Using Securities Markets for Financing and Investing Opportunities

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1 Chapter 19 Using Securities Markets for Financing and Investing Opportunities McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Chapter Nineteen NAME that COMPANY When the price of their stock rises to a certain level, many companies will split the stock in order to make the stock appear more affordable. However, this company run by America s most successful investor has never split its stock even when the price of the company s stock reached $150,000 a share (that s right $150,000 for one share.) Name that company! Berkshire Hathaway 19-5

3 The Function of Securities Markets LG1 The BASICS of SECURITIES MARKETS Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: 1. Assist businesses in finding long-term funding to finance capital needs 2. Provide private investors a place to buy and sell securities such as stocks and bonds

4 The Function of Securities Markets LG1 TYPES of SECURITIES MARKETS Primary markets Handle the sale of new securities Initial Public Offering (IPO) -- The first offering of a corporation s stock Secondary markets Handle the trading of securities between investors with the proceeds of the sale going to the seller 19-7

5 The Role of Investment Bankers LG1 INVESTMENT BANKERS and INSTITUTIONAL INVESTORS Investment Bankers -- Specialists who assist in the issue and sale of new securities. Institutional Investors -- Large organizations such as pension funds or mutual funds that invest their own funds or the funds of others. 19-8

6 The Role of Investment Bankers LG1 INSTITUTIONAL INVESTORS Top 10 Institutional Investors (ranked by world assets) Combined asset value (2014) of Top 10 is greater than U.S. GDP Which company is the largest institutional Investor in the world? What is the total value of their worldwide assets? All amounts are in $ U.S. millions Data as of Dec. 31,

7 Stock Exchanges LG2 TOP STOCK EXCHANGES Source: What is the largest stock exchange in the world? How about the size of the Top 15 in the world (Oct. 2014)? 19-11

8 Securities Regulations and the SEC LG2 The SECURITIES and EXCHANGE COMMISSION Securities and Exchange Commission (SEC) Federal agency regulating stock exchanges Prospectus Must file this with the SEC before issuing stock; Must be sent to prospective investors Search using EDGAR (SEC)

9 Advantages & Disadvantages of Issuing Stock LG3 ADVANTAGES of ISSUING STOCK Stockholders are owners of a firm and never have to be repaid their investment. There s no legal obligation to pay dividends Issuing stock can improve a firm s balance sheet since stock creates no debt

10 Issuing Shares of Common and Preferred Stock LG3 TWO CLASSES of STOCK Common Stock Holders have the right to vote for the board of directors and share in the profits if dividends are approved Preferred Stock Owners are given preference in the payment of company dividends before common stock dividends are distributed 19-18

11 Learning the Language of Bonds LG4 LEARNING the LANGUAGE of BONDS Bond -- A corporate certificate indicating that an investor has lent money to a firm (or a government). Principal Face value of the bond Interest (Coupon Rate) Payment the bond issuer makes to the bondholders 19-20

12 Advantages & Disadvantages of Issuing Bonds BOND RATINGS LG4 Rating Moody s S & P Fitch Description Aaa AAA AAA Highest Quality Aa AA AA High Quality A A A Upper-Medium Grade Baa BBB BBB Medium Grade Ba BB BB Lower-Medium Grade B B B Speculative Caa CCC, CC CCC Poor Ca C DDD Highly Speculative C D D Lowest Grade 19-23

13 How Investors Buy Securities LG5 BUYING SECURITIES Stockbroker -- A registered representative who works as a market intermediary to buy and sell securities for clients. Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds

14 Choosing the Right Investment Strategy LG5 FIVE INVESTMENT CRITERIA 1. Investment risk 2. Yield 3. Duration 4. Liquidity 5. Tax consequences 19-29

15 Choosing the Right Investment Strategy LG5 BlackRock List (2015) Source:

16 Reducing Risk by Diversifying Investments LG5 PRIMARY INVESTMENT SERVICES CONSUMERS NEED Savings and investing advice Help with 401k plans Retirement planning Tax planning Estate planning Education expense planning Source: Investment Company Institute

17 Investing in Stocks LG6 PERCEPTIONS of the MARKET Bulls: Investors who believe stock prices are going to rise. Bears: Investors who expect stock prices to decline. Source: BlackRock.com

18 Understanding Stock Quotations LG6 UNDERSTANDING STOCK QUOTATIONS 19-42

19 Understanding Bond Quotations LG7 UNDERSTANDING BOND QUOTATIONS 19-45

20 Investing in Mutual Funds & Exchange- Traded Funds LG8 INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors money and buys stocks according to the fund s purpose. Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges, but are traded more like individual stocks than mutual funds

21 Investing in Mutual Funds & Exchange- Traded Funds LG8 PERCENTAGE of HOUSEHOLDS OWNING MUTUAL FUNDS Year % of Households % % % % % Source: Investment Company Institute Factbook

22 Understanding Mutual Fund Quotations LG8 UNDERSTANDING MUTUAL FUND QUOTATIONS 19-50

23 Understanding Mutual Fund Quotations LG8 COMPARING INVESTMENTS 19-51

24 Chapter 20 Money, Financial Institutions, and the Federal Reserve McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

25 What is the Money Supply? LG2 The MONEY SUPPLY Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: - M1 -- Money that can be accessed quickly (coins, paper money, travelers checks, etc.). - M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.). - M3 -- M2 + big deposits like institutional money market funds

26 What is the Money Supply? LG2 HIGHEST U.S. BILL DENOMINATION? Currently: highest denomination is $100 bill The highest bill ever printed, however, was a $100,000 note that was printed from December 18, 1934 to January 9, It was used for transactions between Federal Reserve Banks

27 Basics About the Federal Reserve LG2 The 12 FEDERAL RESERVE DISTRICT BANKS 20-77

28 Basics About the Federal Reserve LG2 MANAGING the MONEY SUPPLY The Fed uses three basic tools: 1. Reserve Requirement -- A percentage of commercial banks checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank. 2. Open-Market Operations -- The buying and selling of government bonds. 3. Discount Rate -- The interest rate the Fed charges for loans to member banks

29 Protecting Your Funds LG5 PROTECTING DEPOSITORS MONEY The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $250,000. The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. The National Credit Union Administration (NCUA) -- Provides up to $250,000 coverage per individual depositor per institution

30 Using Technology to Make Banking More Efficient LG6 TECHNOLOGICAL ADVANCEMENTS in BANKING Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically. Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account.

31 Connecting through Social Media Career Plan Career Plan Q&A Work Time

Using Securities Markets for Financing & Investing Opportunities

Using Securities Markets for Financing & Investing Opportunities Chapter Nineteen Using Securities Markets for Financing & Investing Opportunities McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. WARREN BUFFETT Berkshire Hathaway

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