Securities Markets: Trading Financial Resources BUSN

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2 Securities Markets: Trading Financial Resources What are the different types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments? 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

3 Basic Types of Financial Securities Three major types of securities that are traded in markets: Common Stock Preferred Stock Bonds 3

4 Common Stock: Basic Ownership The basic form of ownership in a corporation Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets 4

5 Preferred Stock: Getting Preferential Treatment Stock that gives its holder preference over common stockholders No Voting Rights Claim on Assets Payment of Dividends Cumulative Feature 5

6 Bonds: Earning Your Interest Long-term debt issued by a corporation or government Maturity Date Par Value Premium Discount Coupon Rate Current Yield Bonds are a legal obligation 6

7 Could Your Best Investment Be a Piece of Junk? Junk bonds are bonds issued by companies with poor credit ratings. Junk bonds offer a higher rate of interest (and risk). In 2007, only 22 companies in the world defaulted in their bonds. During the recession in 2008, the number soared to 126. In late 2008, investing in junk bonds became a hot strategy. 7

8 Methods of Retiring Bonds Most bonds are secured with a pledge of specific assets. Methods of retiring bonds: Serial bonds have unique maturity dates and help spread out repayments. Companies may establish a sinking fund to assist in repayment. Sinking funds allows the issuer to buy back bonds each year. Callable bonds have provisions for early redemption. Convertible bonds allow bonds to be transferred into shares of common stock. 8

9 Trading Securities: The Primary Market Public Offering: Initial Public Offering (IPO) Select an Investment bank (underwriter) Prepare paperwork Arrange for financing Carry out the offer Private Placement: Quicker, simpler, less expensive Investment bank assistance No SEC registration Only available to accredited investors 9

10 Trading Securities: The Secondary Market Security Exchanges New York Stock Exchange Traditionally an auction market NASDAQ Electronic exchange Two largest exchanges in the United States Over the Counter Market Electronic Communication Networks 10

11 Major Global Stock Exchanges 11

12 Big Changes at the NYSE NYSE Hybrid Market - a new trading system to allow investors to execute trading through an automated trading system called NYSE Direct+ The Hybrid Market changed more in 2008 NYSE replaced its specialists with designated market makers (DMMs) who have more freedom to participate in the market for specific stocks. 12

13 The Over-the-Counter Market (OTC) Small corporations or those without satisfactory business performance are listed on the OTC. Some corporations choose OTC to avoid listing fees and charges. The market for most OTC is much less active than stocks listed on the major exchanges. 13

14 Penny Stocks: Finding Something Pretty in the Pinks? 1,000 shares of stock for under a hundred bucks! Penny stocks are low-priced speculative stocks issued by small corporations. They are not traded on major exchanges Listed on online services called Pink Sheets Investing in penny stocks is risky The companies lack the resources to survive setbacks Limited reliable information Little SEC oversight The market is not active it make be hard to find buyers if you want out 14

15 Electronic Communications Networks A new completely computer-based securities market ECNs automatically match buyers and sellers Investors can trade after hours Both NYSE and NASDAQ have bought into ECNs 15

16 Regulation of Securities Markets: Establishing Confidence in the Market State Regulations Federal Legislation Securities Act 1933 Require firms to file registration when issuing stock Securities Exchange Act of 1934 Securities and Exchange Commission Established report filing Registration of brokers and dealers Prosecution power Individual and Company Fraudulent Activity (i.e. insider trading) 16

17 Symbolic Logic: Do You LUV this HOG s DNA? Every publicly traded corporation is identified by a unique combination of letters known as stock symbols. Can you Guess These? GOOG Google MMM 3M JAVA Sun Microsystems HOG Harley-Davidson DNA Genentech LUV Southwest Airlines 17

18 Personal Investing What are your short-term and long-term goals? Given your budget, how much are you able to invest? How long can you leave your money invested? How concerned are you about the tax implications of your investments? How much tolerance do you have for risk? DIVERSIFICATION 18

19 Choosing a Broker: Access to the Markets Individuals must use a broker to trade stocks on the organized exchanges and OTC market. Full Service Brokers Provide a range of services Discount Brokers Basic buy/sell capabilities The competition between brokers is intense and both attempt to offer more services. 19

20 Buying Securities: Let s Make a Deal Market Orders buy or sell a security at the current market price Limit Orders place limits on the price at which orders are executed 20

21 Strategies for Investing in Securities Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding 21

22 How Do You like Them Apples? In the first years of the ipod, Apple s stock went to the moon Shares rose 1600% between 2003 and 2007 Many investors missed out they had bailed on Apple at the turn of the century The fast rise of the stock even shocked Apple insiders Steve Jobs, the company CEO, had renegotiated his stock options Although his stock was worth over a billion dollars in mid-2007, they would have been worth over $5 billion 22

23 Other Investment Options: Mutual Funds and Exchange Traded Funds Mutual Funds Diversification Professional Management Variety Liquidity Exchange Traded Funds Features of stocks and a mutual fund Purchasing ownership in a market basket of stocks You can buy and sell ETFs any time of the day, unlike Mutual Funds 23

24 Does Green Investing Earn Green Returns? The New Alternatives Fund which was established in 1982 selected stocks based on environmental considerations. The number of green funds has grown Over the long haul, these funds are making money The Winslow Green Growth Fund has an annual return of 8.45% 24

25 Stock Indices: Tracking the Trends Stock Index : Tracks how the prices of a specific set of stocks have changed Standard and Poor s 500: Tracks 500 stocks and weighs the total market value of each stock Dow Jones Industrial Average (DJIA) most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors. 25

26 Major Stock Price Indices 26

27 Tracking the Performance of Specific Securities Source: Yahoo! Finance stock quote accessed April 2, Reproduced with permission of Yahoo! Inc. YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc. Source: Yahoo! Finance stock quote accessed April 2, Reproduced with permission of Yahoo! Inc. YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc. 27

28 Looking Back What are the different types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments? 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28

Types of Stock. Common Stock most common form of stock. Preferred Stock. Companies may customize other classes of stock.

Types of Stock. Common Stock most common form of stock. Preferred Stock. Companies may customize other classes of stock. Stock Market Basics What are Stocks? Stock is ownership in a publicly traded company. Stock is a claim on the company s assets and earnings. The more stock you have, the greater your claim as an owner.