© 2007 Prentice Hall, Inc. All rights reserved.16–1 Chapter 16 Securities and Investments.

© 2007 Prentice Hall, Inc. All rights reserved. 16–1

Chapter 16Chapter 16

Securities and InvestmentsSecurities and Investments


L E A R N I N G O U T C O M E SL E A R N I N G O U T C O M E SAfter reading this chapter, you should be able to:After reading this chapter, you should be able to:

Describe the role of securities markets and explain the difference Describe the role of securities markets and explain the difference between primary securities markets and secondary securities between primary securities markets and secondary securities markets.markets.Discuss the value to shareholders of common and preferred Discuss the value to shareholders of common and preferred stock and identify the major stock exchanges and stock markets.stock and identify the major stock exchanges and stock markets.Distinguish among the various types of bonds in terms of their Distinguish among the various types of bonds in terms of their issuers and safety.issuers and safety.Describe the investment opportunities offered by mutual funds. Describe the investment opportunities offered by mutual funds. Describe the risk-return relationship, and discuss the use of Describe the risk-return relationship, and discuss the use of diversification and asset allocation for investments.diversification and asset allocation for investments.Explain the process by which securities are bought and sold.Explain the process by which securities are bought and sold.Explain how securities markets are regulated. Explain how securities markets are regulated.


What’s in It for Me?What’s in It for Me?

By using this chapter’s presentation on By using this chapter’s presentation on securities and investments, you will benefit in securities and investments, you will benefit in two ways:two ways:

1.1. You’ll be better prepared to evaluate investment You’ll be better prepared to evaluate investment opportunities for your personal financesopportunities for your personal finances

2.2. You’ll be better prepared for where and how to buy You’ll be better prepared for where and how to buy and sell securitiesand sell securities


Securities MarketsSecurities Markets

SecuritiesSecurities Represent secured, or financially valuable, claims on Represent secured, or financially valuable, claims on

the part of investorsthe part of investors

Securities MarketsSecurities Markets Markets in which stocks and bonds are soldMarkets in which stocks and bonds are sold

StockStock Represents an ownership claim on the assets of a Represents an ownership claim on the assets of a

corporationcorporation

BondBond Represents a financial claim of money owed by a Represents a financial claim of money owed by a

company to the bondholdercompany to the bondholder


Primary and Secondary Primary and Secondary Securities MarketsSecurities Markets

Primary Securities MarketsPrimary Securities Markets The market in which The market in which newnew stocks and bonds (but not stocks and bonds (but not

mutual funds) are bought and sold by firms and mutual funds) are bought and sold by firms and governmentsgovernments

Secondary Securities MarketsSecondary Securities Markets Where Where existingexisting stocks and bonds are traded stocks and bonds are traded

Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC) The government agency that regulates U.S. The government agency that regulates U.S.

securities marketssecurities markets New securities must be approved by the SECNew securities must be approved by the SEC


Primary and Secondary Primary and Secondary Securities Markets (cont’d)Securities Markets (cont’d)

Investment banks help bring new securities to Investment banks help bring new securities to the market by:the market by: Advising companies on the timing and financial terms Advising companies on the timing and financial terms

of new issuesof new issues

Underwriting—or buying—new securities, bearing Underwriting—or buying—new securities, bearing some of the risks of issuing themsome of the risks of issuing them

Distributing new securities through banks and Distributing new securities through banks and brokers to individual investorsbrokers to individual investors


StocksStocks

StockStock A portion (share) of the ownership of a corporationA portion (share) of the ownership of a corporation

Common stockCommon stock Preferred stockPreferred stock

DividendDividend A payment to shareholders, on a per-share basis, A payment to shareholders, on a per-share basis,

out of the company’s earningsout of the company’s earnings

Stock ValuesStock Values ParPar—declared face value at time of issue—declared face value at time of issue MarketMarket—current share price in a market—current share price in a market BookBook—proportional worth of owners’ equity—proportional worth of owners’ equity


Stocks (cont’d)Stocks (cont’d)

Investment Traits of Common StockInvestment Traits of Common Stock Price volatilityPrice volatility Dividend payment uncertaintyDividend payment uncertainty High growth potentialHigh growth potential

Preferred StockPreferred Stock Have preferential claim on dividendsHave preferential claim on dividends

Investor PreferencesInvestor Preferences Capital gainsCapital gains Market appreciation (growth)Market appreciation (growth)


Blue Chip Stocks:Blue Chip Stocks:A Changing Perspective?A Changing Perspective?

““Old” EconomyOld” Economy Established firmEstablished firm

Sound financial historySound financial history

Stable pattern of dividendsStable pattern of dividends

““New” EconomyNew” Economy Rapid growth in market valueRapid growth in market value


Stock ExchangesStock Exchanges

Stock ExchangeStock Exchange An organization formed to provide an institutional An organization formed to provide an institutional

setting in which stocks can be bought and soldsetting in which stocks can be bought and sold The exchange enforces certain rules to govern its The exchange enforces certain rules to govern its

members’ trading activitiesmembers’ trading activities

Trading FloorTrading Floor The physical location in an exchange where stocks The physical location in an exchange where stocks

are tradedare traded

Stock BrokersStock Brokers Earn commissions by executing buy-and-sell orders Earn commissions by executing buy-and-sell orders

from nonexchange membersfrom nonexchange members


Stock Exchanges (cont’d)Stock Exchanges (cont’d)

Discount BrokersDiscount Brokers Offer lower fees to investors than do full-service Offer lower fees to investors than do full-service

stock brokersstock brokers

Online TradingOnline Trading Conditions favoring online tradingConditions favoring online trading

Convenient access to the InternetConvenient access to the Internet

Fast no-nonsense transactionsFast no-nonsense transactions

Opportunity for self-directed investors to manage their own Opportunity for self-directed investors to manage their own investments while paying low fees for tradinginvestments while paying low fees for trading


Full-Service BrokersFull-Service Brokers A full-service brokerage can offer clients consulting A full-service brokerage can offer clients consulting

advice in personal financial planning, estate advice in personal financial planning, estate planning, and tax strategies, along with a wider planning, and tax strategies, along with a wider range of investment productsrange of investment products

Initial Public Offerings (IPOs)Initial Public Offerings (IPOs) The first sale of a company’s stock to the general The first sale of a company’s stock to the general

publicpublic IPOs are generally not available to the public through online IPOs are generally not available to the public through online

retail brokersretail brokers Specialist is appointed by the exchange to control trading for Specialist is appointed by the exchange to control trading for

a particular stocka particular stock

Stock Exchanges (cont’d)Stock Exchanges (cont’d)


New York Stock New York Stock ExchangeExchange

Global Stock Global Stock ExchangesExchanges

American American Stock Stock

ExchangeExchange

Over-the-Over-the-Counter Counter MarketMarket

Regional Stock Regional Stock ExchangesExchanges

NasdaqNasdaq

The Major Exchanges and MarketsThe Major Exchanges and Markets


The Major Exchanges and Markets (cont’d)The Major Exchanges and Markets (cont’d)

The New York Stock ExchangeThe New York Stock Exchange For many people, “the stock market” means the New For many people, “the stock market” means the New

York Stock Exchange (NYSE)York Stock Exchange (NYSE)

The American Stock Exchange (AMEX) The American Stock Exchange (AMEX) The second-largest floor-based U.S. exchange is The second-largest floor-based U.S. exchange is

located in New York Citylocated in New York City

Regional Stock ExchangesRegional Stock Exchanges Seven regional stock exchanges were organized to Seven regional stock exchanges were organized to

serve investors in places other than New Yorkserve investors in places other than New York

Global Stock ExchangesGlobal Stock Exchanges The value of shares listed on foreign exchanges The value of shares listed on foreign exchanges

continues to growcontinues to grow


The Major Exchanges and Markets (cont’d)The Major Exchanges and Markets (cont’d)

Over-the-Counter (OTC) MarketOver-the-Counter (OTC) Market So called because its original traders kept supplies of So called because its original traders kept supplies of

shares on hand and, as opportunities arose, sold shares on hand and, as opportunities arose, sold them over the office counter to interested buyersthem over the office counter to interested buyers

National Association of Securities Dealers National Association of Securities Dealers Automated Quotation (Nasdaq) systemAutomated Quotation (Nasdaq) system The world’s oldest electronic stock marketThe world’s oldest electronic stock market Orders are gathered and executed on a Orders are gathered and executed on a

computer networkcomputer network


Fantasy Stock MarketsFantasy Stock Markets

Fantasy Stock MarketsFantasy Stock Markets Are Internet-based games that provide an

investment experience that is educational, challenging, and entertaining

Teach you how securities markets work

Enable you to enter stock-ticker symbols, search sources for information on companies, make buy-and-sell decisions, and discover the financial results as real market prices change


Bonds Bonds

BondsBonds Represent a promise by the issuer to pay the buyer a Represent a promise by the issuer to pay the buyer a

certain amount of money by a specified future datecertain amount of money by a specified future date U.S. government bondsU.S. government bonds

Municipal bondsMunicipal bonds

Corporate bondsCorporate bonds

Nearly all secondary trading in bonds occurs in the Nearly all secondary trading in bonds occurs in the OTC marketOTC market


Bearer Bearer BondsBonds DebenturesDebentures

RegisteredRegisteredBondsBonds

SecuredSecured Bonds Bonds

Types of Corporate BondsTypes of Corporate Bonds


Mutual FundsMutual Funds

Mutual FundMutual Fund A portfolio of stocks, bonds, and other securities A portfolio of stocks, bonds, and other securities

purchased with pooled investments from individuals purchased with pooled investments from individuals and organizationsand organizations

No-load fundsNo-load funds do not charge buy or sell commissions do not charge buy or sell commissions

Load fundsLoad funds charge commissions charge commissions


Mutual Funds (cont’d)Mutual Funds (cont’d)

Types of FundsTypes of Funds Money market mutual funds: funds stressing safety unds stressing safety

and stabilityand stability

Balanced funds: Balanced funds: funds stressing conservative capital funds stressing conservative capital growthgrowth

Aggressive growthAggressive growth funds: funds stressing mfunds stressing maximum long-term capital growth


Diversification and Asset AllocationDiversification and Asset Allocation

The Risk-Return RelationshipThe Risk-Return Relationship Safer investments tend to offer lower returns; riskier Safer investments tend to offer lower returns; riskier

investments tend to offer higher returns.investments tend to offer higher returns.

DiversificationDiversification Buying several different kinds of investments rather Buying several different kinds of investments rather

than just one so that the risk of loss is reduced by than just one so that the risk of loss is reduced by spreading the total investment across more stocksspreading the total investment across more stocks

Asset AllocationAsset Allocation The proportion—the relative amounts—of funds The proportion—the relative amounts—of funds

invested in (or allocated to) each of the investment invested in (or allocated to) each of the investment alternativesalternatives


Buying and Selling SecuritiesBuying and Selling Securities

Financial Information ServicesFinancial Information Services Stock quotationsStock quotations Bond quotationsBond quotations Mutual funds quotationsMutual funds quotations

Market IndexesMarket Indexes Bull marketsBull markets Bear marketsBear markets


The S&PThe S&P500500

The Nasdaq The Nasdaq CompositeComposite

Dow Jones Industrial AverageDow Jones Industrial Average

Market IndexesMarket Indexes



The Dow Jones Industrial Average (DJIA)The Dow Jones Industrial Average (DJIA) The most widely cited U.S. market indexThe most widely cited U.S. market index

Measures the performance of financial markets by Measures the performance of financial markets by focusing on 30 blue-chip companies as reflectors of focusing on 30 blue-chip companies as reflectors of economic healtheconomic health

The S&P 500 Composite Index The S&P 500 Composite Index Consists of 500 stocks, including 400 industrial firms, Consists of 500 stocks, including 400 industrial firms,

40 utilities, 40 financial institutions, and 20 40 utilities, 40 financial institutions, and 20 transportation companiestransportation companies



Nasdaq Composite IndexNasdaq Composite Index All Nasdaq-listed companies are included in the All Nasdaq-listed companies are included in the

index, for a total of more than 3,300 firms (both index, for a total of more than 3,300 firms (both domestic and foreign)domestic and foreign)


Investing in the Securities MarketsInvesting in the Securities Markets

Placing OrdersPlacing OrdersMarket OrderMarket OrderLimit OrderLimit OrderStop OrderStop OrderRound LotRound LotOdd LotOdd Lot

Financing PurchasesFinancing PurchasesMargin TradingMargin TradingShort SalesShort Sales


Securities Market RegulationSecurities Market Regulation

The National Association of Securities Dealers The National Association of Securities Dealers (NASD)(NASD) The largest private-sector securities-regulation The largest private-sector securities-regulation

organization in the worldorganization in the world Every broker/dealer is required by law to be a Every broker/dealer is required by law to be a

member of the NASD and to pass qualification member of the NASD and to pass qualification exams and meet standards for financial soundnessexams and meet standards for financial soundness


Securities Market Regulation (cont’d)Securities Market Regulation (cont’d)

NYSE Self-RegulationNYSE Self-Regulation Circuit breakersCircuit breakers

Securities and Exchange CommissionSecurities and Exchange Commission ProspectusesProspectuses

Insider tradingInsider trading

State Government RegulationState Government Regulation Blue-sky lawsBlue-sky laws

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© 2007 Prentice Hall, Inc. All rights reserved.16–1 Chapter 16 Securities and Investments.

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