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© 2007 Prentice Hall, Inc. All rights reserved. 16–1
Chapter 16Chapter 16
Securities and InvestmentsSecurities and Investments
© 2007 Prentice Hall, Inc. All rights reserved. 16–2
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.
© 2007 Prentice Hall, Inc. All rights reserved. 16–3
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–4
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–5
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–6
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–7
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–8
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)
© 2007 Prentice Hall, Inc. All rights reserved. 16–9
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–10
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–11
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–12
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)
© 2007 Prentice Hall, Inc. All rights reserved. 16–13
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–14
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–15
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–16
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–17
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–18
Bearer Bearer BondsBonds DebenturesDebentures
RegisteredRegisteredBondsBonds
SecuredSecured Bonds Bonds
Types of Corporate BondsTypes of Corporate Bonds
© 2007 Prentice Hall, Inc. All rights reserved. 16–19
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–20
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–21
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–22
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–23
The S&PThe S&P500500
The Nasdaq The Nasdaq CompositeComposite
Dow Jones Industrial AverageDow Jones Industrial Average
Market IndexesMarket Indexes
© 2007 Prentice Hall, Inc. All rights reserved. 16–24
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–25
Market IndexesMarket Indexes
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)
© 2007 Prentice Hall, Inc. All rights reserved. 16–26
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–27
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
© 2007 Prentice Hall, Inc. All rights reserved. 16–28
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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