Honors Finance and Investments
Chapter 3
I. Securities Markets
A. Primary Function
1.
2.
3.
4.
II. Market Makers
A. Broker
1.
B. Securities Dealer
1.
2.
C. Market Makers
1.
D. Specialist
1.
a) NYSE
b) American Stock Exchange
E. Bid and Ask Prices
1.
2. Bid =
3. Ask =
4.
: willing to purchase at $20 and sell at $21
5.
F. Round Lot
1. Normal unit trading in a security
2.
G. Odd Lot
1. Unit of trading that is less than a round lot
2.
H. Spread
1.
2. The actual value of the security is the bid price, but
you pay the ask price
III.Securities Exchanges
A. Over-the-counter markets
1. NASDAQ
a)
B. NYSE (or another organized exchange)
1. Must continue to:
a)
b)
c)
d)
2. The exchange may delist the securities if the firm is
unable to maintain these requirements
C. Ticker Tape
1. YTD % CHG
a)
2. HI LO
a)
3. STOCK
a)
4. SYM
a)
5. DIV
a)
6. YLD %
a)
b)
7. PE
a)
8. VOL 100s
a)
9. LAST
a)
10.
NET CHG
a)
IV.
The Mechanics of Investing in Securities
A. Place a purchase order with a broker
B. The broker then contacts the securities dealer
C. Types of Orders
1. Market Order
a)
2. Limit Orders
a) Day Order
(1)
b) Good-Til-Canceled Order
(1)
D. Confirmation Statement
1.
2.
3.
4.
5. Amount due (includes transaction fees)
a) Commission
(1)
(2)
6. Must pay within three business days
a) Settlement date
b) (t+3)
E. Margin
1.
2.
3. Margin = Equity/Total value of the portfolio
a) Own stock worth $10,000
b) You paid $8,000 in cash
c) You borrowed $2,000 from broker
d) Margin = 80%
F. Margin Requirement
1.
2. Interest on amount borrowed
a)
3. Must payback initial borrowed amount no matter what
happens to the stock price
4.
G. Financial Leverage
1.
V. Delivery of Securities
A.
1. Mandatory 2. Street Name
a)
3. Broker is the custodian
4. Broker sends monthly statement to investor
a)
b)
c)
d)
5. Advantages
a)
b) Do not have to store documents
c)
6. Disadvantages
a)
b) All documentation sent from company will be
delivered to brokerage firm
(1)
(2)
B. Take delivery
VI.
Short Sale
A. Long Position
1.
B. Short Position
1.
2. Borrow stock and sell it, if price declines, buy back
stock and pay off loan
3. Contract for future delivery
VII. Measures of Securities Prices
A.
B.
1.
nation
- Largest, most well known companies in
Alcoa
American Express
Boeing
Bank of America
Caterpillar
Cisco Systems
Chevron
DuPont
Walt Disney
General Electric
Home Depot
Hewlett Packard
IBM
Intel
Johnson and Johnson
JP Morgan
Kraft
Coca Cola
McDonalds
3M
Merck
Microsoft
Pfizer
Proctor Gamble
AT&T
Travelers
United Tech
Verizon
Wal-Mart
Exxon
C.
D. NYSE Composite Index
E.
F. How are indexes calculated?
1. Simple Averages
a)
2. Weighted Averages
a)
VIII. Foreign Securities
A. London, Paris, Tokyo Exchanges
1.
B. American Brokers that have access to foreign
exchanges
C. American Depository Receipts (ADRs)
1.
2.
3.
4.
5.
6.
7.
D. Foreign Bonds
1. Bonds issued by foreign firms
2. Bonds issued by foreign governments
3. Bonds issued in foreign countries by American Firms
a) Firms can sell bonds in local currency
b)
(1) Bonds sold in a foreign country but denominated
in the currency of the issuing firm
(2) Dollars
IX.
Competition in the Securities Market
A.
1. Theory that securities prices correctly measure the
current value of a firms future earnings and dividends