Chapter Twenty Securities Markets Financing Investing Opportunities Mc

Chapter Twenty Securities Markets: Financing & Investing Opportunities Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 1

Types of Investments v Traditional v Stocks/Bonds v Gov’t Securities/CDs v Money Market or Mutual Funds v Real Estate Mc. Graw-Hill/Irwin v High-Risk v Stock on Margin v Commodities v Futures v Junk Bonds © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 2

Functions of Securities Market Investment Banker Debt Financing Equity Financing Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 3

What Adults Believe About Wall Streets’ Key Players % Adults That Agree With the Statement Source: USA Today Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 4

Broker/Brokerage* v. Full Service = $480 v. Discount = $170 v. On-Line = $ 20 *Cost to Trade 500 Shares of IBM @ Price of $101. 50 Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 5

Number of Households That Own Mutual Funds Source: The Freep. com Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 6

Mutual Fund Owners Source: USA Today, 10/16/2000 Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 7

Bond Market v Coupon Rate/Interest Rate v Denomination v Principal v Maturity Date v Types I. - Unsecured/Debenture Secured Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. O. U. 8

Bonds Advantages v No Vote v Interest is Tax. Deductible v Temporary Source of Funds Mc. Graw-Hill/Irwin Disadvantages v Increase Debt v Legal Obligation v Repaid on Maturity Date © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 9

Bond Features v Sinking fund v Callable v Convertible v Discount Mc. Graw-Hill/Irwin vs. Premium © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 10

Capital Markets v. Primary Markets (IPOs) v. Secondary Markets v. Common vs. Preferred v. Underwriting Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 11

What is Stock? v Ownership v Certificate v Par Value v Dividends Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 12

Stock Advantages v No Repayment v No Legal Obligation v Does Not Create Debt Mc. Graw-Hill/Irwin Disadvantages v Voting Rights v Dividends not Tax -Deductible v Management Works to Keep Stockholders Happy © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 13

Features of Stock v Growth vs. Income v Capital Gain vs. Dividend v Blue Chip vs. Penny v Market Order v Limit Order v Stock Split Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 14

Organized Securities Exchanges v New York Stock Exchange (NYSE) v Over-the-Counter (OTC/NASDAQ) v American Stock Exchange (AMEX) v Regional Stock Exchange v Foreign Stock Exchange Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 15

Founding Dates of U. S. Exchanges New York Stock Exchange (1792) Chicago Stock Exchange (1882) Boston Stock Exchange (1834) Chicago Board Options Exchange (1973) NASDAQ (1971) International Securities Exchange (2000) Philadelphia Stock Exchange (1790) Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 16

The Original 12 Dow Stocks ~ ~ ~ American Cotton Oil American Sugar Refining Co. American Tobacco Chicago Gas Distilling & Cattle Feeding Co. General Electric Co. Laclede Gas Light Co. National Lead North American Co. Tennessee Coal, Iron, & Railroad Co. U. S. Leather U. S. Rubber Co. Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 17

DJIA Biggest Net Jumps Gains Date 09/08/98 5. 0 10/28/97 09/01/98 09/02/97 09/23/98 11/03/97 02/02/98 12/01/97 Mc. Graw-Hill/Irwin Points % 380. 5 Losses Date 10/27/97 08/31/98 10/19/87 08/27/98 08/04/98 09/10/98 08/15/97 09/30/98 Points 554. 3 512. 6 508. 0 357. 4 299. 4 249. 5 247. 4 237. 9 337. 2 4. 7 288. 4 3. 8 257. 4 3. 4 257. 2 3. 3 232. 3 3. 1 201. 3 2. 6 2. 4 Companies, Inc. , All Rights Reserved. © 190. 0 2002 The Mc. Graw-Hill % 7. 2 6. 4 22. 6 4. 2 3. 4 3. 2 3. 1 2. 9 18

DJIA Biggest % Jumps Gains Date Points 10/06/31 12. 9 10/30/29 28. 4 09/21/32 7. 7 10/21/87 186. 8 08/03/32 5. 1 02/11/32 6. 8 11/14/29 18. 6 12/18/31 6. 9 Mc. Graw-Hill/Irwin Losses % 14. 9 12. 3 11. 4 10. 2 9. 5 9. 4 Date 10/19/87 10/28/29 10/29/29 11/06/29 12/18/09 08/12/32 03/14/07 10/26/87 Points 508. 0 38. 3 30. 6 25. 6 5. 8 6. 9 156. 8 © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. % 22. 6 12. 8 11. 8 9. 2 8. 7 8. 4 8. 3 8. 0 19

NASDAQ vs. NYSE NASDAQ NYSE Daily Share Volume 696 Million 513 Million Market Capitalization $1. 95 Trillion $8. 7 Trillion 5, 499 3, 006 # of Firms Listed Market Cap. /Firm Mc. Graw-Hill/Irwin $354 Million © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. $2, 894 Million 20

Stock Market Fluctuations v. Bull Mc. Graw-Hill/Irwin Market v. Bear Market © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 21

Securities Regulation v. Securities - Prospectus v. Securities 1934 - - Exchange Act of Insider Trading v. What - Act of 1933 is Regulated Prospectus Insider Trading Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 22

Measures of Investment v Stock - Indexes DJIA S & P 500 Amex NASDAQ v Stock Quotations v Bond Quotations Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 23

Investment Criteria v. Risk v. Yield v. Duration v. Liquidity v. Tax Mc. Graw-Hill/Irwin Consequences © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 24

Investment Options. Risky to Safe v Commodities v Stocks v Mutual Funds v Corporate Bonds v Government Securities v Diversification Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 25

Components for Optimal Portfolio Performance ~ Diversification ~ Timeliness ~ Safety & Risk ~ Income Return Mc. Graw-Hill/Irwin & Total © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 26

Debt vs. Equity Financing Debt Financing 4 Secured or Debenture 4 Must be repaid on maturity date 4 Interest must be paid whenever specified Mc. Graw-Hill/Irwin Equity Financing 4 Preferred or Common 4 Investment never has to be repaid 4 Not legally obligated to pay dividends © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 27

Paying Dividends Through Thick & Thin Company Dividends Paid Since Washington Gas Light 1852 J. P. Morgan 1892 Westvaco 1892 General Electric 1899 PPG Industries 1899 Bristol-Myers Squibb 1900 Source: Standard & Poor’s Corp. Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 28

How Stock Splits Work 100 shares of stock selling at $99@ 100 shares $33@ Lower Price increases Demand Increased demand increases price 100 shares $37@ 3 for 1 Stock Split Declared 100 shares $37@ How Much Profit Has Been Made? Mc. Graw-Hill/Irwin © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 29

Buying Stock on Margin How does the investor make money? Step 1 Step 2 Mc. Graw-Hill/Irwin An investor wishes to buy 100 shares at $100 per share However, the investor has only $4, 000 available to invest Step 3 Step 4 © 2002 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved. 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 30