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