Securities Firms, Mutual
Funds, and Financial
Conglomerates
Chapter 20
© 2003 South-Western/Thomson Learning
Learning Objectives

What securities firms are and what financial
services they provide

Various types of mutual funds

What are hedge funds and real estate
investment trusts (REITs)

Role of government-sponsored enterprises
(GSEs)

What financial conglomerates are and why
they have grown so much in recent years
Slide 2
Securities Firms
The two main functions of securities firms
are investment banking and the buying and
selling of previously issued securities.

Investment Banks
 Financial institutions that design, market and
underwrite new issuances of securities in
primary market
 Responsibilities for New Offerings-two types
 Initial Public Offering (IPO) - not previously sold
financial stocks or bonds to public
 Seasoned Issuance – when stocks or bonds have
been previously issued
 Timing
Slide 3
Securities Firms

Investment Banks
 Role of Securities and Exchange Commission
 Registration Statement
 Statement that must be filed with the SEC before new
securities offering can be issued
 Prospectus
 Subpart of registration statement that must be given to
investors before they purchase securities
 Credit Rating
 Underwriting and Marketing
 Syndicate
 Group of investment banks
 Each underwrites a proportion of new securities offering
Slide 4
Securities Firms

Investment Banks and Functioning of
Primary Market
 Private Placement
 Method of issuing new securities by selling
to limited number of large investors
Slide 5
Brokers & Dealers: Secondary
Market

Types of Orders – to instruct broker /
dealer
 Market Orders
 Purchase or sell the securities at present market
price
 Limit Orders
 Purchase securities at market price up to certain
maximum
 Short Sell
 Borrow shares of stocks
 Sell them today with guarantee that investor will
replace them by a date in future
Slide 6
Brokers & Dealers: Secondary
Market

Margin Loans
 Loans to investors
 Proceeds are used to purchase securities

Brokerage Fees
 Brokerage firms could compete by offering
lower fees
 Discount brokerage firms
 Provide limited or no investment advice
 Fees much lower that full-service brokerage firms
Slide 7
Securities Industry
Self-regulated by National Association of
Securities Dealers (NASD) and various
securities exchanges such as the New York
and American stock exchanges.

Securities Industry Protection
Corporation (SIPC)
 Nonprofit membership corporation
 Established by Congress in 1970
 Provides insurance up to $500,000 per
investor
Slide 8
 To protect investors’ securities from
liquidation by brokerage firm
Investment Companies
Companies that own and manage a large
group of different mutual funds.

Open-End Fund
 Mutual fund continually sells new shares to
public
 Buys outstanding shares from public
 At price equal to the net asset of value
 Difference between market value of shares of stock
that mutual fund owns and liabilities of mutual fund

Slide 9
Closed-End Fund
 Mutual fund sells limited number of shares like
other corporations
 Usually do not buy back outstanding shares
Investment Companies

Load
 Sales commission
 Paid to broker to purchase mutual finds
 By law, load cannot exceed 8.5%

No-Load
 Mutual funds purchased directly from
mutual fund company
 Not subject to a load
Slide 10
Growth of Investment Funds


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Recent legislation gives individuals
control over where their pension funds are
invested, many have chosen mutual funds
Many types of mutual funds are often
offered by single investment company
Create new funds that invest in several
mutual funds
 Fund of Funds
 Mutual fund
 Invests in portfolio of other mutual funds rather than
individual stocks and/or bonds
Slide 11
Growth of Investment Funds

Stock Funds
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Slide 12
Aggressive growth funds
Global equity funds
Growth and income funds
Income-equity funds
Index funds
Sector funds
Socially conscious funds
Exhibit 20–3a
A Sample of the Types of Mutual Funds
Slide 13
Growth of Investment Funds

Bond Funds
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Slide 14
Corporate bond funds
Global bond funds
Ginnie Mae funds
High-yield bond funds
Long-term municipal bond funds
State municipal bond funds
U.S. government income funds
Exhibit 20–3b
A Sample of the Types of Mutual Funds
Slide 15
Growth of Investment Funds

Stock and Bond Funds
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Slide 16
Balanced funds
Flexible portfolio funds
Income-mixed funds
Convertible securities funds
Exhibit 20–3c
A Sample of the Types of Mutual Funds
Slide 17
Hedge Funds
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Slide 18
Nontraditional type of MF that attempt to earn
maximum returns regardless of rising or falling
financial prices
General partner usually organizes fund and is
responsible for day-to-day trading decisions
Not regulated as traditional investment pools or
mutual funds
Attempt to earn high - or maximum - returns
Use riskier investment strategies than those in
traditional mutual funds
Traditionally charge high fees and take large percent
of profits
Real Estate Investment Trusts
(REITs)
Special type of mutual fund
 Pools funds of many small investors
 Uses them to buy or build income
property
 Uses them to make or purchase
mortgage loans

Slide 19
Government-Sponsored
Enterprises
Publicly held corporations that are chartered
by Congress.

GSE Housing Market
 Federal National Mortgage Association
(Fannie Mae)
 Federal Home Loan Mortgage
Corporation (Freddie Mac)
 Government National Mortgage
Association (Ginnie Mae)
Slide 20
Government-Sponsored
Enterprises

GSE Farm Loan Market
 Federal Farm Credit Banks Funding
Corporation (FFCBFC)
 Issues bonds and discount notes to make loans to
farmers
 Federal Credit Financial Assistance
Corporation (FACO)
 Issues bonds with explicit government guarantee
 Uses proceeds to assist the FFCBFC
Slide 21
Government-Sponsored
Enterprises

GSE Student Loan Market
 Student Loan Marketing Association (Sallie
Mae)
 Issues securities to purchase student loans
 Increases the amount and liquidity of funds flowing
into student loans

Financing Corporation (FICO)
 Issues bonds
 Uses proceeds to help resolve the savings and
loan crisis
Slide 22
Financial Conglomerates


Own and operate several different types of
financial intermediaries and institutions
Alleged advantages of forming financial
conglomerates include taking advantage of
 Economies of scale - gains from size that may
result from several firms
 Streamline management
 Eliminate duplication of effort of several separate firms
 Economies of scope
 Advantages to firms being able to offer customers
several financial services under one roof
 Diversification
 Branching out of financial conglomerates into several
product lines
Slide 23