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Chapter 15

Chapter 15. Understanding Securities and Investments. " If stock market experts were so expert, they would be buying stock, not selling advice.” ~ Norman Augustine. Key Topics. Primary and secondary securities markets Common and preferred stock Various types of bonds

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Chapter 15

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  1. Chapter 15 Understanding Securities and Investments

  2. "If stock market experts were so expert, they would be buying stock, not selling advice.”~ Norman Augustine

  3. 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

  4. SecuritiesStocks 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

  5. 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!

  6. Common StockHigh 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

  7. “New” Economy Rapid growth in market value Blue Chip StocksA Changing Perspective? “Old” Economy • Established firm • Sound financial history • Stable pattern of dividends

  8. 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

  9. Preferred Stock • Lower Risk, Lower Potential Return • Fixed dividend • First claim on assets • No voting rights • Possible features: • Callable • Cumulative

  10. Stock ExchangesInstitutional Settings for Trading Stocks Brokers • Full service brokers • Discount brokers • On-line trading

  11. $60 % 45 15 30 12 9 15 6 '96 '97 '98 '99 The Growth of Online Trading Commission fees charged by top ten brokers For-Commission Fees Online Share of Trades Percentage of shares traded online

  12. The Major Exchanges and the OTC Market New York Stock Exchange Foreign Stock Exchanges American Stock Exchange Over-the-Counter Market Regional Stock Exchanges Nasdaq and NASD

  13. BOND: A promise by the issuer to pay the buyer a certain amount of money by a specified future date • U.S. Government Bonds • Municipal Bonds • Corporate Bonds Nearly all secondary trading in bonds occurs in the OTC market

  14. Medium (Investment) Grades High Grades Poor Grades Speculative How Risky Is Your Bond? Moody's Aaa, Aa A, Baa Ba, B Caa to C Stanford & Poor's AAA, AA A, BBB BB, B CCC to D

  15. Types of Bonds Registered Bonds Secured Bonds Bearer Bonds Debentures

  16. Mutual FundsPooled Investments • Load Funds • No-Load Funds Mutual funds control about 20% of the stock market, but new cash inflows dropped 90% in 2001 Source: Stock Fund Inflows Plunge 90% in 2001, Los Angeles Times, C1, January 31, 2002

  17. Reading Stock Quotations

  18. Reading Mutual Fund Quotations

  19. Market Indexes Dow Jones Industrial Average The S&P 500 The Nasdaq Composite

  20. Bull and Bear Markets (1972 – 2000)

  21. 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 May 26, 1896The First Dow Jones Industrials List Source: History of the Dow, Randy Befumo, 3/23/02, http://www.fool.com/ddow/historyofthedow.htm

  22. Placing Orders Market Order Limit Order Stop Order Round Lot Odd Lot Financing Choices Margin Trading Short Sales Investing in the Securities Markets High risk alert!

  23. Securities Market Regulation Self-Regulation • Circuit breakers Securities and Exchange Commission • Prospectuses • Insider trading State Government Regulation • Blue Sky laws

  24. 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

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