Fourth Edition PART 6 Understanding Financial

Fourth Edition PART 6. . . Understanding Financial Issues Copyright © 2003 Prentice Hall, Inc.

Chapter 15 Understanding Securities and Investments Copyright © 2003 Prentice Hall, Inc. 15 - 2

"If stock market experts were so expert, they would be buying stock, not selling advice. ” ~ Norman Augustine Copyright © 2003 Prentice Hall, Inc. 15 - 3

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 Copyright © 2003 Prentice Hall, Inc. 15 - 4

Securities Stocks and Bonds Holders of stocks and bonds have a stake in the company that issued them Stocks: An ownership stake Bonds: A financial stake Primary Securities Market Secondary Securities Market Copyright © 2003 Prentice Hall, Inc. 15 - 5

Investment Banks Help Bring New Securities to the Market They advise companies on the timing and financial terms of new issues They underwrite—or buy—new securities, bearing some of the risks of issuing them They distribute new securities through banks and brokers to individual investors New securities must be approved by the SEC! Copyright © 2003 Prentice Hall, Inc. 15 - 6

Common Stock High Risk, High Potential Return Par Value The face value of a share of stock at the time it is originally issued Market Value The current price of a share in the stock market Book Value Stockholder’s equity divided by the number of shares Copyright © 2003 Prentice Hall, Inc. 15 - 7

Blue Chip Stocks A Changing Perspective? “Old” Economy Established firm Sound financial history Stable pattern of dividends “New” Economy Rapid growth in market value Copyright © 2003 Prentice Hall, Inc. 15 - 8

Hot Stocks in a Cold Year 2001 Stock Price Gain Auto. Zone +152% Best Buy +152% Xerox +125% H&R Block +116% Krispy Kreme Copyright © 2003 Prentice Hall, Inc. +113% Source: Game Over for the Bear? , Los Angeles Times, C 1, January 31, 2002 15 - 9

Preferred Stock Lower Risk, Lower Potential Return Fixed dividend First claim on assets No voting rights Possible features: Callable Cumulative Copyright © 2003 Prentice Hall, Inc. 15 - 10

Stock Exchanges Institutional Settings for Trading Stocks Brokers Full service brokers Discount brokers On-line trading Copyright © 2003 Prentice Hall, Inc. 15 - 11

The Growth of Online Trading % Commission fees charged by top ten brokers 45 15 30 12 9 15 Percentage of shares traded online '96 Copyright © 2003 Prentice Hall, Inc. '97 '98 6 Online Share of Trades For-Commission Fees $60 '99 15 - 12

The Major Exchanges and the OTC Market New York Stock Exchange American Stock Exchange Regional Stock Exchanges Copyright © 2003 Prentice Hall, Inc. Foreign Stock Exchanges Over-the. Counter Market Nasdaq and NASD 15 - 13

BOND: A promise by the issuer to pay the buyer a certain amount of money by a specified future date U. S. Government Bonds Municipal Bonds Corporate Bonds Nearly all secondary trading in bonds occurs in the OTC market Copyright © 2003 Prentice Hall, Inc. 15 - 14

How Risky Is Your Bond? Medium High (Investment Poor ) Grades Speculative Grades Moody's Aaa, Aa Stanford & Poor's CCC to D Copyright © 2003 Prentice Hall, Inc. A, Baa AAA, AA Ba, B Caa to C A, BBB BB, B 15 - 15

Types of Bonds Registered Bonds Bearer Bonds Copyright © 2003 Prentice Hall, Inc. Secured Bonds Debentures 15 - 16

Mutual Funds Pooled Investments Load Funds No-Load Funds Mutual funds control about 20% of the stock market, but new cash inflows dropped 90% in 2001 Source: Stock Fund Inflows Plunge 90% in 2001, Los Angeles Times, C 1, January 31, 2002 Copyright © 2003 Prentice Hall, Inc. 15 - 17

Reading Stock Quotations Copyright © 2003 Prentice Hall, Inc. 15 - 18

Reading Mutual Fund Quotations Copyright © 2003 Prentice Hall, Inc. 15 - 19

Market Indexes Dow Jones Industrial Average The S&P 500 Copyright © 2003 Prentice Hall, Inc. The Nasdaq Composite 15 - 20

Bull and Bear Markets (1972 – 2000) Copyright © 2003 Prentice Hall, Inc. 15 - 21

May 26, 1896 The First Dow Jones Industrials List American Cotton Oil Laclede Gas American Sugar National Lead American Tobacco The North American Company Chicago Gas Distilling and Cattle Feeding General Electric Tennessee Coal and Iron U. S. Leather U. S. Rubber Source: History of the Dow, Randy Befumo, 3/23/02, http: //www. fool. com/ddow/historyofthedow. htm Copyright © 2003 Prentice Hall, Inc. 15 - 22

Investing in the Securities Markets Placing Orders Financing Choices Market Order Margin Trading Limit Order Short Sales Stop Order Round Lot High risk alert! Odd Lot Copyright © 2003 Prentice Hall, Inc. 15 - 23

Securities Market Regulation Self-Regulation Circuit breakers Securities and Exchange Commission Prospectuses Insider trading State Government Regulation Blue Sky laws Copyright © 2003 Prentice Hall, Inc. 15 - 24

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 Copyright © 2003 Prentice Hall, Inc. 15 - 25