Transcript Chapter 18 Financing and Investing through Securities Markets Copyright © 2005 by South-Western, a division of Thomson Learning, Inc.

Chapter 18
Financing and
Investing through
Securities Markets
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
The Primary Market
Security—stock, bond, or money market instrument
that represents an obligation on the part of the
issuer.
 Primary Market—market where new security
issues are first sold to investors; the issuer
receives the proceeds from the sale.
Initial Public Offering (IPO)
 Secondary Market—financial markets where
previously issued securities are traded among
investors.,
Examples: NYSE, NASDAQ
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Securities Exchanges
 The New York Stock Exchange
NYSE (Big Board)—the largest, and
probably the most famous, stock market in
the world
Also one of the
oldest, having
been founded
in 1792
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Securities Exchanges
 The NASDAQ Stock Market
NASDAQ stock market—second-largest
stock market in U.S., trading stock issues
of firms that are typically smaller, less wellknown than those on the NSYE
Unlike trading on the NSYE, which takes
place face-to-face or the trading floor,
trading on the NASDAQ takes place on an
electronic network
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 Money Market Instruments—short-term debt issued by
corporations, financial institutions, and governments.
 Mature within 1 year, Low Risk
Examples:
U.S. Treasury bills – short-term securities issued by the U.S.
Treasury and backed by the full faith and credit of the U.S.
government. Maturities of 30, 90, 180, or 360 days.
Commercial Paper - unsecured debt issued by corporations with
high credit ratings to finance its short-term needs. Commercial
paper is available in a variety of denominations and usually
ranges in maturity from 2 to 270 days.
Certificates of Deposit – a time deposit at a financial institution.
Repurchase Agreement - one party sells the other a security at a
specified price with a commitment to buy the security back at a
later date for another specified price.
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 Bonds – long-term debt security
Issuer promises to pay to the bondholder principal
and interest according to the terms and conditions
of the bond. Sold to raise long-term funds for a
corporation or government agency.
Example: You buy a bond with a $1,000 face
value, a 5% interest rate and a 10-year maturity
 You would collect interest payments totaling
$50 in each of those 10 years. When the
decade was up, you'd get back your $1,000.
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Investors choose from among a variety of bonds
Secured Bond—bond backed by specific
pledge of a company’s assets.
Debenture (Unsecured) Bond
Government - Issued by U.S. Treasury
Municipal – issued by state and local
governments (not subject to Fed. Inc. tax)
Corporate
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 How to Read Bond Quote Tables
Two factors determine a bond’s price:
risk and interest rate
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 Moody’s and Standard & Poor’s Bond Ratings
Bonds vary considerably in terms of risk
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 Retiring Bonds
Bonds mature on a specific date
Borrowers must have the necessary funds
available to pay the principal at that time
Call Provision - allows the issuer to
redeem the bond before maturity
• Serial Bonds – Issue bonds that mature on
different dates
• Sinking Fund – Make annual deposits to
accumulate funds for use in redeeming bonds
when they mature
• Issue more…
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 Stock
Common Stock
Share of ownership in a company.
can vote on major company decisions
They expect to receive cash dividends
and to benefit from capital gains. (Often
no dividends are issued.)
Preferred Stock
receive preference in payment of dividends
Seldom confers voting rights
Dividends are fixed
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Convertible Securities
Bonds or stock that contains a
conversion feature
Gives the holder the right to exchange
their securities for a fixed number of
shares of common stock
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Securities Purchasers
 Investment Motivations
Primary Investment Objectives by Type
of Security
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Securities Purchasers
 Taxes and Investing
Interest received from bonds, and
dividends received from stocks, are
considered ordinary income which is taxed
at the investor’s marginal tax rate
Profits made from the sale of securities
owned for over a year are taxed at the
capital gains rate
Other, special tax rules apply for
investment income
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Buying and Selling Securities
Brokerage Firm—financial intermediary that
buys and sells securities for individual and
institutional investors.
 When investors buy or sell securities through
a brokerage firm, they pay a fee which vary
widely among brokerage firms
 A full-service firm charges higher fees, but
provides a large number of services and
offers investment advice
 A discount firm charges lower fees, but offers
less advice and fewer services - Etrade
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Buying and Selling Securities
 Placing an Order
A market order instructs a brokerage firm
to obtain the highest price possible – if the
investor is selling – or the lowest price
possible – if the investor is buying
A limit order instructs the brokerage firm
not to pay more than a specified price for
stock if the investor is buying, or accept
less than a specified price if the investor is
selling
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 How to
Read
Stock
Quote
Tables
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Stock Indexes
 Stock indexes reflect the general activity of
the stock market
 The most common indices include:
Dow Jones Industrial Average (DJIA) –
average of 30 of the largest and most
widely held public companies in U.S.
Standard & Poor’s 500 – 500 large publicly
held companies that trade on NYSE or
NASDAQ
NASDAQ composite – 3,000 stocks
 Foreign indices include the DAX (Germany),
and the Nikkei (Tokyo)
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Mutual Funds
 Mutual Fund—financial institution that pools
investment money from purchases of its shares
and uses the money to acquire diversified
portfolios of securities consistent with the fund’s
investment objective.
Investors who buy shares of a mutual fund
become part owners of a large number of
securities, thereby lessening their individual risk
Diversified
Managed by professionals
Not traded on stock exchanges
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 Distribution of Mutual Fund Assets by Type of Fund
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 How to Read Mutual Fund Tables
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Legal and Ethical Issues in Securities
 Examples of unethical trading practices
include brokers urging investors to buy highrisk investments or “churning” accounts
(excessive trading) just to generate higher
commissions
 Examples of illegal trading practices include
brokers theft from a client’s portfolio and
giving false or misleading information to
investors
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Legal and Ethical Issues in Securities
 Government Regulation of the Securities
Markets
Full and Fair Disclosure—requirement
that investors should be told all relevant
information by issuers so the can make
informed decisions.
Prospectus—document that gives a
detailed description of a company issuing
securities
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Legal and Ethical Issues in Securities
 Government Regulation of the Securities
Markets
Insider Training—the use of material nonpublic information to make an investment
profit
Example: someone using non-public
information about a pending merger, or a
major oil discovery, to profit in the stock
market at the expense of ordinary investors
Regulation FD – firms must share
information with all investors at the same time
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