Financial MarketingMarketing II

Corporate Financial Terms

• Capital—money and credit required to run a business

• Securities—stocks and bonds

• Common stock—Owners of common stock are in much the same position as the partners in a partnership. Common stock owners participate in the management of the business and share in the profits. Common stock owners do not receive dividends, until all other investors have been paid. There is no fixed rate of dividends on common stock.

• Preferred stock—Ownership of preferred stock has preference over ordinary, or common stock. Preferred stockholders receive dividends first. (A corporation must pay its regular debts and interest on borrowed money before any dividend can be paid.) The preferred stockholders usually receive a fixed dividend, ranging from 4% to 7% of the face value of the stock.

• Short-term capital—Borrowed capital that must be paid back in a relatively short time period of 30, 60, or 90 days and usually in less than a year.

• Corporate bond—A long-term written promise to pay a definite sum of money at a specified time. Bonds do not represent a share in the ownership of the corporation; but represent evidence of a debt owed by the corporation.

• Open-line of credit—Bank will permit regular borrowing and repaying. (No credit limit!)

Methods of fund-raising available to the corporate form of business

• Investment Banking—Defined—Corporation contracts with an investment company to buy the securities and remarket them through their own channels.

– Advantage of Investment Banking—The entire amount of cash becomes available immediately.

– Disadvantage of Investment Banking—The cost of such marketing is generally higher than the sale of securities directly to stockholders.

• Stock- – Preferred Stock--Fixed dividend

First claim against dividends Stockholders usually do not have voting rights unless dividends are not declared and paid regularly

– Common Stock—No fixed rate of dividend Receive dividends after preferred stockholders One vote per share of stock

– **Sometimes preferred stock is more expensive due to the added benefits the preferred stockholder receives.

• Bonds - There are three advantages to a corporation that issues bonds.

1. Considered to be a long-term loan 2. There is an established interest rate 3. Bondholders are creditors and expect payment

Types of Bonds • Mortgage—Pledges specific assets as a guarantee that

the interest and the principal will be paid according to the terms specified in the bonds. (Land, buildings, machinery, are used as security for such bonds).

• Debenture—No specific assets are pledged as security. They are secured by the faith and the credit of the corporation that issues them. Public corporations, such as city, state, and federal governments, usually issue debenture (revenue) bonds when they need to borrow money. Private corporations usually find it difficult to sell debenture bonds—if bonds cannot be sold bondholders may start foreclosure proceedings against the corporation.

• Coupon bonds—Generally payable to the bearers (holders). The corporation that issues them has no way of knowing who the owners are at the time interest payments are due. (Coupons—one for each interest—due date are attached to each bond.) The owner of the bond may collect the interest by clipping a coupon and cashing it at the office of the corporation or at a bank on or after the date specified on the coupon.

• Registered bonds—Corporation keeps a record of each owner and pays the interest and the principal by check to the registered owner. (This bond means more clerical work for the corporation—but it is preferred by many people who buy bonds.)

• Convertible bonds—Holders of convertible bonds have the privilege of exchanging them for a definite number of shares of stock. (This feature is attractive to holders. They receive a fixed rate of interest as long as they hold the bonds—if the corporation should begin to earn large profits and to pay large dividends, they may exchange the bonds for stock and begin receiving dividends instead of interest.

Terms relating to the purchase of securities

• Bull Market—Optimistic market. A belief that prices will rise for an individual stock, bond, or commodity, an industry segment, or the market as a whole. A prolonged period of rising prices.

• Bear Market—A prolonged period of falling prices. A bear market is usually brought on by the anticipation of declining economic activity, and rising interest rates causes a bear market in bonds.

• Dividend—A transfer of earnings usually in common stock and are issued to stockholders of common stock. May be paid in cash or stock of a company.

• Speculator—A person who engages in a business deal where good profit may be made at considerable risk.

• Investor—A person who invests money for income or profit. Long-term investments usually mean small risks are taken.

List the reasons for purchasing securities -Cash rich consumers turn to the stock market to make

more money.

-High personal liquidity—the ability to turn assets into cash quickly. (The saving account is used for investment purposes.

-Safety—Bonds offer a low degree of risk.

-Capital Appreciation—Growth possibilities.

-Income—Dividends, Blue Chips (stock of nationally known company that has a long record of profit growth and dividend payment and a reputation for quality management, products, and services.

Analyze the impact that the purchase of securities could have on employment in financial marketing.

Investment bankers will be needed • to advise corporations on the best way to raise capital. • to obtain external financing for corporations. • as middlemen between the corporation and the investing

public. • To distribute new issues (stocks) to the public.

Stockbrokers will be needed to handle the buying and selling of stocks and bonds to the general public.

Describe elements necessary to become a successful investor

• Researching the market—To research the market use the Internet to research company background and stock prices.

• Talking with brokers—Contact a local bank or investment company to arrange a field trip or a guest speaker to come to the classroom to find out first hand what is going on in the market.

• Obtaining information – Standard and Poor’s Reports—This is a resource book available for purchase at a local

book store or by contacting the Mississippi Economic Council. This resource may be located in your local school library or city library. Standard and Poor’s is also available on the Internet and for purchase in the form of a CD.

– Business oriented newspapers: The Wall Street Journal USA Today – CNN —financial news program that air daily– Financial News Network—An entire network that provides financial information

Define terms associated with stock trades • Market orders—Orders to be executed at the best price obtainable immediately after

its receipt by a broker. (The best possible price when the order reaches the trading floor.)

• Limit orders—Orders to be executed at a specified price, or at a price more favorable to the customer, if possible.

• G.T.C.—Good til cancelled—if not executed on the day given, the order is carried over by the broker to the following day.

• Stop order—Stop orders may be to buy or sell. Purpose of a buy order is to limit the loss of a short sell, while a stop order limits the loss of a holder of stock. (Short sell—selling securities, commodities, or foreign currency not actually owned by the seller. In making the short sale, the seller hopes to cover—that is, buy back—sold items at a lower price and thus earn a profit.)

• Day order—An order good only for the day received, after which it is automatically cancelled.

• $2 Broker—Floor broker who does not represent a firm.

Steps in a stock’s purchase• Open a brokerage account. • Specify type of order.

Market Stop Limit Day G.T.C.

• Transmittal of order • Interaction of brokers • Trade is made Ex. of Trade: Odd Lot Sale—100 shares of stock

—standard trading for most stocks and is also referred to as round lot sale.

• Customer notification.

Major column headings of the financial section of the daily newspaper

• 52 Week High—During a one year period this is the highest selling price of a stock. • 52 Week Low—During a one-year period this is the lowest selling price of a stock. • Stocks—Part ownership in a company. • Dividend—The cash value per share of the anticipated yearly dividend (not all companies

give out dividends) • Ratio—Price of a stock divided by earnings per share for the 12-month period. • High—The highest price paid for a stock during the day’s trading session.• Low—The lowest price paid for a stock during the day’s trading session. • Close—The closing price or last price of the day for a stock. • Net Change—The amount the selling price changed compared to the previous day.

Terms associated with securities tables

• P/E Ratio—Price/Earnings—shows relationship between the stock’s value and the company’s earnings from the last 12 months.

• Yield—Shows what dividend an investor will receive as a percentage of the stock’s current price. This is a way of evaluating the stock’s value by comparing the percentage with other investment earnings.

• Net Change—The amount the selling price changed as compared to the previous day. • Common Stock—The group of investors paid last by the company— amount of dividend will

vary in amount. • Preferred Stock—The group of stockholders who have preference over other groups of

stockholders. This group receives dividends first. • Volume—Number of shares traded that day in multiples of 100.

• NYSE—New York Stock Exchange. – Big Board—Popular term for the NYSE

• AMEX—American Exchange – The Curb—Nickname for AMEX

• NASDAQ—National Association of Security Dealers Automatic Quotations.

Terms associated to the securities exchange system

• Liquidity—Ability of an individual or company to convert assets into cash or cash equivalents without significant loss. Investments in money market funds and listed stocks are much more liquid than investing in real estate. Characteristic of a security or commodity with enough units outstanding to allow large transactions without a substantial drop in price. A stock, bond, or commodity that has a great many shares outstanding therefore has liquidity.

• OTC– Over-the-Counter—Security that is not listed and traded on an organized exchange. Market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange.

• Primary Market—Market for the new issues of securities. A market is a primary if the proceeds of sales go to the issuers of the securities sold.

• Secondary Market—Exchanges and over-the-counter markets where securities are bought and sold subsequent to original issuance, which took place in the primary market.

Securities Exchange

• An organization of brokers and dealers doing business for customers and themselves in a specified marketplace. – Ex. NYSE, AMEX, NASDAQ

• Functions of the Securities Exchange -Provides corporations with a broad national market for its securities. -Enables listed corporations to raise new capital through the issuance of new securities. -Enables general public investors to purchase or sell corporate securities in an orderly and efficient manner.

Bull Market vs. Bear MarketThere are many theories about how "bull" and "bear" became market terms, but the most common explanation comes from the nature of the animals. The bull tosses things up with his horns, while the bear tears fruit and honey down from trees with his claws. The bull, therefore, represents an upward moving market, and the bear represents a downward moving market.