Chapter 21

Ch

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THE FUTURE OF BUSINESSGitman & McDaniel

5th Edition

THE FUTURE OF BUSINESSGitman & McDaniel

5th Edition

Chapter

Understanding Securitiesand Securities Markets

Understanding Securitiesand Securities Markets

21

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2Ch

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Stocks and Bonds

Common

Preferred

Corporate Bonds

Government Securities

1

BondsBondsBondsBondsStocksStocksStocksStocks

SecuritiesSecurities Investment certificates that represent either equity or debt.Investment certificates that

represent either equity or debt.


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Stocks1

Preferred Stock

Preferred Stock

Common Stock

Common Stock

• Dividends set at issuance, and are paid before common stock dividends

• Ownership does not allow voting rights.

• Dividends set at issuance, and are paid before common stock dividends

• Ownership does not allow voting rights.

• Ownership that allows voting rights.• Can be bought and sold (liquidity). • May pay dividends

• Ownership that allows voting rights.• Can be bought and sold (liquidity). • May pay dividends

Historic Stock Market Return (since WWII): 12%


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Microsoft Stock Price


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Intel 5-yr Stock Price


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Intel 20-Year Stock Price

Intel 5-Year Stock Price


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Government Securities2

Municipal BondsMunicipal Bonds

Treasury BondsTreasury Bonds

U.S. TreasuryU.S. Treasury Treasury NotesTreasury Notes

Treasury BillsTreasury Bills

Revenue BondsRevenue Bonds

General Obligation Bonds

General Obligation Bonds


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Ratings2


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BondsBonds::

Long-term debt obligations (liabilities) of corporations & governments

issuers must pay back:

– principal (par value) at maturity (due date)

– plus interest (coupon rate)

Like stock, bonds may be bought and sold on the securities market


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3 Other Types of Securities

Mutual FundMutual Fund

Futures ContractsFutures Contracts

OptionsOptions

Financial-services companythat pools investors’ funds

to buy a selection of securities

Financial-services companythat pools investors’ funds

to buy a selection of securities

Legally binding obligations to buyor sell commodities or

financial instruments at later date

Legally binding obligations to buyor sell commodities or

financial instruments at later date

Contracts to buy or sell quantities of common stocks or financial

instruments at later date

Contracts to buy or sell quantities of common stocks or financial

instruments at later date


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3 Appeal of Mutual Funds

Good way to hold a diversified,less risky, portfolio

Professional management

May offer higher returns


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4 Securities Market

Help companies raise long-term financing,

a process calledunderwriting

Help companies raise long-term financing,

a process calledunderwriting

InvestmentBankers

InvestmentBankers

A person licensed to buy and sell securities on

behalf of clients

A person licensed to buy and sell securities on

behalf of clients

StockbrokerStockbroker


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4 Types of Markets

SecondaryMarket

SecondaryMarket

Old (already issued) securitiesare bought and sold, or traded,

among investors

Old (already issued) securitiesare bought and sold, or traded,

among investors

PrimaryMarket

PrimaryMarket

New securities are sold to the public

New securities are sold to the public


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5

Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Over-the-Counter MarketOver-the-Counter MarketOver-the-Counter MarketOver-the-Counter Market

Organized Stock ExchangesOrganized Stock ExchangesOrganized Stock ExchangesOrganized Stock Exchanges

Buying and Selling atSecurities Exchanges


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5

American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)

American Stock ExchangeAmerican Stock Exchange(AMEX)(AMEX)

New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)

New York Stock ExchangesNew York Stock Exchanges(NYSE)(NYSE)

U.S. Stock Exchanges


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5 Anatomy of a Stock Trade


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5

NYSENASDAQ

NYSENASDAQ

LondonLondon

TorontoToronto

MontrealMontreal

ParisParis SydneySydney

ZurichZurich

Buenos AiresBuenos Aires

TokyoTokyo

FrankfurtFrankfurt Hong KongHong Kong

TaiwanTaiwan

Global Trading and Foreign Exchanges


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5

A telecommunications network that links dealersthroughout the U.S. and enables them to tradesecurities

A telecommunications network that links dealersthroughout the U.S. and enables them to tradesecurities

Over-the-Counter(OTC)Market

Over-the-Counter(OTC)Market

The first electronic-basedstock market and the fastest growing part of thestock market.

The first electronic-basedstock market and the fastest growing part of thestock market.

NASDAQNASDAQ

The Over-the-Counter Market


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5

Bull MarketBull

Market

BearMarketBear

Market

Prices rise. Better returns.Prices rise. Better returns.

Prices go down. Low, or negative, returns.Prices go down. Low, or negative, returns.

Bull or Bear Market?


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5

Securities andExchange

Commission

Securities andExchange

Commission

The main federal government agency responsible for

regulating the U.S. securities industry.

The main federal government agency responsible for

regulating the U.S. securities industry.

Insider TradingInsider Trading The use of information that is

not available to the general public to make profits on securities transactions.

The use of information that is not available to the general public to make profits on securities transactions.

Regulation of Securities Markets


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5

• Insider trading

• Misrepresenting or omitting information

• Stealing customer funds or securities

• Violating responsibilities to treat customers fairly

• Selling securities without proper SEC registration

Securities Industry Violations


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5

http://www.sec.gov/answers/circuit.htm

Measures that stop tradingin the securities markets

for a short period tolimit the amount the market

can drop in one day.

Measures that stop tradingin the securities markets

for a short period tolimit the amount the market

can drop in one day.

Circuit BreakersCircuit Breakers

Circuit Breakers


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Securities Exchanges: NYSE

To prevent a fast crash, the New York Stock Exchange has several “trading breakerstrading breakers”

– a 1,100-point drop1,100-point drop stops trading for1 hour if it occurs before 2:00 pm

– a 2,250-point2,250-point dropdrop stops trading for2 hours if it occurs before 1:00 pm

– a 3,350-point3,350-point dropdrop stops trading for the rest of the day

Source: Associated Press in The Arizona Republic, Jan. 3, 2000, pg. D3.


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6

Company financial statementsCompany financial statements

Economic and financial publicationsEconomic and financial publications

Online information resourcesOnline information resources

Security price quotationsSecurity price quotations

Market averages and indexesMarket averages and indexes

Popular Sources of Investment Information


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6

Wall Street Journal

Barron’s

Business Week

Kiplinger’s Personal Finance

Forbes

Fortune

Smart Money

Worth

Money

Economic and Financial Publications


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6

CBS Marketwatch

CNN Money

EXCITE

Yahoo! Finance

Morningstar

See Exhibit 21.5 for more sources

http://www.marketwatch.com

http://money.cnn.com

http://money.excite.com

http://finance.yahoo.com

http://www.morningstar.com

Online Information Sources


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7 Stock Quotations

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