securities firms, mutual funds, and financial conglomerates chapter 20 © 2003 south-western/thomson...
TRANSCRIPT
Securities Firms, Mutual Funds, and Financial
Conglomerates
Securities Firms, Mutual Funds, and Financial
Conglomerates
Chapter 20
© 2003 South-Western/Thomson Learning
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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
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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Exhibit 20–3aA Sample of the Types of Mutual Funds
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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
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Exhibit 20–3bA Sample of the Types of Mutual Funds
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Growth of Investment FundsGrowth of Investment Funds
Stock and Bond Funds Balanced funds Flexible portfolio funds Income-mixed funds Convertible securities funds
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Exhibit 20–3cA Sample of the Types of Mutual Funds
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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
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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
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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.
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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
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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
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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