BUSN 3rd kelly mcgowen chapter10

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BUSN

Securities Markets: Trading Financial Resources

©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.

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Securities Markets:
Trading Financial Resources

• 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.

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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.

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Securities Markets: Trading Financial Resources

Common Stock: Basic Ownership

The basic form of ownership in a corporation
• 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.

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Securities Markets: Trading Financial Resources

Preferred Stock: Getting Preferential Treatment

Stock that gives its holder preference over common
stockholders





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No Voting Rights
Claim on Assets
Payment of Dividends
Cumulative Feature

©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.

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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.

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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.

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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.

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Securities Markets: Trading Financial Resources

Trading Securities: The Primary Market

Public Offering:
Private Placement:
• Initial Public Offering

• Quicker, simpler, less
(IPO)
expensive
• Select an Investment
• Investment bank
bank (underwriter)
assistance
• Prepare paperwork
• No SEC registration
• Arrange for financing
• Only available to
accredited investors
• Carry out the offer

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.

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Securities Markets: Trading Financial Resources

Trading Securities: The Secondary Market

 Security Exchanges
• New York Stock Exchange
Traditionally an “auction market”

• NASDAQ
Electronic exchange

Two largest
exchanges in
the United
States

 Over the Counter Market
 Electronic Communication Networks
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.

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BUSN

Securities Markets: Trading Financial Resources

Major Global Stock Exchanges

©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.

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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.

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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.

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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.

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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.

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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.

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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?

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GOOG

HOG

Google

Harley-Davidson

MMM

DNA

3M

Genentech

JAVA

LUV

Sun Microsystems

Southwest Airlines

©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.

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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.

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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.

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Securities Markets: Trading Financial Resources

Buying Securities: Let’s Make a Deal

Market Orders –
buy or sell a security
at the current
Limit Orders –
market price

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.

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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.

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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 mid2007, they would have been worth over $5 billion
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.

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Securities Markets: Trading Financial Resources

Other Investment Options:
Mutual Funds and Exchange Traded Funds

Exchange Traded Funds

Mutual Funds
•
•
•
•

Diversification
Professional Management
Variety
Liquidity

•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
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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.


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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.

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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.

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