Download Securities Markets

Chapter 4
Charles P. Jones, Investments: Analysis and Management,
Twelfth Edition, John Wiley & Sons
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Channel funds from savers to borrowers
Help firms and governments raise cash by
selling securities (financial claims on issuer)
Provide a place where investors can earn a
return
Help allocate cash to where it is most
productive
Help lower the cost of exchange
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Primary Markets
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New securities are issued in a primary market
◦ Initial public offerings versus seasoned new issues
◦ Average investors do not often benefit much from
IPOs
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Issue facilitated by investment banker
◦ Intermediaries between issuer and investor
 Buy securities from issuer at a discount, sell them to
investors
 Difference between two amounts is spread
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Client advice includes type and features of
security, offer price, and timing of sale
Underwriting services
◦ By purchasing securities, investment bankers
assume risk of selling securities to investors
◦ May form syndicates to reduce risk
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Coordinates marketing by helping issuer
register securities, issue prospectus, and sell
securities
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Issuer
Originating investment banker
Underwriting syndicate (group) of investment bankers
Selling group of underwriting syndicate + selected retail brokerage houses
Investors
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Automatic Shelf Registration allows certain
issuers to sell new securities over time after
filing a single registration
Private placement means new securities are
sold directly to investors, bypassing the open
market
◦ Registration not required
◦ Can be cheaper and faster for issuer
◦ Can lead to higher costs, restrictions
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Markets where investors trade previously
issued securities
Allow for trading of stocks, bonds, derivatives
New York Stock Exchange/Euronext and
NASDAQ are major US exchanges
Investors are represented by brokers who
facilitate trades between buyers and sellers
for a fee
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NYSE
◦ Has physical location in New York City
◦ Recently acquired the American Stock Exchange,
now called NYSE Amex, which focuses on small
companies
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NASDAQ
◦ Electronic market of dealers (“market makers”) who
trade directly with each other and customers
◦ Gathers and consolidates quotes and orders from
participants
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Other Secondary Markets
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Over-the-Counter (OTC)
◦ Not organized marketplace or exchange
◦ Forum for securities not listed on a U.S. exchange
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Better Alternative Trading System (BATS)
◦ Appeals to hedge funds, others who want speed
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Electronic Communication Networks (ECNs)
◦ Offer automation, lower costs, anonymity
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US equity markets account for a decreasing
share of world’s stock market capitalization
◦ Foreign markets include developed and emerging
markets
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Emerging markets
◦ Often offer large potential for profits and large risks
 Illiquidity, lack of information, political uncertainty
◦ China and Brazil have grown and attracted investor
attention
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Stock Market Indexes
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Measure only the change in prices of a
defined group of stocks over a period of time
Do not include dividends and therefore
generally understate total returns
However, price changes are primary way to
describe the performance of equity markets
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Stock Market Indexes
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Dow Jones Industrial Average
◦ Composed of 30 “blue-chip” stocks
◦ Only major market index that is price weighted
 Weights high-priced stocks more than low-priced
stocks
◦ Oldest, most well-known measure
◦ Percentage change in index matters: the level of the
index does not
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Stock Market Indexes
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Standard & Poor’s 500 Composite Index
◦ Accounts for about 75% of U.S. stock-market value
◦ Expressed as index number relative to a base index
value of 10 (1941-43)
◦ Capitalization-weighted index: Prices and shares
outstanding considered
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NASDAQ Indexes
Russell 1000 Index
Wilshire 5000 Total Market Index
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Stock Market Indexes
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The “correct” index depends on the investor’s
purpose
◦ DJIA and S&P 500 best for measuring performance
of large stocks
◦ NASDAQ indexes best for measuring performance
of NASDAQ stocks
◦ Wilshire 5000 best for measuring performance of
U.S. stocks in the broadest sense
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Foreign Stock Market Indicators
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MSCI EAFE Index
◦ Essentially a non-American world index (without
Brazil or India)
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Dow Jones World Stock Index
◦ Capitalization-weighted (unlike the DJIA)
◦ Represents about 80% of world’s stock markets
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Global Dow Index
Euro STOXX 50 and Euro STOXX 600
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Bond and Derivatives Markets
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Secondary bond markets
◦ Necessary or investors might avoid bonds
◦ Primarily an over-the-counter network of dealers
◦ Bond brokers often buy for their own accounts and
resell
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Derivatives
◦ Options trade on exchanges
◦ Futures markets mostly electronic
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Market Globalization
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Electronic trading systems allow for afterhours trading
Stock prices can change even when
exchanges are closed
Bonds also being traded around the clock
Individual investors can benefit from
globalization
◦ Can trade in foreign markets and in foreign
currencies
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