Chapter 19 Securities Markets

What Are Securities Markets?  Financial markets for stocks and bonds  Assist businesses in finding capital  Provide private investors with a “store” to buy and sell investments  Problems with our current markets Problems with our current markets  Companies sell securities only once – the “primary market”  Investors buy and sell on the secondary market – companies only make money from this on stocks that they own in other companies.

The Need for Capital  Businesses would rather take out loans or work off of retained earnings  Businesses instead sometimes have to go to the public money markets  Issue stocks or bonds to raise money.

People in the Investment Process  Investment bankers  Those who assist in the purchase and sale of investments  Lehman Brothers, Solomon Brothers, Merrill Lynch ALL GONE  Goldman Sachs and Morgan Stanley only ones left

Bonds  Sort of like corporate IOUs  Promises repayment of future amount, plus interest  Bonds are rated in terms of the risk of their repayment (yes, sometimes, they are not repaid, in situations of bankruptcy)  A $1000 bond with 5% interest allows the holder to receive $50 each year until the maturity date, when they receive their $1000 back.

Pros and Cons of Bonds  Pros  Bonds allow the firm to maintain its equity  Interest is tax-deductible  Cons  Bonds increase the debt load of the firm  Bonded companies are legally responsible for paying the debt back.  Some bonds can be converted into common stock.

Stock  Stock refers to a “certificate” of partial ownership in a company.  Dividends are part of a company’s profits that may be paid out to shareholders.  Preferred stock  Get promise of dividends; first dibs on company assets; but no voting rights  Common stock  Voting rights; no promise of dividends; last to be paid in a liquidation

Pros and Cons of Stock  Pros:  Stockholders never have to be repaid (they do, however, have a right to their share of the company’s assets)  Selling stock does not add to the company’s debt load  Cons:  Stockholders vote on the future direction of the company; control is given up  Dividends are not tax-deductible

Stock Exchanges  NYSE NYSE  New York Stock Exchange  About $70 billion in securities traded here each day, market value of each > $50M  Represents $22 trillion in market capitalization  NASDAQ  Used to only deal with small firms (market value $8M and up), now those small firms are big!

Stock Market Terms  Bull market:  Stocks are on the rise, great time to buy  Bear market:  Stocks are expect to fall  Capital gains:  What you have made on stocks since you bought them  Splits:  The company offers two stocks for every outstanding share, to induce demand for lower priced stock

The Role of the SEC  SEC = Securities and Exchange Commission  Regulates securities trading  Requires prospectus  Requires public disclosure of health and behavior  Watches for insider trading

How to Invest  Is it the right time to invest?  Warren Buffett on timing the market  Taking a look at the health of the markethealth of the market  Online Options  Fidelity Fidelity  Sharebuilder Sharebuilder  Scottrade Scottrade  ***Remember, you don’t know anything that isn’t already built in to the price of the stock***  Don’t expect to gain money because you like Nike shoes; you have to look deeper and see whether you believe in a company's long-term ability to grow.