* * * Securities Markets: Financing and Investing Opportunities Nickels * McHugh McGraw-Hill/Irwin Understanding Business, 8e * * CHAPTER ** 19 McHugh 1-1 19-1 © 2008 The McGraw-Hill Companies, Inc., All Rights * * * Functions of Securities Markets • Long-Term Funding for Businesses • Place to Buy/Sell Securities (Investments) 19-2 * * * Capital Markets • Primary Markets (IPO's) • Secondary Markets 19-3 * * * Investment Banker • Assist Sale/Issue of New Securities • Underwrite issues • Sells to Institutional Investors 19-4 * * * Bond Market • Coupon/Interest Rate • Denomination ($1,000) • Principal • Maturity Date • Classes • Unsecured/Debenture • Secured 19-5 * * * Bonds Advantages Disadvantages • No Vote • Interest is Tax- • Increase Debt • Legal Obligation • • • Deductible Temporary Source of Funds Can be repaid before maturity with call provision to Pay Interest Repaid on Maturity Date 19-6 * * * Special Bond Features • Sinking Fund • Callable • Convertible 19-7 * * * Debt vs Equity Financing Debt Financing Equity Financing • Secured or • Preferred or Debenture Common • Must be repaid on • Investment never maturity date • Interest must be paid whenever specified has to be repaid • Not legally obligated to pay dividends 19-8 * * * What is Stock? • Ownership • Certificate • Par Value • Dividends • Common vs Preferred 19-9 * * * Stock Advantages • • • Disadvantages No Repayment No Legal Obligation • • Does Not Create Debt • Voting Rights Dividends not TaxDeductible Management Works to Keep Stockholders Happy 19-10 * * * Investing in Stock • Growth vs Income • Capital Gain vs Dividend • Blue Chip vs Penny • Market Order • Limit Order • Stock Split 19-18 * * * How Stock Splits Work 100 shares of ABC stock selling at $80 for Stock Split Declared 100 shares @ $40 100 shares @ $40 Lower Price increases Demand Increased demand increases price 100 shares @ $45 100 shares @ $45 How Much Profit Has Been 19-19 * * * Return From Most Widely Held Stock Rank Price One Year Total Return General Electric $34.66 -2.2% Microsoft 27.97 4.1 Pfizer 21.35 -21.0 ExxonMobil 57.38 17.0 Cisco Systems 17.37 -11.1 Johnson & Johnson 63.34 5.6 Intel 25.11 4.6 Citigroup 47.94 7.6 Source: Money, January 2006 19-20 * * * Mutual Funds • Pool Investors’ • Money Best for Small Investors Index Fund • • Diversification • No-Load vs Load • Open-End vs Closed-End 19-21 * * * Sales of Mutual Funds Worldwide (In Billions) Q4, ’03 Q2, ’04 Q4, ‘04 Q2 ‘05 All Funds $73 $22 $166 $166 Equity 116 75 100 65 Bond -4 -12 43 49 Money Market -67 -58 -10 * Balanced/mixed 23 24 26 Other 13 25 Source: USA Today, 10/16/2000 Source: Investors Business Daily, February 10, 2006 19-22 * * * Types of Investments Traditional • Stocks/Bonds • Gov’t Securities/CDs • Money Market or Mutual Funds • Real Estate High-Risk • Stock on Margin • Junk Bonds • Commodities 19-23 * * * Components for Optimal Portfolio Performance • Diversification • Timelines • Safety & Risk • Income & Total Return 19-24 * * * Do Corporations Provide Enough Information? Source: USA Today 19-25 * * * How does Buying Stock on Margin work? Step Step An investor wishes to buy 100 shares at $100 per share However, the investor has only $4,000 available to invest Step Step The investor finds he is able to buy the stock with a 40% margin The investor puts up $4,000 and borrows $6,000 from the broker 19-26 * * * Measures of Investment • Stock Quotations • Bond Quotations • Mutual Fund Quotations 19-27 * * * Stock Quotes • • • • • • • • • % Change in YTD Price High/Low Price Company Name & Stock Symbol Last Dividend Per Share Dividend Yield P/E Ratio # of Shares Traded Closing Price Net Change- Price 19-28 * * * Mutual Fund Quotations • Fund Name • Net Asset Value (NAV) • Net Change in NAV • YTD Return • Long-Term Return 19-29 * * Original * 12 Dow Stocks (1896) • American Cotton Oil • Laclede Gas Light Co • American Sugar Refining Co • National Lead • North American Co • Tennessee Coal, Iron, & Railroad Co • U.S Leather • U.S Rubber Co • American Tobacco • Chicago Gas • Distilling & Cattle Feeding Co • General Electric Co 19-30 * * * How Much Have They Grown? 1955 2003/2004 S&P 500 45.48 1126.21(’04) NYSE $207.7 Billion Mutual Fund Industry Million Source: Fortune, 2004 $17.8 Trill (’03) accounts 250 Mill (’03) 100 funds 8,000 $2.5 Billion assets $7 Trill 19-31 * * * What Adults Believe About Wall Streets’ Key Players % Adults That Agree With the Statement Source: USA Today 19-32 ... Markets • Long-Term Funding for Businesses • Place to Buy/Sell Securities (Investments) 19- 2 * * * Capital Markets • Primary Markets (IPO's) • Secondary Markets 19- 3 * * * Investment Banker •... Happy 19- 10 * * * Organized Securities Exchanges • New York Stock Exchange (NYSE) • American Stock Exchange (AMEX) • Over-the-Counter (OTC) • NASDAQ 19- 11 * * * Top European Companies by Market... Financial Times, March 7, 2005 19- 12 * * * Own Stocks? Source: USA Today 19- 13 * * * Investment Criteria • Risk • Yield • Duration • Liquidity • Tax Consequences 19- 14 * * * Investing in Bonds