1. Primary Securities and Where They Are Traded

2. Capital Market Securities
Money market securities
Mature within one year or less
Capital market securities
Maturity dates range from 1 year to infinity
Include following securities
Debt
Preferred stock
Common stock

3. Money Market Securities
Characteristics
Types:
Treasury bills
Commercial papers
Certificate of deposits
Banker’s Acceptance
Federal funds
Libor market
REPOS

4. Component of U.S. Money Market
Billions of $ Outstanding
Commercial Paper
$715.0
Bankers Acceptances
$14.0
Short-Term Treasury Securities
$371.2
Term Eurodollars
$149.4
Repurchase agreements
$272.1
Large CDs
$616.1
Small CDs
$958.3
Over $200
billion are
traded on
average
trading day.

5. Fixed Income Securities
Include all debt issued by governments and corporations
Most fixed income securities are marketable legal contracts
Promise to pay interest payments periodically (usually)
Promise repayment of principal at maturity
May have other features
Sinking funds, callable, convertible, etc

6. Fixed Income Securities
US Government securities
Non-marketable US treasury securities
Marketable US treasury securities
Notes and bonds
Federal agency securities
Government national mortgage association (Ginnie Mae)
Federal national mortgage association (Fannie Mae)
Zeros
STRIPS – Separate Trading of Registered Interest and Principal of Securities

7. Fixed Income Securities
Municipal bonds
Corporate bonds
Specifies all terms of the issue, such as
Coupon payments
Collateral provisions
Sinking fund provisions
Conversion stipulations
Other protective provisions
Secured vs unsecured (aka debentures)

8. Equity Securities
Represent a claim on earnings and assets of a corporation
Includes common and preferred stock
Common stock is the first security issued in a corporation and the last security retired in bankruptcy
Common and preferred stock have
No maturity dates
No claims on specific corporate assets
No claims on specific sources of corporate earnings
Characteristics

9. The Global Stock Market
Aggregate market capitalization of equity shares in the world grew from $9.6 trillion in 1990 to over $35 trillion in 2000
An average rate of 14.8% annually
Financial capital is very mobile
In 1990 the Tokyo Stock Exchange was 30.5% of the global market but only 12.7% in 1999
North America increased its share of the world equity market from 28.0% (1990) to 50.28% (1999)

10. The World’s Equity Capital
World’s equity capital is concentrated in North America, western and central Europe and the Pacific Rim (mostly Japan)
Because market prices
are rather volatile,
this situation can
change rapidly. For
instance, from
Japan’s stock market
was worth more than
the U.S. stock market.

11. The World’s Bond Market

12. The World’s Bond Market

13. U.S. Market for Bonds

14. Brokerage Services Brokers
Sales people (earning a commission) employed by dealers
Have no money invested in the dealer’s security inventory
Help create markets by buying and selling from employer’s inventory
Brokerage firms extend credit (margin accounts) to clients
Enables client to do more securities trading

15. Brokerage Services Types of stock brokerage services Full-service
Take buy and sell orders
Extend margin credit to customers
Hold clients’ securities in safe keeping
Collect cash dividends
Provide free investment research
Perform ‘hand-holding’ services
Pleasant telephone conversations
Investment counseling
Birthday cards
All paid for by clients’ trading commissions
Range from $30 - $150 for one common stock transaction
Examples
Merrill Lynch
Goldman Sachs
PaineWebber
Morgan Stanley Dean Witter
Salomon Smith Barney

16. Brokerage Services Discount Brokers Simply take orders
Offer little or no investment advice
No ‘hand-holding’ services provided
Little opportunity for churning
Lower commissions
Range from $20 to $50
Examples
Charles Schwab & Company
Quick & Reilly
Muriel Siebert
Jack White & Company
Fidelity Investments
Vanguard Brokerage Services

17. Brokerage Services Electronic brokers
Take buy and sell orders via Internet
No ‘hand-holding’ services
May provide investment research
May or may not be free
Low commissions
Range from almost free to $35 a trade
Examples
Discover Brokerage
DLJdirect
E*Trade
Archipelago
Bloomberg Tradebook
Accutrade

18. Transacting When making a trade, the investor must specify
Type of order
Market order, limit order, stop orders, scale order, fill or kill order, good till canceled order
Whether or not margin will be involved
Examples: How margin and short sell work

19. Primary Markets
Investment Banks: A few thousand investment banking firms exist in the U.S., including
Merrill Lynch & Co.
Morgan Stanley Dean Witter
Lehman Brothers
Credit Suisse First Boston
Goldman, Sachs & Co.
Salomon Smith Barney
Bear Stearns Cos.
Paine Webber

20. Secondary Market
Once securities are issued in the primary market, they can begin trading in the secondary market
Types of secondary markets
Organized exchange run by dealers (TSX, ME, VSE, NYSE, AMEX, Regionals, CBOE)
Electronic market in which dealers compete with one another (Nasdaq)
Electronic communication networks

21. Third U.S. Market
Third market—subset of OTC market where exchange-listed stocks are traded
Competes with organized exchanges
Offers cost savings in the form of better bid-ask prices
Nasdaq and regional stock exchanges are the core of the third market
For instance, in 1999 Chicago Stock Exchange (CHX) traded over 90% of the NYSE-listed stocks
Majority of CHX’s trading volume is from dual listings
CHX pays for order flow
Specialists take a penny or so (per share) from their bid-ask spread and give it to brokers to encourage brokers to execute their orders on the CHX rather than NYSE

22. Fourth U.S. Market
Fourth market—a network of market-makers, block traders and institutions
Bypass normal dealer services and negotiate directly with each other
Instinet (short for Institutional Network) has operated in the fourth market since 1970
Has computer terminals in over 5,000 subscribers’ offices
Millions of shares are traded in secrecy daily via Instinet
Commissions range from 2¢ to 8¢ a share