Download Chapter 19X Securities Markets_Fall 15

Chapter
Securities
Markets:
Financing and
Investing
Opportunities
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Functions of
Securities Markets
Long-Term
Funding for
Businesses
Place to
Buy/Sell
Securities
(Investments)
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Stock Market Fluctuations
Bull Market
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Bear Market
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Stock Exchanges
•
Organization whose members can
buy and sell (exchange) securities
for companies and investors
– Brokerage firms purchase
memberships (seats) on the
exchanges
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Organized Securities Exchanges
New York Stock
Exchange (NYSE)
American Stock
Exchange (AMEX)
NASDAQ
Foreign Stock
Exchanges
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U.S. Exchanges
• New York Stock Exchange (NYSE)
–
–
–
–
Largest stock exchange in U.S.
Floor-based exchange
Often referred to as the Big Board
Has a fixed number of memberships
– Membership price varies with strength of
the market
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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U.S. Exchanges
• American Stock Exchange (AMEX)
– Second largest stock exchange in U.S.
• Regional Exchanges
– Chicago, San Francisco, Philadelphia,
Cincinnati, Spokane, and Salt Lake City
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Over-The-Counter Market
•
Exchange provides means to trade stocks not
listed on national exchanges
– NASDAQ is nationwide electronic system
that communicates OTC trades to brokers
– Originally dealt with small firms that could
not qualify for national listing
– Intel and Microsoft traded on OTC market
– Also handles corporate and government
bonds
– Stocks can be de-listed if exchange minimum
requirements not held up
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Foreign Exchanges
• Japan ----------- NIKKEI
• Germany ------- DAX
• France ---------- CAC-40
• Britain ---------- FTSE 100
• Euro Zone ----- DJ Euro Stoxx
• Hong Kong ---- Hang Seng
• India ------------- Bombay Sensex
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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BONDS
(Debt)
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Bond Terms
$ Principal
$ Interest Rate
$ Term
$ Issue Date
$ Maturity Date
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Bond Classes
$ Classes
¢ Unsecured
¢ Debenture
¢ Secured
¢ Mortgage
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Special Bond Features
• Callable
• Convertible
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Bond Considerations
• Sinking Fund
• Bonds are rated according to
risk by Standard & Poor and
Moody’s
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Bonds
Advantages
No Vote
Interest is TaxDeductible
Can be repaid
before maturity
with call
provision
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Disadvantages
XIncrease Debt
XLegal
Obligation to
Pay Interest
XRepaid on
Maturity Date
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STOCKS
(Equity)
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What is Stock?
• Ownership
• Dividends
• Common and
Preferred
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Issuing Common Stock
• Most basic form of ownership
and includes the rights:
– To vote for company’s board of
directors and on important issues
– To share in the company’s profits
through dividends
– Preemptive rights give common
stockholders first right to
purchase any new shares of
common stock
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Issuing Preferred Stock
• Stock that gives its owners
preference in payment of
dividends and earlier claim
on assets
• Does not include voting
rights
• May be called a hybrid
investment: (stock/bond)
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Issuing Preferred Stock
• Differences from Common
Stock:
– Par value is basis for dividend
firm is willing to pay
– Dividends on preferred stock
must be paid in full before any
common stock dividends can
be paid
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Issuing Preferred Stock
• Similarities between
Preferred Stock and Bonds:
– Both have a Face (or Par)
Value, and both have a fixed
rate of return
– Preferred stocks are rated
according to Risk by Standard
& Poor and Moody’s just like
bonds
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Issuing Preferred Stock
• Differences between Preferred
Stock and Bonds:
– Preferred stock dividends do not
legally have to be paid
– Stock never has to be repurchased
– Both types increase in market
value, but stocks generally
increase at a higher percentage
than bonds
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Issuing Preferred Stock
• Special Features of Preferred
Stock:
– Preferred stock can be callable
– Preferred stock can be convertible
– With cumulative preferred stock
missed dividends can be
accumulated if not paid
Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.
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Stock
Disadvantages
Advantages
• No Repayment
• No Legal
Obligation
• Does Not
Create Debt
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• Voting Rights
• Dividends not
Tax-Deductible
• Management
Works to Keep
Stockholders
Happy
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Stock Splits
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How Stock Splits Work
100 shares of
ABC stock
selling @ $99


100 shares $33@
100 shares $33@
100 shares $33@
Lower Price

increases Demand
Increased demand
increases price
100 shares
@$37

3 for 1
Stock Split
Declared
100 shares
@$37
100 shares
@$37
How Much Potential Profit Has
20-26
Been
Made?
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Buying Stock On Margin
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Buying Stock on Margin
How does the investor make money?
Step 1
Step 2
An investor
wishes to buy
100 shares at
$100 per share
However, the
investor has
only $4,000
available to
invest
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Step 3
Step 4
The investor
finds he is able
to buy the
stock with a
40% margin
The investor
puts up $4,000
and borrows
$6,000 from
the broker
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Any financial paper has stock quotes that
will look something like the image below:
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Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has
traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no
special symbols or letters following the name, it is common stock. Different symbols imply different
classes of shares. For example, "pf" means the shares are preferred stock.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch
financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside
this symbol. If you are looking for stock quotes online, you always search for a company by the ticker
symbol. If you don't know what a particular company's ticker is you can search for it at:
http://finance.yahoo.com/l.
Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is
blank, the company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per
share divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per
share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in
hundreds. To get the actual number traded, add "00" to the end of the number listed.
Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at
throughout the day. In other words, these are the maximum and the minimum prices that people have
paid for the stock.
Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the
closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is
bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day
because the price is constantly changing (even after the exchange is closed for the day). The close is
merely an indicator of past performance and except in extreme circumstances serves as a ballpark of
what you should expect to pay.
Column 12: Net Change - This is the dollar value change in the stock price from the previous day's
closing price. When you hear about a stock being "up for the day," it means the net change was positive.
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Stock Market Indicators
• Dow Jones Industrial Average (DJIA)
– 30 Industrial, 20 Transportation, 15 Utility
• Standard & Poor’s 500
– 400 Industrial, 40 Financial, 40 Utility,
20 Transportation
• NASDAQ
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Stock Market Indicators
Big Charts.com
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