fourth edition copyright ©2003 prentice hall, inc. part 6........................ understanding...

Fourth EditionFourth Edition

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc.

PART 6 . . . . . . . . . . . . . . . . . . . . . . . .PART 6 . . . . . . . . . . . . . . . . . . . . . . . .Understanding Financial IssuesUnderstanding Financial Issues

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 15 - 15 - 22

Chapter 15Chapter 15

Understanding Securities and Investments

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

Mutual funds and commodities

Buying and selling securities

Regulation of securities markets


SecuritiesStocks and Bonds

Holders of stocks and bonds have a stake Holders of stocks and bonds have a stake in the company that issued themin the company that issued them

Stocks:Stocks: An ownership stake An ownership stake

Bonds:Bonds: A financial stake A financial stake

Primary Securities MarketPrimary Securities Market

Secondary Securities MarketSecondary Securities Market


Investment Banks Help Bring New Securities to the Market

They They adviseadvise companies on the timing and companies on the timing and financial terms of new issuesfinancial terms of new issues

They They underwriteunderwrite—or buy—new securities, —or buy—new securities, bearing some of the risks of issuing thembearing some of the risks of issuing them

They They distributedistribute new securities through banks new securities through banks and brokers to individual investorsand brokers to individual investors

New securities must be approved by the SEC!New securities must be approved by the SEC!


Common StockHigh Risk, High Potential Return

Par ValuePar Value

The face value of a share of stock at the time it is The face value of a share of stock at the time it is originally issuedoriginally issued

Market ValueMarket Value

The current price of a share in the stock marketThe current price of a share in the stock market

Book ValueBook Value

Stockholder’s equity divided by the number of Stockholder’s equity divided by the number of sharesshares


Blue Chip StocksA Changing Perspective?

““Old” EconomyOld” Economy

Established firmEstablished firm

Sound financial historySound financial history

Stable pattern of dividendsStable pattern of dividends

““New” EconomyNew” EconomyRapid growth in market valueRapid growth in market value


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: Source: Game Over for the Bear?,Game Over for the Bear?, Los Angeles Times, C1, January 31, 2002 Los Angeles Times, C1, January 31, 2002


Preferred StockLower Risk, Lower Potential Return

Fixed dividend

First claim on assets

No voting rights

Possible features:

Callable

Cumulative


Stock ExchangesInstitutional Settings for Trading Stocks

BrokersBrokers

Full service brokersFull service brokers

Discount brokersDiscount brokers

On-line tradingOn-line trading


'96'96 '97'97 '98'98 '99'99

$60$60

4545

3030

1515

1515

1212

99

66

%%

The Growth of Online TradingO

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On

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Sh

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of T

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ees

Fo

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ees

Commission fees charged by top ten brokers

Percentage of shares traded online


New York Stock New York Stock ExchangeExchange

Foreign Stock Foreign Stock ExchangesExchanges

American American Stock Stock

ExchangeExchange

Over-the-Over-the-Counter Counter MarketMarket

Regional Stock Regional Stock ExchangesExchanges

Nasdaq and Nasdaq and NASDNASD

The Major Exchanges and the OTC Market


BOND:

U.S. Government Bonds

Municipal Bonds

Corporate Bonds

A promise by the issuer to pay the buyer A promise by the issuer to pay the buyer a certain amount of money by a specified a certain amount of money by a specified future datefuture date

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


High Grades

Medium(Investment)

Grades SpeculativePoor

Grades

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


Bearer BondsBearer Bonds DebenturesDebentures

Registered BondsRegistered Bonds Secured BondsSecured Bonds

Types of Bonds


Mutual FundsPooled Investments

Load Funds

No-Load Funds

Source: Source: Stock Fund Inflows Plunge 90% in 2001Stock Fund Inflows Plunge 90% in 2001 , Los Angeles Times, C1, January 31, 2002, Los Angeles Times, C1, January 31, 2002

Mutual funds control about 20% Mutual funds control about 20% of the stock market, but new cash of the stock market, but new cash inflows dropped 90% in 2001inflows dropped 90% in 2001


Reading Stock Quotations


Reading Mutual Fund Quotations


The S&P 500The S&P 500The Nasdaq The Nasdaq CompositeComposite

Dow Jones Industrial AverageDow Jones Industrial Average

Market Indexes


Bull and Bear Markets (1972 – 2000)


May 26, 1896The First Dow Jones Industrials List

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

Source: Source: History of the DowHistory of the Dow, Randy Befumo, 3/23/02, , Randy Befumo, 3/23/02, http://www.fool.com/ddow/historyofthedow.htm


Investing in the Securities Markets

Placing OrdersPlacing Orders

Market Order

Limit Order

Stop Order

Round Lot

Odd Lot

Financing ChoicesFinancing Choices

Margin Trading

Short Sales

High risk alert!High risk alert!


Securities Market Regulation

Self-RegulationSelf-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


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

fourth edition copyright ©2003 prentice hall, inc. part 6........................ understanding...

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