• Securities Financial instrument such as stocks and bonds.
PRIMARY VERSUS SECONDARY
MARKETS
• Primary market
• Initial public offering (IPO)
• Sold in open markets or through investment bankers
• Underwriting
• Secondary market
TYPES OF SECURITIES
Money Market Instruments
• Money market instruments Short-term debt securities
Bonds
• Firms use bonds to obtain long-term debt capital.
Quality Ratings for Bonds
• Two factors determine the price of a bond: its risk and its interest rate.
• Bond rating indicates a bond’s level of risk.
Retiring Bonds
• Firms must have necessary funds to pay bonds at maturity.
• Call provisions.
Stock
Common stock Shares of ownership in a corporation.
Preferred stock Stock whose holders have priority over
common stockholders.
Convertible Securities
• Holder has right to exchange for a fixed number of shares of common stock.
SECURITIES PURCHASERS
• Institutional investors and individual purchasers
Investment Motivations
• Growth in capital over time
• Stability of principal
• Liquidity
• Current income from dividend yields
• Income growth
Taxes and Investing
• Tax considerations are an important factor in investment decisions.
SECURITIES EXCHANGES
• Stock exchanges Financial market where stocks are traded.
New York Stock Exchange
• World’s largest, as measured by total value of stock traded.
The Nasdaq Stock Market
• A computerized communications network that links member investment firms.
Other U.S. Stock Markets
Foreign Stock Markets
• Most countries have at least one stock exchange.
ECNs and the Future of Stock Markets
BUYING AND SELLING SECURITIES
Brokerage firm Buys and sells securities for individual and institutional investors.
Placing an Order
• Investor initiates purchase by contacting brokerage firm.
• Market order
• Limit order
Stock Indexes
MUTUAL FUNDS AND EXCHANGETRADED FUNDS
Mutual fund Financial institution that pools money from purchases of its shares
and uses the money to acquire diversified portfolios of securities consistent
with the fund’s investment objectives.
Mutual Funds
• Investors become part owners of large number of securities, lessening individual
risk.
Exchange-Traded Funds
• Raises funds by selling shares to investors and then uses those funds to purchase
a portfolio of securities.
• Low operating expenses, more tax efficient.
LEGAL AND ETHICAL ISSUES IN
SECURITIES TRADING
Government Regulation of the Securities Market
• Regulated through the Securities and Exchange Commission
• Full and fair disclosure
• Insider trading
Industry Self-Regulation