New York Stock Exchange • Started with 24 NY brokers in 1792 • Registered as NYSE in 1934 • Largest stock exchange in the world with over 3,000 listed companies with a market cap of 13 trillion dollars. • Has 28 of the 30 companies in the Dow listed on its exchange.
Value of NYSEHas increased from 14.5 in 1950 to 677.58 as of 2000Averaged a 13% return over the 90’s
Requirements to be listed on NYSE • 2000 shareholders • 1,100,000 shares outstanding • Market value of shares of at least 60 million • Pre-tax earnings of 6,500,000 dollars over past three years. • Revenues of 100 million dollars
Requirements for Non-US company • 5,000 shareholders worldwide. • 100,000,000 DOLLAR market value. • Earnings of at least $100 million over past three years. • Revenues of at least 100 million over the past year.
What kind of trading goes on at the NYSE? • Bonds • - buying • - selling • Stocks • - buying • - selling • - short selling • - puts • - calls
How does buying and selling a stock happen on the NYSE • First an investor places an order to buy or sell shares in a NYSE listed company.
How does buying and selling a stock happen on the NYSE • NYSE member brokerage firm sends the order to the NYSE trading floor by computer or telephone • The order is then routed to a broker’s booth or directly to the trading post specialist
How does buying and selling a stock happen on the NYSE • The order appears on the specialist’s screen and he exposes the order in the agency auction market and makes the trade. • A transaction report is then sent to the originating brokerage firms
How does buying and selling a stock happen on the NYSE • This is followed by a 3-day Clearance and Settlement cycle at which time transfer of ownership is completed electronically. • Finally the investor receives confirmation from his/her brokerage firm. If shares were purchased he submits payment, if he sold shares his account is credited.
Other transactions – short selling • Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed, before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought back to close out the transaction. Use this technique when you believe the stock price will drop.
Other transactions - options • Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Buy call options if you believe a stock will be worth more than the price set by the option (the strike price), plus the price you pay for the option itself. Buy a put options if you believe the stock's price will drop below the price set by the option.
Real world example - AOL • Have $3400 • Current stock stock price = $34 • Call option for Jan 2004 = $3.40 per share @ $60 strike price • Put option for Jan 2004 = $3.40 per share @ $20 strike price
Real World Example – AOLIf you think AOL will go up • Purchase 100 shares at $34 dollars a piece • Purchase call options on 1,000 shares at $3.40
Real world example - AOL • If you did a call option on AOL and the price went to $150 your gain would be $86,600! • That is a 2547% return! • However….
Real World Example - AOL • If the stock price was at $60 or below the option would be worthless. • And the $3400 dollars would be lost.
Real world example – AOLYou think AOL is going to tumble • Short sell 100 shares at $34 dollars a share. • Buy put options on a 1000 shares of AOL for $3.40 @ a strike price of $20
Real World Example - AOL • If you short sell and AOL goes bankrupt you can make up to twice you money. • However, you have unlimited liability and if the price goes to $150 and you have not covered then you have to spend $11,600 to do so!
Who owns stock? • Individuals • Government • Foreigners • Institutions We know how having stock can increase wealth for owners but why do corporations issue it?
Why corporations issue common stock • Obviously they issue stock to raise money but why raise money with common stock instead of bonds or a line of credit? • 1. Run their operations without borrowing money and therefore don’t have debt or interest payments.
Reasons to issue common stock • Buy other companies with stock as currency. For instance when AOL merged with Time Warner they “bought” Time Warner’s shares with AOL stock thereby not reducing AOL’s cash.
Reasons to issue common stock • Compensate employees especially executives richly without using cash. • For example, take Charles Wang, the CEO of Computer associates…
Reasons to issue common stock • Value of stock options given last year • 600 million dollars • Value of exercised options last year • 118 million dollars • Being able to receive a fat bonus without affecting your companies bottom line • Priceless