1. Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 6........................ Understanding Financial Issues

2. Copyright ©2003 Prentice Hall, Inc. 15 - 2 Chapter 15 Understanding Securities and Investments

3. Copyright ©2003 Prentice Hall, Inc. 15 - 3 "If stock market experts were so expert, they would be buying stock, not selling advice.” ~ Norman Augustine

4. Copyright ©2003 Prentice Hall, Inc. 15 - 4 Key Topics Primary and secondary securities markets Common and preferred stock Various types of bonds Mutual funds and commodities Buying and selling securities Regulation of securities markets

5. Copyright ©2003 Prentice Hall, Inc. 15 - 5 Securities Stocks and Bonds Holders of stocks and bonds have a stake in the company that issued them Stocks: An ownership stake Bonds: A financial stake Primary Securities Market Secondary Securities Market

6. Copyright ©2003 Prentice Hall, Inc. 15 - 6 Investment Banks Help Bring New Securities to the Market They advise companies on the timing and financial terms of new issues They underwrite —or buy—new securities, bearing some of the risks of issuing them They distribute new securities through banks and brokers to individual investors New securities must be approved by the SEC!

7. Copyright ©2003 Prentice Hall, Inc. 15 - 7 Common Stock High Risk, High Potential Return Par Value The face value of a share of stock at the time it is originally issued Market Value The current price of a share in the stock market Book Value Stockholder’s equity divided by the number of shares

8. Copyright ©2003 Prentice Hall, Inc. 15 - 8 Blue Chip Stocks A Changing Perspective? “Old” Economy Established firm Sound financial history Stable pattern of dividends “New” Economy Rapid growth in market value

9. Copyright ©2003 Prentice Hall, Inc. 15 - 9 2001 Stock Price Gain Hot Stocks in a Cold Year AutoZone+152% Best Buy+152% Xerox+125% H&R Block+116% Krispy Kreme+113% Source: Game Over for the Bear?, Los Angeles Times, C1, January 31, 2002

10. Copyright ©2003 Prentice Hall, Inc. 15 - 10 Preferred Stock Lower Risk, Lower Potential Return Fixed dividend First claim on assets No voting rights Possible features: Callable Cumulative

11. Copyright ©2003 Prentice Hall, Inc. 15 - 11 Stock Exchanges Institutional Settings for Trading Stocks Brokers Full service brokers Discount brokers On-line trading

12. Copyright ©2003 Prentice Hall, Inc. 15 - 12 '96'97'98'99 $6045 30 15 15 12 9 6 % The Growth of Online Trading Online Share of Trades For-Commission Fees Commission fees charged by top ten brokers Percentage of shares traded online

13. Copyright ©2003 Prentice Hall, Inc. 15 - 13 New York Stock Exchange Foreign Stock Exchanges American Stock Exchange Over-the- Counter Market Regional Stock Exchanges Nasdaq and NASD The Major Exchanges and the OTC Market

14. Copyright ©2003 Prentice Hall, Inc. 15 - 14 BOND: U.S. Government Bonds Municipal Bonds Corporate Bonds A promise by the issuer to pay the buyer a certain amount of money by a specified future date Nearly all secondary trading in bonds occurs in the OTC market

15. Copyright ©2003 Prentice Hall, Inc. 15 - 15 High Grades Medium (Investment) Grades Speculative Poor Grades How Risky Is Your Bond? Moody'sAaa, AaA, BaaBa, BCaa to C Stanford & Poor'sAAA, AAA, BBBBB, BCCC to D

16. Copyright ©2003 Prentice Hall, Inc. 15 - 16 Bearer Bonds Debentures Registered Bonds Secured Bonds Types of Bonds

17. Copyright ©2003 Prentice Hall, Inc. 15 - 17 Mutual Funds Pooled Investments Load Funds No-Load Funds Source: Stock Fund Inflows Plunge 90% in 2001, Los Angeles Times, C1, January 31, 2002 Mutual funds control about 20% of the stock market, but new cash inflows dropped 90% in 2001

18. Copyright ©2003 Prentice Hall, Inc. 15 - 18 Reading Stock Quotations

19. Copyright ©2003 Prentice Hall, Inc. 15 - 19 Reading Mutual Fund Quotations

20. Copyright ©2003 Prentice Hall, Inc. 15 - 20 The S&P 500 The Nasdaq Composite Dow Jones Industrial Average Market Indexes

21. Copyright ©2003 Prentice Hall, Inc. 15 - 21 Bull and Bear Markets (1972 – 2000)

22. Copyright ©2003 Prentice Hall, Inc. 15 - 22 May 26, 1896 The First Dow Jones Industrials List American Cotton Oil American Sugar American Tobacco Chicago Gas Distilling and Cattle Feeding General Electric Laclede Gas National Lead The North American Company Tennessee Coal and Iron U.S. Leather U.S. Rubber Source: History of the Dow, Randy Befumo, 3/23/02, http://www.fool.com/ddow/historyofthedow.htm http://www.fool.com/ddow/historyofthedow.htm

23. Copyright ©2003 Prentice Hall, Inc. 15 - 23 Investing in the Securities Markets Placing Orders Market Order Limit Order Stop Order Round Lot Odd Lot Financing Choices Margin Trading Short Sales High risk alert!

24. Copyright ©2003 Prentice Hall, Inc. 15 - 24 Securities Market Regulation Self-Regulation Circuit breakers Securities and Exchange Commission Prospectuses Insider trading State Government Regulation Blue Sky laws

25. Copyright ©2003 Prentice Hall, Inc. 15 - 25 Chapter Review Explain the difference between primary and secondary securities markets Discuss common and preferred stock Distinguish among the various types of bonds Describe mutual funds and commodities Explain the buying and selling process for securities Explain securities market regulation