1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Chapter 18 Financing and Investing through Securities Markets

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-2 The Primary Market Security—stock, bond, or money market instrument that represents an obligation on the part of the issuer. Primary Market—market where new security issues are first sold to investors; the issuer receives the proceeds from the sale. Initial Public Offering (IPO) Secondary Market—financial markets where previously issued securities are traded among investors., Examples: NYSE, NASDAQ

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-3 Securities Exchanges The New York Stock Exchange NYSE (Big Board)—the largest, and probably the most famous, stock market in the world Also one of the oldest, having been founded in 1792

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-4 Securities Exchanges The NASDAQ Stock Market NASDAQ stock market—second-largest stock market in U.S., trading stock issues of firms that are typically smaller, less well- known than those on the NSYE Unlike trading on the NSYE, which takes place face-to-face or the trading floor, trading on the NASDAQ takes place on an electronic network

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-5 Money Market Instruments—short-term debt issued by corporations, financial institutions, and governments. Mature within 1 year, Low Risk Examples: U.S. Treasury bills – short-term securities issued by the U.S. Treasury and backed by the full faith and credit of the U.S. government. Maturities of 30, 90, 180, or 360 days. Commercial Paper - unsecured debt issued by corporations with high credit ratings to finance its short-term needs. Commercial paper is available in a variety of denominations and usually ranges in maturity from 2 to 270 days. Certificates of Deposit – a time deposit at a financial institution. Repurchase Agreement - one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price.

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-6 Bonds – long-term debt security Issuer promises to pay to the bondholder principal and interest according to the terms and conditions of the bond. Sold to raise long-term funds for a corporation or government agency. Example: You buy a bond with a $1,000 face value, a 5% interest rate and a 10-year maturity You would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you'd get back your $1,000.

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Investors choose from among a variety of bonds 18-7 Secured Bond—bond backed by specific pledge of a company’s assets. Debenture (Unsecured) Bond Government - Issued by U.S. Treasury Municipal – issued by state and local governments (not subject to Fed. Inc. tax) Corporate

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-8 How to Read Bond Quote Tables Two factors determine a bond’s price: risk and interest rate

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-9 Moody’s and Standard & Poor’s Bond Ratings Bonds vary considerably in terms of risk

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-10 Retiring Bonds Bonds mature on a specific date Borrowers must have the necessary funds available to pay the principal at that time Call Provision - allows the issuer to redeem the bond before maturity Serial Bonds – Issue bonds that mature on different dates Sinking Fund – Make annual deposits to accumulate funds for use in redeeming bonds when they mature Issue more…

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-11 Stock Common Stock  Share of ownership in a company.  can vote on major company decisions  They expect to receive cash dividends and to benefit from capital gains. (Often no dividends are issued.) Preferred Stock  receive preference in payment of dividends  Seldom confers voting rights  Dividends are fixed

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-12 Convertible Securities  Bonds or stock that contains a conversion feature  Gives the holder the right to exchange their securities for a fixed number of shares of common stock

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-13 Securities Purchasers Investment Motivations Primary Investment Objectives by Type of Security

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-14 Securities Purchasers Taxes and Investing Interest received from bonds, and dividends received from stocks, are considered ordinary income which is taxed at the investor’s marginal tax rate Profits made from the sale of securities owned for over a year are taxed at the capital gains rate Other, special tax rules apply for investment income

15. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-15 Buying and Selling Securities Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors. When investors buy or sell securities through a brokerage firm, they pay a fee which vary widely among brokerage firms A full-service firm charges higher fees, but provides a large number of services and offers investment advice A discount firm charges lower fees, but offers less advice and fewer services - Etrade

16. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-16 Buying and Selling Securities Placing an Order A market order instructs a brokerage firm to obtain the highest price possible – if the investor is selling – or the lowest price possible – if the investor is buying A limit order instructs the brokerage firm not to pay more than a specified price for stock if the investor is buying, or accept less than a specified price if the investor is selling

17. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-17 How to Read Stock Quote Tables

18. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-18 Stock Indexes Stock indexes reflect the general activity of the stock market The most common indices include: Dow Jones Industrial Average (DJIA) – average of 30 of the largest and most widely held public companies in U.S. Standard & Poor’s 500 – 500 large publicly held companies that trade on NYSE or NASDAQ NASDAQ composite – 3,000 stocks Foreign indices include the DAX (Germany), and the Nikkei (Tokyo)

19. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-19 Mutual Funds Mutual Fund—financial institution that pools investment money from purchases of its shares and uses the money to acquire diversified portfolios of securities consistent with the fund’s investment objective. Investors who buy shares of a mutual fund become part owners of a large number of securities, thereby lessening their individual risk Diversified Managed by professionals Not traded on stock exchanges

20. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-20 Distribution of Mutual Fund Assets by Type of Fund

21. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-21 How to Read Mutual Fund Tables

22. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-22 Legal and Ethical Issues in Securities Examples of unethical trading practices include brokers urging investors to buy high- risk investments or “churning” accounts (excessive trading) just to generate higher commissions Examples of illegal trading practices include brokers theft from a client’s portfolio and giving false or misleading information to investors

23. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-23 Legal and Ethical Issues in Securities Government Regulation of the Securities Markets Full and Fair Disclosure—requirement that investors should be told all relevant information by issuers so the can make informed decisions. Prospectus—document that gives a detailed description of a company issuing securities

24. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-24 Legal and Ethical Issues in Securities Government Regulation of the Securities Markets Insider Training—the use of material non- public information to make an investment profit Example: someone using non-public information about a pending merger, or a major oil discovery, to profit in the stock market at the expense of ordinary investors  Regulation FD – firms must share information with all investors at the same time