10 Financial Markets Allocating Financial Resources Copyright 2017

10 Financial Markets: Allocating Financial Resources Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES 1 Explain the role of financial markets in the U. S. economy and identify the key players in these markets 2 Identify the key laws that govern the way financial markets operate and explain the impact of each law 3 Describe and compare the major types of securities that are traded in securities markets Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 2

LEARNING OUTCOMES 4 Explain how securities are issued in primary market and traded on secondary market 5 Compare several strategies that investors use to invest in securities 6 Interpret the information provided in the stock quotas available on financial websites Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 3

News and Books • News: Staying on Top of Market • Book: Inc. magazine calls it one of “the best, clearest guides to the numbers” on the market. Readers agree, saying it’s exactly “what I need to know” and calling it a “must-read” for decision makers without expertise in finance. Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 4

Financial Markets • Transfer funds from savers to borrowers • Depository institutions: Obtain funds by accepting checking and savings deposits and then lending those funds to borrowers • Commercial banks • Credit unions: Owned by its depositors • Savings and loan associations: Obtain funds by accepting savings deposits used to make mortgage loans Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 5

Financial Markets • Nondepository institutions • Institutional investors - Amass huge pools of financial capital and use them to acquire a portfolio of many different assets • Securities brokers: Act as an agent for investors who want to buy and sell financial securities • Securities dealers: Participate directly in securities markets, buying and selling stocks for their own accounts • Investment banks: Specialize in helping firms raise financial capital by issuing securities in primary markets Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 6

Laws Governing Financial Markets • Federal Reserve Act of 1913 • Established Federal Reserve System as the central bank of United States • Banking Act of 1933 • Established FDIC to insure bank deposits prohibiting commercial banks from selling insurance • Securities Act of 1933 • Required firms issuing new stocks in a public offering to file a registration statement with SEC Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 7

Laws Governing Financial Markets • Securities Exchange Act of 1934 • Established the SEC to regulate and oversee the securities industry • Example • Financial Services Modernization Act of 1999 • Overturned the section of Banking Act of 1933 Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 8

Types of Securities Common stock • Basic form of ownership in a corporation Preferred stock • Gives its holder preference over common stockholders in terms of dividends and claims on assets Bond • Formal debt instrument issued by a corporation or government entity Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 9

Types of Securities Convertible securities • Bond or share of preferred stock that gives its holder the right to exchange it for a stated number of shares of common stock Mutual fund • Institutional investor that raises funds by selling shares to investors and uses the accumulated funds to buy a portfolio of many different securities Exchange-traded fund (ETF) • Shares traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or securities Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 10

Issuing and Trading Securities • Primary securities market: Newly issued securities are traded • Public offering: New securities are offered to any investors who are willing and able to purchase them • Facebook • Private placement: Negotiated between the corporation and a small group of accredited investors Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 11

Issuing and Trading Securities • Secondary securities market: Previously issued securities are traded • Stock (securities) exchange: Organized venue for trading stocks and securities that meet listing requirements • Over-the-counter market (OTC): Securities are listed on exchanges are traded • OTC Example • Electronic communications networks (ECN): An automated, computerized securities trading system that automatically matches buyers and sellers • ECN Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 12

Strategies for Investing in Securities • Buying bonds and stocks to generate income • Investing by analyzing market timings • Investing in undervalued stocks • Investing in stocks by analyzing the potential of the company • Buying and holding stocks Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 13

Exhibit 10. 2 Major Stock Price Indices Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 14

SUMMARY • Financial markets transfer funds from savers to borrowers using depository and nondepository institutions • Federal and government laws regulate financial markets to protect investors and improve stability Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 15

SUMMARY • Types of securities traded in markets include common stock, preferred stocks, bonds, convertible securities, and mutual funds and ETFs • Corporations raise financial capital in the primary securities market and the issued securities are traded in the secondary securities market Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 16

SUMMARY • Strategies used by investors to invest in securities include investing for income, market timing, value investing, investing for growth, and buying and holding • Using the Internet, one can find information about general market trends and the performance of specific securities Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 17

KEY TERMS • • Financial markets Depository institution Credit union Savings and loan association Securities broker Securities dealer Investment bank Federal Reserve Act of 1913 • Banking Act of 1933 • Securities and Exchange Act of 1934 • Securities and Exchange Commission • Financial Services Modernization Act of 1999 • Common stock Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 18

KEY TERMS • • • Capital gain Preferred stock Bond Maturity date Par value (of a bond) Coupon rate Current yield Convertible security Financial diversification Mutual fund • Net asset value per share • Exchange traded fund (ETF) • Primary securities market • Secondary securities market • Public offering • Private placement • Initial public offering (IPO) Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 19

KEY TERMS Underwriting Registration statement Accredited investor Stock (securities) exchange • Market makers • Over-the-counter (OTC) market • • • Electronic communications network (ECN) • Market order • Limit order • Stock index • Dow Jones Industrial Average (DJIA) • Standard and Poor’s 500 Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 20

Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 10 21