Download Chapter 21

Understanding Securities
and Securities Markets
Chapter 21
21
Chapter
THE FUTURE OF BUSINESS
Gitman & McDaniel
5th Edition
Prepared by
Deborah Baker
Texas Christian University
Learning Goals
1 How do common stock and preferred stock differ as
investments?
2 What are bonds, and what investment advantages and
disadvantages do they offer?
3 What other types of securities are available to investors?
4 What is the function of the securities markets?
Chapter 21
5 Where can investors buy and sell securities, and how are
these securities markets regulated?
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2
Learning Goals
6 Which sources of investment information are the most
helpful to investors?
7 What can investors learn from stock, bond, and mutual
fund quotations?
Chapter 21
8 What are the current trends in securities markets?
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1
Learning Goal 1
Chapter 21
How do common stock and
preferred stock differ
as investments?
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4
Stocks and Bonds
1
Securities
Investment certificates that
represent either equity or debt.
Chapter 21
Stocks
Bonds
 Common
 Corporate Bonds
 Preferred
 Government
Securities
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Stocks
Chapter 21
1
Common
Stock
• Ownership that allows voting rights.
• Can be bought and sold (liquidity).
• May pay dividends
Preferred
Stock
• Dividends set at issuance,
and are paid before common stock
dividends
• Ownership does not allow
voting rights.
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2
Learning Goal 2
Chapter 21
What are bonds, and what
investment advantages and
disadvantages do they offer?
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2
Types of Corporate Bonds
Collateral trust bonds
Convertible bonds
Debenture
Equipment trust certificates
Floating-rate bonds
High-yield (junk) bonds
Chapter 21
Mortgage bonds
Zero-coupon bonds
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Government Securities
2
Treasury Bills
U.S. Treasury
Treasury Notes
Treasury Bonds
General Obligation
Bonds
Municipal Bonds
Chapter 21
Revenue Bonds
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Chapter 21
2
Moody’s and Standard & Poor’s Bond Ratings
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3
Learning Goal 3
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What other types of securities
are available to investors?
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Other Types of Securities
3
Mutual Fund
Financial-services company
that pools investors’ funds
to buy a selection of securities
Legally binding obligations to buy
or sell commodities or
Futures Contracts
financial instruments at later date
Chapter 21
Options
Contracts to buy or sell quantities
of common stocks or financial
instruments at later date
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3
Appeal of Mutual Funds
 Good way to hold a diversified,
less risky, portfolio
 Professional management
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 May offer higher returns
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4
Learning Goal 4
Chapter 21
What is the function
of the securities market?
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Securities Market
4
Investment
Bankers
Chapter 21
Stockbroker
Help companies raise
long-term financing,
a process called
underwriting
A person licensed to buy
and sell securities on
behalf of clients
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Types of Markets
Chapter 21
4
Primary
Market
New securities are
sold to the public
Secondary
Market
Old (already issued) securities
are bought and sold, or traded,
among investors
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5
Learning Goal 5
Chapter 21
Where can investors buy and
sell securities, and how are these
security markets regulated?
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Buying and Selling at
Securities Exchanges
5
Organized Stock Exchanges
Types of
Securities
Markets
Chapter 21
Over-the-Counter Market
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5
U.S. Stock Exchanges
New York Stock Exchanges
(NYSE)
Chapter 21
American Stock Exchange
(AMEX)
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Chapter 21
5
Anatomy of a Stock Trade
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5
Global Trading and Foreign Exchanges
London
NYSE
NASDAQ
Tokyo
Toronto
Buenos Aires
Frankfurt
Hong Kong
Montreal
Zurich
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Paris
Sydney
Taiwan
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The Over-the-Counter Market
5
Over-the-Counter
(OTC)
Market
Chapter 21
NASDAQ
A telecommunications
network that links dealers
throughout the U.S. and
enables them to trade
securities
The first electronic-based
stock market and the
fastest growing part of the
stock market.
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Bull or Bear Market?
Chapter 21
5
Bull
Market
Prices rise.
Better returns.
Bear
Market
Prices go down.
Low, or negative, returns.
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Chapter 21
5
Regulation of Securities Markets
Securities and
Exchange
Commission
The main federal government
agency responsible for
regulating the U.S. securities
industry.
Insider Trading
The use of information that is
not available to the general
public to make profits on
securities transactions.
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5
Securities Industry Violations
• Insider trading
• Misrepresenting or omitting information
• Stealing customer funds or securities
• Violating responsibilities to treat customers fairly
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• Selling securities without proper SEC registration
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Circuit Breakers
5
Circuit Breakers
Measures that stop trading
in the securities markets
for a short period to
limit the amount the market
can drop in one day.
Chapter 21
http://www.sec.gov/answers/circuit.htm
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6
Learning Goal 6
Chapter 21
Which sources of investment
information are the most
helpful to investors?
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6
Popular Sources of Investment Information
Company financial statements
Economic and financial publications
Online information resources
Chapter 21
Security price quotations
Market averages and indexes
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6
Economic and Financial Publications
 Wall Street Journal
 Barron’s
 Business Week
 Kiplinger’s Personal Finance
 Forbes
 Fortune
 Smart Money
Chapter 21
 Worth
 Money
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Online Information Sources
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6
 CBS Marketwatch
http://www.marketwatch.com
 CNN Money
http://money.cnn.com
 EXCITE
http://money.excite.com
 Yahoo! Finance
http://finance.yahoo.com
 Morningstar
http://www.morningstar.com
See Exhibit 21.5
for more sources
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7
Learning Goal 7
Chapter 21
What can investors learn
from stock, bond, and
mutual fund quotations?
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Chapter 21
7
Stock Quotations
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Chapter 21
7
Bond Quotations
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Market Averages and Indexes
Chapter 21
7
Market
Averages
Summarizes price behavior based
on average price of groups of
securities at a given point in time.
Market
Indexes
Measures of the current price
behavior of securities relative to a
base value set at an earlier point.
Dow Jones
Industrial Average
Measures the stock prices of 30 large
well-known corporations that trade on
the NYSE and NASDAQ
Standard & Poor’s
500 stock index
Market index that includes 400
industrials, 20 transportation, 40
public utility, and 40 financial stocks.
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8
Learning Goal 8
Chapter 21
What are the current trends in
securities markets?
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8
Trends in Securities and Securities Markets
Rebuilding
Investor
Trust
Chapter 21
Stronger Role
Sarbanes-Oxley
for the
Act of 2002
SEC
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