Stocks CHAPTER 3

What are we going to learn in this chapter?

Stocks What does a stock represent? What does it mean if you are a stockholder? How do you gain wealth when you own a stock? Common Stocks

Stocks Income Stocks Blue-chip Stocks Growth Stocks Cyclical Stocks Defensive Stocks

How Stocks Work STEP ONE Koray decides to invest in the stock market. Berna decides to sell 300 shares of Fenerbahce stock to help pay for a new car, even though she has a rich husband. STEP TWO Koray has been thinking of investing in the Fenerbahce. He calls his broker, who is a member of the Borsa Istanbul, to get a quote on Fenerbahce. Berna checks the prices at Borsa Istanbul online.

How Stocks Work STEP THREE Koray’s broker and Berna find out the current quote and price for Fenerbahce from an electronic data system that continually updates information directly from the Floor of the Borsa Istanbul.

How Stocks Work STEP FOUR Taking into account what he already knows about Fenerbahce, Koray instructs his broker to purchase 300 shares of Fenerbahce at the current market price. Berna logs into her online brokerage account, which is linked to a brokerage firm that is a member of the Borsa Istanbul, and places an order to sell her 300 shares at the current market price.

How Stocks Work STEP FIVE Both orders are sent electronically to the Borsa Istanbul Trading Floor. STEP SIX A Designated Market Maker (DMM) uses enhanced technology to bring together buyers and sellers, improve prices and serve as a point of accountability.

How Stocks Work STEP SEVEN Borsa Istanbul trading engine automatically executes any market or limit order that is marketable against the exchange quote up to 1 million shares. This is called auto-execution. STEP EIGHT Both orders are represented as auction market orders in order to have the opportunity for price improvement. The DMM oversees all orders to make sure the transactions are executed fairly and in an orderly manner.

How Stocks Work STEP NINE After the transaction is executed, notices are sent to the firms originating the orders and to the consolidated tape so that a written record is made of every transaction. STEP TEN The transaction is reported by computers and appears on the consolidated tape displays across the country and around the world

How Stocks Work STEP ELEVEN The transaction is processed electronically, crediting Koray’s brokerage firm and debiting the account of Berna’s brokerage firm. Koray’s broker calls him and tells him at what price he bought 300 shares of XYZ. In a couple of days, Koray receives a written confirmation. Berna receives confirmation from her brokerage firm electronically on her computer within seconds. These confirmations describe the trade and its details.

How Stocks Work STEP TWELVE Koray settles his account within three business days after the transaction by submitting payment to his brokerage firm for the 300 shares of Fenerbahce, plus any applicable commissions. Berna’s trade is also settled in three business days. Her account will be credited with the proceeds of the sale of stock, minus any applicable commissions.

How do you think stock prices are determined?

What Drives Stock Prices Financial health of a company Whose stocks would you consider for purchase? Likelihood to lose money Announcements Historical behavior Future prospects Mergers & Acquisitions

What Drives Stock Prices Industry Even though HP’s desktop sales are good, would you invest in it? Why? Why not? Cyclical industries When would you consider buying shares of Altınbaş?

What Drives Stock Prices Economic Trends A very profitable firm in Greece: buy or sell? Which signals would you consider? Consumer Price Index (CPI) Shrinking economy

What Drives Stock Prices World news FED Announcements Egypt and TemSa China improving investment conditions Brazil’s rating being improved

How to Read a Stock Table 52 Week High and Low Stock Dividends Yield % P/E 52 High 52 Low StockDivYld %P/ESales 1000s HighLowLastChg XYZ

How to Read a Stock Table Sales 1000s High Low Last Change 52 week LowStockDivYld %P/ESales 1000s HighLowLastChg XYZ

Why would investors buy stocks?

How Firms Issue Stocks Primary market Secondary market Initial public offering Seasoned equity offering

How Firms Issue Stocks Investment Banking Public offerings Underwriters How many underwriter/s? Underwriting syndicate

How Firms Issue Stocks Advisory role Preliminary registration statement Red herring Prospectus Public announcement Firm commitment

How Firms Issue Stocks

Private Placements Why bother? Any disadvantages?

How Firms Issue Stocks Initial Public Offerings Investment bankers Exchange approval Prospectus Road show Bookbuilding Revisions

How Firms Issue Stocks Why do investors truthfully reveal their interest in an offering to the investment banker? Might they be better off expressing little interest, in the hope that this will drive down the offering price? Interest expressed Allocation size Optimism Bookbuilding Underpricing

How Firms Issue Stocks

Order Types Market Orders Price-Contingent Orders Stop Orders

Stock Market Indexes

Stock Market Indexes Price-weighted index Portfolio Index The portfolio and the index have……. StockInitial PriceFinal PriceSharesI. V. StocksF.V. Stocks ABC XYZ TOTAL600690

Stock Market Indexes Market-value weighted index Total market value S&P500 StockInitial PriceFinal PriceSharesI. V. StocksF.V. Stocks ABC XYZ TOTAL600690

Stock Market Indexes Equally weighted index Rebalancing StockInitial PriceFinal PriceSharesI. V. StocksF.V. Stocks ABC XYZ TOTAL600690

END OF CHAPTER