10
Securities Markets: Trading Financial Resources
BUSN
©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.
©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.
1

10
• 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?
BUSN
©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

10
Securities Markets: Trading Financial Resources
Basic Types of Financial Securities
Three major types of securities that are traded in markets:
 Common Stock
 Preferred Stock
 Bonds
BUSN
©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.
3

10
Securities Markets: Trading Financial Resources
Common Stock: Basic Ownership
• Voting Rights
• Right to Dividends
• Capital Gains
• Preemptive Rights
• Right to Residual
Claim on Assets
BUSN
©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.
4

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
5

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
6

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
7

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
8

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
9

10
Securities Markets: Trading Financial Resources
Trading Securities: The Secondary Market

Security Exchanges
•
New York Stock Exchange
Traditionally an “auction market”
•
NASDAQ
Electronic exchange

Over the Counter Market

Electronic Communication Networks
Two largest exchanges in the United
States
BUSN
©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.
10

10
Securities Markets: Trading Financial Resources
Major Global Stock Exchanges
BUSN
©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.
11

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
12

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
13

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
14

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
15

10
Securities Markets: Trading Financial Resources
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)
BUSN
©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.
16

10
Securities Markets: Trading Financial Resources
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
HOG
Harley-Davidson
DNA
Genentech
LUV
Sun Microsystems Southwest Airlines
BUSN
©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.
17

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
18

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
19

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
20

10
Securities Markets: Trading Financial Resources
Strategies for Investing in Securities
• Investing for Income
• Market Timing
• Value Investing
• Investing for Growth
• Buying and Holding
BUSN
©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.
21

10
Securities Markets: Trading Financial Resources
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
BUSN 22
©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.

10
Securities Markets: Trading Financial Resources
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
BUSN
©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.
23

10
Securities Markets: Trading Financial Resources
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%
BUSN
©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.
24

10
Securities Markets: Trading Financial Resources
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.
BUSN
©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.
25

10
Securities Markets: Trading Financial Resources
Major Stock Price Indices
BUSN
©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.
26

10
Securities Markets: Trading Financial Resources
Tracking the Performance of Specific Securities
Source: Yahoo! Finance stock quote accessed April 2, 2009. 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, 2009. Reproduced with permission of Yahoo!
Inc. YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc.
BUSN
©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.
27

10
• 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?
BUSN
©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