1. 5 5 C h a p t e r The stock market second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill / IrwinSlides by Yee-Tien (Ted) Fu @2002 by the McGraw- Hill Companies Inc.All rights reserved.

2.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 2 Primary market & Secondary market This chapter is an overvew of how stock market works, and how to read and understand stock market information reported in the finantial press. Primary market: a market in which new securities are originally sold to investors. Secondary market: a market in which previously issued securities trade among investors. (Stock market consists of the two) Goal

3.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 3 A Brief History of NYSE NYSE (New York Stock Exchange): It excutes sell and buy in well over a billion shares, established in 1971. Together with Nasdaq gained the majority of stock trading in the United States.  Initial public offerings(IPOs): an initial public offering occurs when a company offers stock for sale to the public for the first time.  Investment banking firm: a firm specializing in arranging financing for companies.

4.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 4 Underwrite, Fixed commitment and Best effort Underwriteاكتتاب: to assume the risk of buying newly issued securities from a company and reselling them to investors. Fixed commitmentالتزام كامل: underwriting arrangement in which the investment banker guarantees the firm a fixed amount for its securities. Best effortبذل أقصى جهد: arrangement in which the investment banker does not guarantee the firm a fixed amount for its securities.

5.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 5 (SEC), Prospectus and Red herring Securities and Exchange Commission(SEC): federal regulatory agency charged with enforcing U.S. securities laws and regulations. Prospectus: document prepared as part of a security offering detailing a company's financial position, its operation, and plans for the future. Red herring: a preliminary prospectus not yet approved by the SEC

6.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 6 Secondary Market for Common Stock If you think of the primary market as the new car showroom at an automotivedealer, where cars are first sold to the public, then the secondary market is just the used-car lot

7.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 7 Secondary Market  Secondary Market stock trading among investors is directed through three channels:  An investor may trade:  Directly with other investors  Directly through a broker who arranges transactions for others  Directly with a dealer who buys and sells securities from inventory

8.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 8 Concepts Dealer: a trader who buys and sells securities form inventory. Broker: an intermediary who arranges security transactions among investors. Bid price: the price a dealer is willing to pay. Spread: the difference between the bid and ask price. NYSE member: the owner of a seat on the NYSE.

9.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 9 Concepts Specialist NYSE: member acting as a dealer on the exchange floor. (Its called market maker) Floor brokers NYSE: member who executes orders for commission brokers on a fee basis. (tow - dollar brokers) Super DOT system: electronic NYSE system allowing orders to be transmitted directly to specialists for immediate execution.

10.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 10 Concepts  Floor traders NYSE: members who trade for their own accounts, trying to anticipate and profit from temporary price fluctuations.  Specialist's post: fixed place on the exchange floor where the specialist operates  Market order: a customer order to buy or sell securities marked for immediate execution at current market price.  Limit order: customer order to buy or sell securities with a specified "limit" price. The order can be executed only at the limit price or better.

11.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 11  stop order: customer order to buy and sell securities when a preset " stop " price is reached.  NYSE uptick rule: rule for shot sales requiring that before a short sale can be executed; the last price change must be an uptick.  There are two key differences between the NYSE and NASDAQ:  1- NASDAQ is a computer network and has no physical location where location where trading takes place.  2- NASDAQ has a multiple market system rather than a specialist system.  Over the counter market: securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.. Concepts

12.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 12 NASDAQ PARTICIPANTS  Electronic communications network: a website that allows investors to trade directly with each other.  Inside quotes: highest bid quotes and the lowest ask quotes offered by dealers for a security NASDAQ participants were about 500 such market makers, which amount to about 15 or so per stock.

13.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 13 Concepts  Third market off-exchange: market for securities listed on an organized exchange  Fourth market: market for exchange -listed securities in which investor's trade directly with other investors, usually through a computer network.  Value-weighted index: stock market index in which stocks are held in proportion to their total company market value.

14.  2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 1 - 14 Concepts Price-weighted index: stock market index in which stocks are held in proportion to their share price. Index staleness: condition that occurs when an index does not reflect all current price information because in the index have not traded recently.