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Secondary Markets
Secondary markets, or secondary financial markets, trade
existing securities (previously owned shares ofstocks, bonds, and
other
financial assets). Secondary markets consist of both organized
exchanges, such as the New York Stock Exchange, and
over-the-counter or
electronic markets, such as NASDAQ: secondary markets consist of
markets in which existing securities are traded.
Organized stock exchanges: Organized stock exchanges are markets
that are used to facilitate the trading of financial instruments.
The main
organized stock exchanges are the New York Stock Exchange and
the American Stock Exchange. There are also regional stock
exchanges, such
as the Pacific, Chicago, Philadelphia, Cincinnati,
Intermountain, Spokane, and Boston Stock Exchanges, but these stock
exchanges are very
small.
The largest stock exchange in the United States is the New York
Stock Exchange. This stock exchange is more than two hundred years
old, and itis still limited to 1,366 seats: the same number of
seats it has had since 1953. The New York Stock Exchange includes
over 3,000 listed
companies. Generally, 80 percent of the daily trading volume in
the United States is done on the New York Stock Exchange.
Over-the-counter (OTC) market: The OTC market is an electronic
network of dealers that allows investors to execute trades without
going
through specialists or intermediaries. That is, there is no
single physical location (exchange) where stocks are traded, rather
these trades are
executed through the National Association of Securities Dealer
Automated Quotation System (NASDAQ) which links various dealers and
brokers
through a computer or telephone based system. Usually the bigger
companies are traded on an exchange rather than an OTC. These
trades are
also executed through the National Market System, a system under
the sponsorship of the National Association of Securities Dealers
(NASD),
which trades stocks of specific sizes, profitability, and
trading requirements. NASD also trades pink sheets, or lists of
small companies not
listed on any exchange; these stocks are traded by brokers
through a network of phone and computer systems and may be
significantly more
risky.
Secondary bond markets: An organized exchange for individual
retail investors to trade bonds does not exist. This may be because
there is little
demand for bonds among individual investors; this may also be
because the transaction costs to trade bonds are so small.
Generally, individuals
must work with a broker who buys or sells bonds through a bond
dealer.
Government bond trading: Government bond trading is dominated by
investment houses, commercial banks, and the Federal Reserve.
Some
bonds, such as Series EE and I Bonds and some Treasury
securities, can be purchased directly over the Internet at
www.treasurydirect.gov.International stock markets: There are
domestic stock exchanges in the developed countries and in many of
the emerging or developing
countries.] Most nations have securities exchanges; these
markets trade more than $25 trillion in assets. In the U.S. stock
markets investors
can often trade American Depository Receipts (ADRs), which are
receipts for -shares that are held on deposit by foreign banks and
represent
ownership of companies which have their primary listing on
exchanges outside the United States.-. Buying an ADR is very
similar to buying the
u-nderlying domestic share from their home market, except you
get your dividends in U.S. dollars and your annual report
information in
English. Another way to invest in international shares is to
invest in mutual funds: many mutual funds invest
internationally.
Primary Markets
Primary markets, or primary financial markets, are where new
financial assets are issued. There are two main types of
primary-market issues.
The first type of issue is known as an initial public offering,
or IPO. These issues are the very first shares a company offers to
the
public. Investment bankers serve as underwriters for these
issues: they facilitate the process of selling these initial public
offerings.
The second type of issue is known as a seasoned new issue. These
issues are new shares that are being issued by a company that
already has
publicly traded shares on existing stock exchanges. A seasoned
new issue is the way a company sells more shares to the investing
public.
Types of Securities
We invest in four main types of securities:Bonds and Money
Market Instruments pay out interest regularly and can be issued by
various entities including governments and corporations.
The price at which these securities are traded fluctuates less
than the price of other securities, but they do fluctuate and this
gives us the
opportunity to obtain bonds at an advantageous price.
Most bonds are rated by independent credit agencies, such as
Moodys or Standard & Poors, but further analysis is often
required.
Equities are usually common stocks and represent the ultimate
ownership of companies. Common stocks are entitled to all the
residual profits
and assets of a company, if any. As a class, the value of stocks
rises over time and has historically beaten inflation.
Markets can fall and rise sharply but during the last century,
US stocks returned about 6% annually in real terms, that is, over
and above
inflation. This figure can only be used as a very rough
guide.
In general, on a long-term basis equities in developed
democratic countries with property rights and the rule of law, such
as Canada, the United
States, and the United Kingdom, have been excellent
investments.
Risk of loss can come from various sources, such as a weak
balance sheet, a product which is competing in a rapidly changing
industry (digital
technology, bio tech), the weather (increasingly), fashion,
extreme market values during bubbles, and volatile politics. The
best way to protect
portfolios against the risk of loss is by diversifying and by
investing in dividend paying stocks supported by great businesses
with strong balance
sheets.
Equities also include preference stocks which take various forms
but usually have a fixed rate of dividend and rank senior to common
stockwhen dividends are distributed or in case of a liquidation.
Preferreds are a hybrid between common stocks and bonds.
Exchange Traded Funds (ETFs) are like mutual funds but traded on
a stock exchange throughout the day much like stocks.
ETFs are funds which hold a portfolio of assets such as stocks,
bonds, commodities and currencies around the world or in a specific
region or
country.
Most ETFs invest according to an index. An example would the ETF
trading on the New York Stock Exchange under the symbol SPY. This
ETF
invests in all the stocks which make up the S&P 500.
ETFs are organized and offered by major financial institutions
and have very low costs and fees.
ETFs are a great way to diversify widely and cheaply. We do not
use ETFs exclusively because one drawback of ETFs is that since
they invest
across the board, their performance tends to be average and one
also has to pay the fees, albeit they are usually low. So we
balance them with
individual stocks.
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One important attraction of ETFs is that they are generally less
volatile than individual stocks and this stabilizes the portfolio
and allows us to
time purchases and sales better.
We often use ETFs to gain access to securities or other assets
which have a good yield but are otherwise difficult to acquire or
too risky to hold
unless in a widely-diversified portfolio, e.g. high yielding
corporate bonds. ETFs can also be used to hold high yielding
foreign currency without
having to open accounts in those currencies.
ETFs are gaining in popularity because they are very useful,
liquid and generally have low management charges.
Exchange Traded Notes (ETNs) are similar to ETFs but are not
funds and do not hold any assets. Rather, these are liabilities
issued by financial
institutions which pay investors in line with the performance of
a particular asset.
An option gives its buyer the right but not the obligation to
buy or sell securities at an agreed price. The seller of the
option, on the other hand,agrees to deliver the buyer's contracted
rights and, in compensation, collects a premium from the buyer.
Used wisely options can be an effective way of protecting a
portfolio by hedging against market falls or for earning additional
income on a
portfolio while still getting price appreciation and
dividends.
We buy and/or sell options only when it is appropriate to do so
and when it makes economic sense.
Next.......Dividend Stocks
http://constantincome.ca/investment/custodian/http://constantincome.ca/investment/custodian/
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Macroeconomics is the branch of economics that examines the
economic behavior of large collections, or aggregates, of
decision-making units
and the large-scale economic implications of aggregate behavior.
Macroeconomics examines the "big picture;" it takes a "start from
the top and
work down" approach to economics.
We Will Focus on a Market Economy In This Course
The Three Roles of Economic Decision Makers in a Market
Economy
Recall that Economics is the study of the rational allocation of
resources under constraints to meet competing objectives.
Allocation involves
decision making, and there are many types of economic decision
makers: individuals, families or households, city, county, state
and national
governments, and international groups such as the United
Nations. Although these decision makers are very different in many
ways,there are
basically just three types ofeconomicdecisions that each
decision maker needs to make in a Market Economy. The first is
which resources to
consume. Consumption is any activity that re-allocates resources
in a way that decreases the value of the resources. The second type
of
economic decision is which resources to produce. Production is
any activity that re-allocates resources in a way that increases
the value of the
resources. The third type of economic decision is whether or not
to coordinate and regulate the consumption and production
activities
ofotherdecision makers. By "Government Activity," we mean any
activity that coordinates or regulates the consumption or
production
activities of others.
We usually think ofConsumers, or Households, as individuals or
groups of individuals collectively making consumption decisions,
Producers, or
Firms, as individuals or groups of individuals collectively
making production decisions, and "the Government" as individuals or
groups ofindividuals collectively making coordination and
regulation decisions. Hence, we speak of "Consumers," "Producers,"
and "Government" as the
three "economic roles" of decision makers. However, it is
important to realize that most individuals play all three "economic
roles"
simultaneously. For example, when I work I make production
decisions, when I go to the store I make consumption decisions, and
when I vote, I
indirectly make coordination decisions by electing government
officials who make coordination decisions for me as my
representatives.
Likewise, a business acts as a consumer when it buys materials
to make its product, as a producer when i t makes and sells its
product, and
indirectly as a coordinator when it lobbies the government for
or against various policies. Hence, when we talk about a
"consumer," what we
mean is any individual facing a "consumption-type" decision. We
mean similar things when we talk about a "producer," or the
"government."
The Circular Flow Model of a Market Economy
The Circular Flow Model of a Market Economy gives a general
schematic picture of the many interactions between the three basic
types of
economic decision makers in a market economy. The Circular Flow
Model is at the border between Microeconomics and Macroeconomics;
it
shows how groups of individual decision makers begin to interact
in markets. The model follows the exchange of resources (recall
the
definition of economics) and emphasizes the fact that physical
resources are never created or destroyed (except, perhaps, in
nuclear reactions)
by market trading, resources simply change form and/or change
hands.
Circular Flow Model
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We can describe the Circular Flow Model by beginning with
Consumers. Consumers initially own all resources. Consumers trade
these
resources for money from Producers in Input, or Factor, Markets.
The resources moving from Consumers to Producers are known as
Inputs (to
the production process) or Factors of Production. Examples of
Factors of Production include Labor, Materials, Energy, Land, and
Capital
("Capital" is a term used to describe Materials that have been
fashioned into a durable form intended to last more than a year).
Obviously, the
money that Producers pay to Consumers for the Consumers' labor
is called "wages." Similarly, money paid for land is called "rent,"
and money
paid for materials is called "interest," or "dividends,"
(depending on whether the Consumers loan the materials to the
Producers or "sell" the
materials to the producers). Producers re-combine the Factors of
Production received from Consumers into more valuable forms
called Outputs, or Products. Producers trade these Outputs for
money from Consumers in Output, or Product, Markets. Outputs can
be
goods, services or information. Examples include automobiles,
hamburgers, air transportation services (e.g., FEDEX), stock
information from
stock brokers, the results of scientific research, professional
football games, etc.
Notice that there are actually two circular flows moving in
opposite directions in the Circular Flow Model. The first flow is
the Physical
Flow ofresources moving from Consumers to Producers and back
again. The second flow is the Financial Flow ofmoneymoving in
the
opposite direction. Note also that for both Consumers and
Producers, the amount of money that is spent must equal the amount
of money
that is earned (the whole field of accounting is based on this
last point).
The Government coordinates and regulates the interaction of
Producers and Consumers in both Input and Output Markets. For
example, in
Input Markets, the Government requires certain workplace safety
standards, prohibits child labor, regulates pollution, taxes
Consumers'
income, rents and interest, etc. In Output Markets, the
Government requires food and medicine safety tests, defines and
enforces units of
measurement (e.g., so that one producer's "gallon" in the same
as another producer's "gallon"), establishes laws and funds courts
to enforce
business contracts, etc.
In Market Economies, three things determine the answers to the
"Three Basic Economic Questions" posed earlier in this handout: (1)
The Initial
Allocation of Resources--the distribution of ownership of
resources among Consumers before market trading begins, (2) the
Choices of
Consumers and Producers in the marketplace and (3) Government
Coordination and Regulation of market transactions.
