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How Securities Are Bought and Sold • Securities are usually exchanged with the help How Securities Are Bought and Sold • Securities are usually exchanged with the help of an account executive or stockbroker • The primary market – A market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities • Investment banking firm—an organization that assists corporations in raising funds, usually by helping sell new issues of stocks, bonds, or other financial securities • High-risk investment—an investment (e. g. , an IPO) made in the uncertain hope of earning a relatively large profit in a short time Copyright © Cengage Learning. All rights reserved 20 |

How Securities Are Bought and Sold (cont’d) • The secondary market – A market How Securities Are Bought and Sold (cont’d) • The secondary market – A market for existing financial securities that are traded between investors – Securities exchange—a marketplace where member brokers meet to buy and sell securities • New York Stock Exchange (NYSE), American Stock Exchange, regional exchanges, foreign exchanges – Over-the-counter (OTC) market—a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange • Nasdaq—computerized electronic exchange system through which most over-the-counter stocks are traded Copyright © Cengage Learning. All rights reserved 20 |

Criteria a Firm Must Meet Before Being Listed on the NYSE Source: New York Criteria a Firm Must Meet Before Being Listed on the NYSE Source: New York Stock Exchange, www. nyse. com, February 9, 2003. Copyright © Cengage Learning. All rights reserved 20 | 3

How Securities Are Bought and Sold (cont’d) • The role of an account executive How Securities Are Bought and Sold (cont’d) • The role of an account executive – An individual, sometimes called a stockbroker or registered representative, who buys and sells securities for clients • Full-service broker—provides personal investment advice and other market and investing information • Discount broker—simply executes buy and sell orders for lower commissions than a full-service broker; does not offer advice Copyright © Cengage Learning. All rights reserved 20 |

Steps in a Typical Stock Transaction on the NYSE Copyright © Cengage Learning. All Steps in a Typical Stock Transaction on the NYSE Copyright © Cengage Learning. All rights reserved 20 | 5

How Securities Are Bought and Sold (cont’d) • The mechanics of a transaction – How Securities Are Bought and Sold (cont’d) • The mechanics of a transaction – Market order • A request that a security be purchased or sold at the current market price – Limit order • A request that a security be bought or sold at a price that is equal to or better than some specified price – Discretionary order • An order to buy or sell a security that lets the broker decide when to execute the transaction and at what price Copyright © Cengage Learning. All rights reserved 20 |

How Securities Are Bought and Sold (cont’d) • Online security transactions – Software can How Securities Are Bought and Sold (cont’d) • Online security transactions – Software can help investors evaluate potential investments, manage investments, monitor value, and place buy and sell orders online – Investors must still analyze the information and make decisions – Online trading generally has lower costs – Program trading—a computer-driven program that monitors the market value of particular stocks and enters buy or sell orders when those stocks reach specified prices Copyright © Cengage Learning. All rights reserved 20 |

How Securities Are Bought and Sold (cont’d) • Commissions – Most brokerage firms have How Securities Are Bought and Sold (cont’d) • Commissions – Most brokerage firms have a minimum commission – Additional commission charges are based on the number of shares and the value of stock bought and sold – Generally, online transactions are less expensive when compared to trading through a full-service brokerage firm – Full-service brokerages charge a percentage of the transaction amount (as much as 1. 5 to 2. 0%) – Commissions for bonds, commodities, and options are lower than for stocks Copyright © Cengage Learning. All rights reserved 20 |

Typical Commission Costs Source: TD Ameritrade website, www. tdameritrade. com, accessed October 23, 2008. Typical Commission Costs Source: TD Ameritrade website, www. tdameritrade. com, accessed October 23, 2008. Copyright © Cengage Learning. All rights reserved 20 |

Regulation of Securities Trading • A regulatory pyramid of four different levels exists to Regulation of Securities Trading • A regulatory pyramid of four different levels exists to make sure investors are protected – 1 st level: Federal regulation by the U. S. Congress • Securities Act of 1933 (Truth in Securities Act) • Provides for full disclosure • Requires registration statement about the corporation and a prospectus describing the new security • Legislation to curb insider trading • Sarbanes-Oxley Act – 2 nd level: Securities and Exchange Commission (SEC) • The agency that enforces federal securities regulations – 3 rd level: State regulation • States require registration of stock issues and licensing of brokers and securities dealers Copyright © Cengage Learning. All rights reserved 20 |

Regulation of Securities Trading (cont’d) • A regulatory pyramid of four different levels exists Regulation of Securities Trading (cont’d) • A regulatory pyramid of four different levels exists to make sure investors are protected (cont’d) – 4 th level: Self-regulation by securities exchanges and brokerage firms • NYSE has published rules, policies, and standards of conduct • Standards apply to every member • Each member firm the NYSE conducts business with is examined yearly • Individual brokerage firms are responsible to ensure their employees are highly trained and meet rigorous ethical standards Copyright © Cengage Learning. All rights reserved 20 |