*
Chapter
Nineteen
*
Using
Securities
Markets for
Financing
and Investing
Opportunities
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
The BASICS of
SECURITIES MARKETS
*The Function
of Securities
Markets
LG1
*
• 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.
19-2
LEARNING the
LANGUAGE of STOCKS
* Learning the
Language of
Stocks
LG3
*
• Stocks -- Shares of
ownership in a company.
• Stock Certificate -Evidence of stock ownership.
• Dividends -- Part of a firm’s
profits that the firm may
distribute to stockholders as
either cash or additional
shares.
19-3
ADVANTAGES of
ISSUING STOCKS
*
Advantages &
Disadvantages
of Issuing Stock
LG3
*
• Stockholders are owners of
a firm and never have to be
repaid their investment.
• There’s no legal obligation to
pay dividends.
• Issuing a stock can improve
a firm’s balance sheet since
stock creates no debt.
19-4
DISADVANTAGES of
ISSUING STOCKS
*
Advantages &
Disadvantages
of Issuing Stock
LG3
*
• Stockholders have the right to vote for a
company’s board of directors.
• Issuing new shares of stock can alter the control
of the firm.
• Dividends are paid from after-tax profits and are
not tax deductible.
• The need to keep stockholders happy can affect
management’s decisions.
19-5
*
TWO CLASSES of STOCK
Issuing Shares
of Common
Stock
LG3
*
• Common Stock -- The most basic form; 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. Preferred stock can
also be:
- Callable
- Convertible
- Cumulative
19-6
LEARNING the
LANGUAGE of BONDS
*Learning the
Language of
Bonds
LG4
*
• Bond -- A corporate certificate indicating that an
investor has lent money to a firm.
• The principal is the face value
of the bond.
• Interest -- The payment the
bond issuer makes to the
bondholders to compensate them
for the use of their money.
19-7
ADVANTAGES of
ISSUING BONDS
*
Advantages &
Disadvantages
of Issuing Bonds
LG4
*
• Bondholders are creditors, not owners of the
firm and can’t vote on corporate matters.
• Bond interest is tax deductible.
• Bonds are a temporary source of funding and
are eventually repaid.
• Bonds can be repaid before the maturity date if
they contain a call provision.
19-8
DISADVANTAGES of
ISSUING BONDS
*
Advantages &
Disadvantages
of Issuing Bonds
LG4
*
• Bonds increase debt and can affect the market’s
perception of the firm.
• Paying interest on bonds is a legal obligation.
• If interest isn’t paid, bondholders can take legal
action.
• The face value of the bond must be repaid on
the maturity date.
19-9
DIFFERENT CLASSES of
CORPORATE BONDS
*Different
Classes of
Bonds
LG4
*
• Corporations can issue two classes of bonds:
1. Unsecured bonds (debenture bonds): not backed
by specific collateral.
2. Secured bonds:
backed by
collateral (land or
equipment).
19-10
*
FIVE INVESTMENT CRITERIA
Choosing the
Right
Investment
Strategy
LG5
*
1. Investment risk
2. Yield
3. Duration
4. Liquidity
5. Tax consequences
19-11
SELECTING STOCKS
*Investing in
Stocks
LG6
*
• Capital Gains -- The positive difference between
the price at which you bought a stock and what you
sell it for.
• Investors can also choose stocks according to
their strategy:
-
Blue-chip stocks
Growth stocks
Income stocks
Penny stocks
19-12
*
STOCK SPLITS
Stock Splits
LG6
*
• Stock Splits -- An action by a company that gives
stockholders two or more shares of additional stock
for every share that’s outstanding.
• Splits cause no change in the firm’s ownership
structure and no change in investment’s value.
• Firms can never be forced to spilt their stocks.
19-13
*
INVESTING in MUTUAL FUNDS
and EXCHANGE-TRADED FUNDS
Investing in
Mutual Funds &
ExchangeTraded Funds
LG8
*
• 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 themselves are traded more like
stocks than mutual funds.
19-14