Securities Firms, Mutual Funds, and Financial

Conglomerates

Securities Firms, Mutual Funds, and Financial

Conglomerates

Chapter 20

© 2003 South-Western/Thomson Learning

Slide 2

Learning ObjectivesLearning Objectives What securities firms are and what financial

services they provide

Various types of mutual funds

What are hedge funds and real estate

investment trusts (REITs)

Role of government-sponsored enterprises

(GSEs)

What financial conglomerates are and why

they have grown so much in recent years

Slide 3

Securities FirmsSecurities Firms

Investment Banks Financial institutions that design, market and

underwrite new issuances of securities in primary market

Responsibilities for New Offerings-two types Initial Public Offering (IPO) - not previously sold

financial stocks or bonds to public Seasoned Issuance – when stocks or bonds have

been previously issued

Timing

The two main functions of securities firms are investment banking and the buying and

selling of previously issued securities.

Slide 4

Securities FirmsSecurities Firms Investment Banks

Role of Securities and Exchange Commission Registration Statement

Statement that must be filed with the SEC before new securities offering can be issued

Prospectus Subpart of registration statement that must be given to

investors before they purchase securities

Credit Rating Underwriting and Marketing

Syndicate Group of investment banks Each underwrites a proportion of new securities offering

Slide 5

Securities FirmsSecurities Firms

Investment Banks and Functioning of Primary Market Private Placement

Method of issuing new securities by selling to limited number of large investors

Slide 6

Brokers & Dealers: Secondary MarketBrokers & Dealers: Secondary Market Types of Orders – to instruct broker /

dealer Market Orders

Purchase or sell the securities at present market price

Limit Orders Purchase securities at market price up to certain

maximum Short Sell

Borrow shares of stocks Sell them today with guarantee that investor will

replace them by a date in future

Slide 7

Brokers & Dealers: Secondary MarketBrokers & Dealers: Secondary Market Margin Loans

Loans to investors Proceeds are used to purchase securities

Brokerage Fees Brokerage firms could compete by offering

lower fees Discount brokerage firms

Provide limited or no investment advice Fees much lower that full-service brokerage firms

Slide 8

Securities IndustrySecurities Industry

Securities Industry Protection Corporation (SIPC) Nonprofit membership corporation Established by Congress in 1970 Provides insurance up to $500,000 per

investor To protect investors’ securities from

liquidation by brokerage firm

Self-regulated by National Association of Securities Dealers (NASD) and various

securities exchanges such as the New York and American stock exchanges.

Slide 9

Investment CompaniesInvestment Companies

Open-End Fund Mutual fund continually sells new shares to

public Buys outstanding shares from public At price equal to the net asset of value

Difference between market value of shares of stock that mutual fund owns and liabilities of mutual fund

Closed-End Fund Mutual fund sells limited number of shares like

other corporations Usually do not buy back outstanding shares

Companies that own and manage a large group of different mutual funds.

Slide 10

Investment CompaniesInvestment Companies

Load Sales commission Paid to broker to purchase mutual finds By law, load cannot exceed 8.5%

No-Load Mutual funds purchased directly from

mutual fund company Not subject to a load

Slide 11

Growth of Investment FundsGrowth of Investment Funds

Recent legislation gives individuals control over where their pension funds are invested, many have chosen mutual funds

Many types of mutual funds are often offered by single investment company

Create new funds that invest in several mutual funds Fund of Funds

Mutual fund Invests in portfolio of other mutual funds rather than

individual stocks and/or bonds

Slide 12

Growth of Investment FundsGrowth of Investment Funds

Stock Funds Aggressive growth funds Global equity funds Growth and income funds Income-equity funds Index funds Sector funds Socially conscious funds

Slide 13

Exhibit 20–3aA Sample of the Types of Mutual Funds

Slide 14

Growth of Investment FundsGrowth of Investment Funds

Bond Funds Corporate bond funds Global bond funds Ginnie Mae funds High-yield bond funds Long-term municipal bond funds State municipal bond funds U.S. government income funds

Slide 15

Exhibit 20–3bA Sample of the Types of Mutual Funds

Slide 16

Growth of Investment FundsGrowth of Investment Funds

Stock and Bond Funds Balanced funds Flexible portfolio funds Income-mixed funds Convertible securities funds

Slide 17

Exhibit 20–3cA Sample of the Types of Mutual Funds

Slide 18

Hedge FundsHedge Funds

Nontraditional type of MF that attempt to earn maximum returns regardless of rising or falling financial prices

General partner usually organizes fund and is responsible for day-to-day trading decisions

Not regulated as traditional investment pools or mutual funds

Attempt to earn high - or maximum - returns Use riskier investment strategies than those in

traditional mutual funds Traditionally charge high fees and take large

percent of profits

Slide 19

Real Estate Investment Trusts (REITs)Real Estate Investment Trusts (REITs)

Special type of mutual fund Pools funds of many small investors Uses them to buy or build income

property Uses them to make or purchase

mortgage loans

Slide 20

Government-Sponsored EnterprisesGovernment-Sponsored Enterprises

GSE Housing Market Federal National Mortgage Association

(Fannie Mae) Federal Home Loan Mortgage

Corporation (Freddie Mac) Government National Mortgage

Association (Ginnie Mae)

Publicly held corporations that are chartered by Congress.

Slide 21

Government-Sponsored EnterprisesGovernment-Sponsored Enterprises

GSE Farm Loan Market Federal Farm Credit Banks Funding

Corporation (FFCBFC) Issues bonds and discount notes to make loans to

farmers

Federal Credit Financial Assistance Corporation (FACO) Issues bonds with explicit government guarantee Uses proceeds to assist the FFCBFC

Slide 22

Government-Sponsored EnterprisesGovernment-Sponsored Enterprises

GSE Student Loan Market Student Loan Marketing Association (Sallie

Mae) Issues securities to purchase student loans Increases the amount and liquidity of funds flowing

into student loans

Financing Corporation (FICO) Issues bonds Uses proceeds to help resolve the savings and

loan crisis

Slide 23

Financial ConglomeratesFinancial Conglomerates Own and operate several different types of

financial intermediaries and institutions Alleged advantages of forming financial

conglomerates include taking advantage of Economies of scale - gains from size that may

result from several firms Streamline management Eliminate duplication of effort of several separate firms

Economies of scope Advantages to firms being able to offer customers

several financial services under one roof Diversification

Branching out of financial conglomerates into several product lines