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Understanding Securities
and Securities Markets
Chapter 22
Chapter 22 Learning Goals
1. What is the function of the securities
markets?
2. How do common stock, preferred stock,
and bonds differ as investments?
3. What other types of securities are
available to investors?
4. Where can investors buy and sell
securities, and how are these securities
markets regulated?
Chapter 22 Learning Goals (cont’d.)
5. How do investors open a brokerage
account and make securities
transactions?
6. Which sources of investment information
are the most helpful to investors?
7. What can investors learn from stock,
bond, and mutual fund quotations?
8. What are the current trends in the
securities markets?
Learning Goal 1
• What is the function of the securities
markets?
– Securities markets
• Allow stocks, bonds, and other securities to be bought
and sold quickly and at a fair price
• New issues are sold in primary market
• Securities are traded in secondary market
– Investment bankers
• Specialize in issuing and selling new security issues
– Stockbrokers
• Licensed professionals who buy and sell securities on
behalf of their clients
Securities:
Investment certificates issued
by corporations or governments
that represent wither equity or
debt
Types of Securities Markets
• Primary
– new securities sold to the public
– issuer gets proceeds
• Secondary
– already issued securities are traded
– stock exchanges, commodities
exchanges, over-the-counter market
Learning Goal 2
• How do common stock, preferred stock, and bonds differ
as investments?
Common Stock
Preferred Stock
Bonds
Represents ownership in a
corporation
Represents ownership in a
corporation
Form of debt; may be
secured or unsecured
Stockholders have voting
rights
Stockholders receive a
stated dividend
Bondholders are creditors
of issuing organization
Riskier than preferred stock
and bonds
Dividends must be paid
before they are paid to
common stockholders
Bond issuer must pay
interest
Offer potential for increased Usually bought for dividend
value and dividend payment income rather than price
income
appreciation
Bond issuer must repay
principal at maturity
Neither price increases nor
dividends are guaranteed
Provide steady source of
income
Stock: Equity Financing
• Common stock
– represents ownership interest
– returns: dividends, stock-price
increases
• Preferred stock
– represents ownership interest
– receive dividends before common
stockholders
– provides fixed income
Bonds:
Long-term debt obligations
(liabilities) of corporations &
governments
• issuers must pay back:
–principal (par value)
–plus interest (coupon rate)
Bonds: Debt Financing
• Corporate bonds
– secured vs. unsecured
– convertible bonds
• US government securities
– treasury bills, notes, bonds
• Municipal bonds
• Bond ratings
– letter grades represent the risk
Learning Goal 3
• What other types of securities are
available to investors?
– Mutual funds
• Financial service companies that pool the funds of many
investors to buy a diversified portfolio of securities
• Offer a convenient way to diversify
• Professionally managed
– Futures contracts
• Legally binding obligations to buy or sell specified quantities
of commodities at an agreed-on price at a future date
• Very risky investments because price may change
drastically
Other Popular Securities
• Mutual funds
– pools investors’ funds
• Futures contracts
• Options
Learning Goal 4
• Where can investors buy and sell securities, and how
are these securities markets regulated?
– Securities are resold on:
• Organized stock exchanges, such as the New York Stock Exchange
• Regional stock exchanges
• Over-the-counter market
– Securities markets are regulated by
• Securities Act of 1933
– Requires disclosure of important information on new securities issues
• Securities Exchange Act of 1934 and 1964 amendment
– Formally empowered the SEC to regulate organized securities exchanges and
over-the-counter market
• Investment Company Act of 1940
– Places investment companies such as mutual funds under SEC control
• Self-regulatory groups such as the NASD
• “Circuit breakers” to halt trading if the Dow Jones Industrial Average drops
rapidly
Securities Exchanges
• Organized stock exchanges
– re-sell securities in an auction-type format
– US stock exchanges
• New York Stock Exchange
• American Stock Exchange
– Global trading & foreign exchanges
• Over-the-Counter Market
– electronic-based Nasdaq
Securities Exchanges: NYSE
• To prevent a fast crash, the New
York Stock Exchange has several
“trading breakers”
– a 1,100-point drop stops trading for
1 hour if it occurs before 2:00 pm
– a 2,250-point drop stops trading for
2 hours if it occurs before 1:00 pm
– a 3,350-point drop stops trading for
the rest of the day
Source: Associated Press in The Arizona Republic, Jan. 3, 2000, pg. D3.
Learning Goal 5
• How do investors open a brokerage account
and make securities transactions?
– Choose a brokerage firm and stockbroker
– Open a cash account or a margin account
• Cash account - all securities transactions are paid in full
• Margin account - allows investors to put up 50% of price of
securities and borrow the rest from broker
– Give an order to broker to buy or sell securities
– Broker sends the order to the stock exchange to
be carried out
– If stock is an over-the-counter stock, broker finds the
dealer with the best price
How to Buy and Sell Securities
• Securities transactions
– place order with broker
– broker makes the transaction
– blocks of 100 are round lots
– market orders, limit orders, stop-loss
orders
• Online investing
– lower transaction costs
– 15% of people in a Consumer
Reports survey had purchased stock
or other investments online (Source:
Consumer Reports, Dec. 1999, p. 10)
Learning Goal 6
• Which sources of investment information are the
most helpful to investors?
– Popular investment information sources:
• Economic and financial publications
–
–
–
–
–
–
•
•
•
•
The Wall Street Journal
Barron’s
Business Week
Fortune
Smart Money
Money
Numerous Internet sites
Subscription services
Investment newsletters
Security price quotations
Popular Sources of
Investment Information
• Economic & financial publications
– Barron’s
– Wall Street Journal
– Business Week
• Online information resources
• Security price quotations
– stocks, bonds, mutual funds
• Market averages & indexes
– Dow Jones Industrial Average
Learning Goal 7
• What can investors learn from stock, bond, and mutual
fund quotations?
– Stock quotations
•
•
•
•
•
Show highest and lowest prices paid for stock during previous 52 weeks
Annual dividend and dividend yield
Price/earnings ratio and the day’s trading volume
High, low, and closing price for the day
Change from the previous day’s closing price
– Bond quotations
•
•
•
•
Show coupon interest rate
Maturity date
Current yield and trading volume
Closing price and change in closing price from previous day
– Mutual fund quotations
• Provide fund’s net asset value
• Net change in NAV from previous day
• Year-to-date percent return
Example Stock Quotation
Hi
Lo Stock
40. 25)
: 38 * - )
Sym
Div
HormelFood HRL
Yld
%
Vol
PE 100s
.66
1.7
High price for
previous 52 weeks
Lo Close
21 1107
High price
for the day
Symbol for
the company
Abbreviated
company name
Hi
Dividend
yield
Annual
dividend
per share
Volume of
shares
traded
Price/earnings
ratio
39.
Net
Chg
38
Net
change
price from
previous
day
Closing price
for the day
Stock Performance
Some reasons why stock prices tend
to increase every January:
• small companies often record gains
in late Dec., which carries through
Jan.
• investors who sell ‘bad’ stocks late
in the year (to deduct the losses on
taxes) buy them back in Jan.
Source: The Arizona Republic, Jan. 2, 2000, pg. D2.
Example Bond Quotation
Bonds
Abbreviated
name
-company
)
DukeEn 7!05
Annual interest
rate & maturity
date
Cur.
Yld.
Vol.
7.6
Close
46
Number of
bonds traded
Current
interest
yield
Net
Chg
99
Net
change
price from
previous
day
Closing price
for the day
Learning Goal 8
• What are the current trends in the securities
markets?
– Securities markets and the investment industry are
changing considerably
• New York Stock Exchange no longer dominates equity market
activity
• Nasdaq is challenging the Big Board
• Emergence of electronic exchanges
– Individual investors are becoming a market force
• Improved technology
• Relative ease of online investing
• Move toward self-management of retirement funds
Trends in Securities
 Market competition
 Nasdaq, AMEX, NYSE
 electronic communications networks
(ECNs)
 More individuals investing
Rise in Internet Investment
Money Invested in the Internet is Estimated
to Rise to $700 billion by 2003
600
estimated
Billio n s o f Do llars
In vested in In tern et
Co m p an ies
700
500
400
300
200
100
0
1998
1999
2000
Source: Newsweek, Dec. 13, 1999, p. 63.
2003