
– Futures contracts• Legally binding obligations to buy or sell specified quantities
of commodities at an agreed-on price at a future date• Very risky investments because price may change
drastically
Other Popular SecuritiesOther Popular Securities
• Mutual funds– pools investors’ funds
• Futures contracts
• Options
Learning Goal 4Learning Goal 4
• WWhere can investors buy and sell securities, and how are these securities markets regulated?– Securities are resold on:
• Organized stock exchanges, such as the New York Stock Exchange• Regional stock exchanges• Over-the-counter market
– Securities markets are regulated by• Securities Act of 1933
– Requires disclosure of important information on new securities issues
• Securities Exchange Act of 1934 and 1964 amendment– Formally empowered the SEC to regulate organized securities exchanges and
over-the-counter market
• Investment Company Act of 1940– Places investment companies such as mutual funds under SEC control
• Self-regulatory groups such as the NASD• “Circuit breakers” to halt trading if the Dow Jones Industrial Average drops
rapidly
Securities ExchangesSecurities Exchanges
• Organized stock exchanges– re-sell securities in an auction-type format– US stock exchanges
• New York Stock Exchange• American Stock Exchange
– Global trading & foreign exchanges
• Over-the-Counter Market– electronic-based Nasdaq
Securities Exchanges: NYSESecurities Exchanges: NYSE
• To prevent a fast crash, the New York Stock Exchange has several “trading trading breakersbreakers”– a 1,100-point drop1,100-point drop stops trading for
1 hour if it occurs before 2:00 pm– a 2,250-point2,250-point dropdrop stops trading for
2 hours if it occurs before 1:00 pm– a 3,350-point3,350-point dropdrop stops trading for the rest
of the day
Source: Associated Press in The Arizona Republic, Jan. 3, 2000, pg. D3.
Learning Goal 5Learning Goal 5
• HHow do investors open a brokerage account and make securities transactions?– Choose a brokerage firm and stockbroker– Open a cash account or a margin account
• Cash account - all securities transactions are paid in full• Margin account - allows investors to put up 50% of price of
securities and borrow the rest from broker
– Give an order to broker to buy or sell securities– Broker sends the order to the stock exchange to
be carried out– If stock is an over-the-counter stock, broker finds the
dealer with the best price
How to Buy and Sell SecuritiesHow to Buy and Sell Securities• Securities transactions
– place order with broker– broker makes the transaction– blocks of 100 are round lotsround lots– market orders, limit orders, stop-loss orders
• Online investing– lower transaction costs– 15% of people in a Consumer Reports survey
had purchased stock or other investments online (Source: Consumer Reports, Dec. 1999, p. 10)
Learning Goal 6Learning Goal 6
• WWhich sources of investment information are the most helpful to investors?– Popular investment information sources:
• Economic and financial publications– The Wall Street Journal– Barron’s– Business Week– Fortune– Smart Money– Money
• Numerous Internet sites• Subscription services• Investment newsletters• Security price quotations
Popular Sources ofPopular Sources ofInvestment InformationInvestment Information
• Economic & financial publications– Barron’s– Wall Street Journal– Business Week
• Online information resources• Security price quotations
– stocks, bonds, mutual funds
• Market averages & indexes– Dow Jones Industrial Average
Learning Goal 7Learning Goal 7• WWhat can investors learn from stock, bond, and mutual fund
quotations?– Stock quotationsStock quotations
• Show highest and lowest prices paid for stock during previous 52 weeks• Annual dividend and dividend yield• Price/earnings ratio and the day’s trading volume• High, low, and closing price for the day• Change from the previous day’s closing price
– Bond quotationsBond quotations• Show coupon interest rate• Maturity date• Current yield and trading volume• Closing price and change in closing price from previous day
– Mutual fund quotationsMutual fund quotations• Provide fund’s net asset value• Net change in NAV from previous day• Year-to-date percent return
Example Stock QuotationExample Stock Quotation
Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg
40 25 HormelFood HRL.66 1.7 21 1107 39 38 38 -
High price for previous 52 weeks
Abbreviatedcompany name
Symbol for the company
Annual dividendper share
Dividendyield
Price/earnings ratio
Volume of shares traded
High price for the day
Closing price for the day
Net change
price from previous
day
Stock PerformanceStock Performance
Some reasons why stock prices tend to increase every January:January:
• small companies often record gains in late Dec., which carries through Jan.
• investors who sell ‘bad’ stocks late in the year (to deduct the losses on taxes) buy them back in Jan.
Source: The Arizona Republic, Jan. 2, 2000, pg. D2.
Example Bond QuotationExample Bond Quotation
Cur. NetBonds Yld. Vol. Close Chg
DukeEn 705 7.6 46 99 - Abbreviated company name
Current interest
yield
Number of bonds traded
Closing price for the day
Net change
price from previous
day
Annual interest rate & maturity
date
Learning Goal 8Learning Goal 8
• WWhat are the current trends in the securities markets?– Securities markets and the investment industry are
changing considerably• New York Stock Exchange no longer dominates equity market
activity
• Nasdaq is challenging the Big Board
• Emergence of electronic exchanges
– Individual investors are becoming a market force• Improved technology
• Relative ease of online investing
• Move toward self-management of retirement funds
Trends in SecuritiesTrends in Securities
Market competition Nasdaq, AMEX, NYSE
electronic communications networks
(ECNs)
More individuals investing
Rise in Internet InvestmentRise in Internet Investment
0
100
200
300
400
500
600
700
Bil
lio
ns
of
Do
llar
s In
vest
ed i
n I
nte
rnet
C
om
pan
ies
1998 1999 2000 2003
estim
ated
Money Invested in the Internet is Estimated to Rise to $700 billion$700 billion by 2003
Source: Newsweek, Dec. 13, 1999, p. 63.