BUSN 3rd kelly mcgowen chapter10

10 BUSN Securities Markets: Trading Financial Resources ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources • What are the different types of securities issued by a corporation? • How are securities issued in the primary market and traded in the secondary market? • How the government and private organizations regulate securities markets? • What are the different types of investment strategies that investors follow? • What are the appeals of mutual funds and exchange traded funds? • How can investors track the performance of their investments? BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Basic Types of Financial Securities Three major types of securities that are traded in markets:  Common Stock  Preferred Stock  Bonds BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Common Stock: Basic Ownership The basic form of ownership in a corporation • Voting Rights • Right to Dividends • Capital Gains • Preemptive Rights • Right to Residual Claim on Assets BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Preferred Stock: Getting Preferential Treatment Stock that gives its holder preference over common stockholders     BUSN No Voting Rights Claim on Assets Payment of Dividends Cumulative Feature ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Bonds: Earning Your Interest Long-term debt issued by a corporation or government • Maturity Date • Par Value • Premium • Discount • Coupon Rate • Current Yield Bonds are a legal obligation BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Could Your Best Investment Be a Piece of Junk? • Junk bonds are bonds issued by companies with poor credit ratings • Junk bonds offer a higher rate of interest (and risk) • In 2007, only 22 companies in the world defaulted in their bonds • During the recession in 2008, the number soared to 126 • In late 2008, investing in junk bonds became a hot strategy BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Methods of Retiring Bonds • Most bonds are secured with a pledge of specific assets • Methods of retiring bonds:  Serial bonds have unique maturity dates and help spread out repayments  Companies may establish a sinking fund to assist in repayment Sinking funds allows the issuer to buy back bonds each year • Callable bonds have provisions for early redemption • Convertible bonds allow bonds to be transferred into shares of common stock BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Trading Securities: The Primary Market Public Offering: Private Placement: • Initial Public Offering • Quicker, simpler, less (IPO) expensive • Select an Investment • Investment bank bank (underwriter) assistance • Prepare paperwork • No SEC registration • Arrange for financing • Only available to accredited investors Carry out the offer BUSN â2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Trading Securities: The Secondary Market  Security Exchanges • New York Stock Exchange Traditionally an “auction market” • NASDAQ Electronic exchange Two largest exchanges in the United States  Over the Counter Market  Electronic Communication Networks BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 10 Securities Markets: Trading Financial Resources Penny Stocks: Finding Something Pretty in the Pinks? 1,000 shares of stock for under a hundred bucks! • Penny stocks are low-priced speculative stocks issued by small corporations • They are not traded on major exchanges • Listed on online services called Pink Sheets • Investing in penny stocks is risky • The companies lack the resources to survive setbacks • Limited reliable information • Little SEC oversight • The market is not active – it make be hard to find buyers if you want out BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 14 10 Securities Markets: Trading Financial Resources Electronic Communications Networks  A new completely computer-based securities market  ECNs automatically match buyers and sellers  Investors can trade “after hours”  Both NYSE and NASDAQ have bought into ECNs BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 15 10 Securities Markets: Trading Financial Resources Regulation of Securities Markets: Establishing Confidence in the Market • State Regulations • Federal Legislation • Securities Act 1933 Require firms to file registration when issuing stock • Securities Exchange Act of 1934 • Securities and Exchange Commission • Established report filing • Registration of brokers and dealers • Prosecution power • Individual and Company Fraudulent Activity (i.e insider trading) BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 16 10 Securities Markets: Trading Financial Resources Symbolic Logic: Do You LUV this HOG’s DNA? Every publicly traded corporation is identified by a unique combination of letters known as stock symbols Can you Guess These? BUSN GOOG HOG Google Harley-Davidson MMM DNA 3M Genentech JAVA LUV Sun Microsystems Southwest Airlines ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 17 10 Securities Markets: Trading Financial Resources Personal Investing  What are your short-term and long-term goals?  Given your budget, how much are you able to invest?  How long can you leave your money invested?  How concerned are you about the tax implications of your investments?  How much tolerance you have for risk?  DIVERSIFICATION BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 18 10 Securities Markets: Trading Financial Resources Choosing a Broker: Access to the Markets • Individuals must use a broker to trade stocks on the organized exchanges and OTC market • Full Service Brokers Provide a range of services • Discount Brokers Basic buy/sell capabilities • The competition between brokers is intense and both attempt to offer more services BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 19 10 Securities Markets: Trading Financial Resources Buying Securities: Let’s Make a Deal Market Orders – buy or sell a security at the current Limit Orders – market price place limits on the price at which orders are executed BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 20 10 Securities Markets: Trading Financial Resources Strategies for Investing in Securities • Investing for Income • Market Timing • Value Investing • Investing for Growth • Buying and Holding BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 21 10 Securities Markets: Trading Financial Resources How Do You like Them Apples? • In the first years of the iPod, Apple’s stock went to the moon • Shares rose 1600% between 2003 and 2007 • Many investors missed out—they had bailed on Apple at the turn of the century • The fast rise of the stock even shocked Apple insiders  Steve Jobs, the company CEO, had renegotiated his stock options  Although his stock was worth over a billion dollars in mid2007, they would have been worth over $5 billion BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 22 10 Securities Markets: Trading Financial Resources Other Investment Options: Mutual Funds and Exchange Traded Funds Exchange Traded Funds Mutual Funds • • • • Diversification Professional Management Variety Liquidity •Features of stocks and a mutual fund •Purchasing ownership in a “market basket” of stocks •You can buy and sell ETFs any time of the day, unlike Mutual Funds 23 BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 Securities Markets: Trading Financial Resources Does Green Investing Earn Green Returns? • The New Alternatives Fund which was established in 1982 selected stocks based on environmental considerations • The number of green funds has grown • Over the long haul, these funds are making money • The Winslow Green Growth Fund has an annual return of 8.45% BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 24 10 Securities Markets: Trading Financial Resources Stock Indices: Tracking the Trends Stock Index : Tracks how the prices of a specific set of stocks have changed Standard and Poor’s 500: Tracks 500 stocks and weighs the total market value of each stock Dow Jones Industrial Average (DJIA) – most widely followed index Tracks 30 stocks picked by the Wall Street Journal editors BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 25 10 BUSN Securities Markets: Trading Financial Resources Major Stock Price Indices ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 26 10 Securities Markets: Trading Financial Resources Tracking the Performance of Specific Securities Source: Yahoo! Finance stock quote accessed April 2, 2009 Reproduced with permission of Yahoo! Inc YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc Source: Yahoo! Finance stock quote accessed April 2, 2009 Reproduced with permission of Yahoo! Inc YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 27 10 Looking Back • What are the different types of securities issued by a corporation? • How are securities issued in the primary market and traded in the secondary market? • How the government and private organizations regulate securities markets? • What are the different types of investment strategies that investors follow? • What are the appeals of mutual funds and exchange traded funds? • How can investors track the performance of their investments? BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 28 ... Communication Networks BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 10 10 BUSN Securities... Journal editors BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 25 10 BUSN Securities... Rights • Right to Dividends • Capital Gains • Preemptive Rights • Right to Residual Claim on Assets BUSN ©2011 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted