Understanding Securities and Securities Markets Chapter 21 21

Learning Goals 1 How do common stock and preferred stock differ as investments? 2

Learning Goals 6 Which sources of investment information are the most helpful to investors?

1 Learning Goal 1 Chapter 21 How do common stock and preferred stock differ

Stocks and Bonds 1 Securities Investment certificates that represent either equity or debt. Chapter

Stocks Chapter 21 1 Common Stock • Ownership that allows voting rights. • Can

2 Learning Goal 2 Chapter 21 What are bonds, and what investment advantages and

2 Types of Corporate Bonds Collateral trust bonds Convertible bonds Debenture Equipment trust certificates

Government Securities 2 Treasury Bills U. S. Treasury Notes Treasury Bonds Municipal Bonds General

Chapter 21 2 Moody’s and Standard & Poor’s Bond Ratings Copyright © 2005 by

3 Learning Goal 3 Chapter 21 What other types of securities are available to

Other Types of Securities 3 Mutual Fund Financial-services company that pools investors’ funds to

3 Appeal of Mutual Funds § Good way to hold a diversified, less risky,

4 Learning Goal 4 Chapter 21 What is the function of the securities market?

Securities Market 4 Investment Bankers Chapter 21 Stockbroker Help companies raise long-term financing, a

Types of Markets Chapter 21 4 Primary Market New securities are sold to the

5 Learning Goal 5 Chapter 21 Where can investors buy and sell securities, and

Buying and Selling at Securities Exchanges 5 Organized Stock Exchanges Types of Securities Markets

5 U. S. Stock Exchanges New York Stock Exchanges (NYSE) Chapter 21 American Stock

Chapter 21 5 Anatomy of a Stock Trade Copyright © 2005 by South-Western, a

5 Global Trading and Foreign Exchanges London NYSE NASDAQ Tokyo Toronto Buenos Aires Frankfurt

The Over-the-Counter Market 5 Over-the-Counter (OTC) Market Chapter 21 NASDAQ A telecommunications network that

Bull or Bear Market? Chapter 21 5 Bull Market Prices rise. Better returns. Bear

Chapter 21 5 Regulation of Securities Markets Securities and Exchange Commission The main federal

5 Securities Industry Violations • Insider trading • Misrepresenting or omitting information • Stealing

Circuit Breakers 5 Circuit Breakers Measures that stop trading in the securities markets for

6 Learning Goal 6 Chapter 21 Which sources of investment information are the most

6 Popular Sources of Investment Information Company financial statements Economic and financial publications Online

6 Economic and Financial Publications § Wall Street Journal § Barron’s § Business Week

Online Information Sources Chapter 21 6 § CBS Marketwatch http: //www. marketwatch. com §

7 Learning Goal 7 Chapter 21 What can investors learn from stock, bond, and

Chapter 21 7 Stock Quotations Copyright © 2005 by South-Western, a division of Thomson

Chapter 21 7 Bond Quotations Copyright © 2005 by South-Western, a division of Thomson

Market Averages and Indexes Chapter 21 7 Market Averages Summarizes price behavior based on

8 Learning Goal 8 Chapter 21 What are the current trends in securities markets?

8 Trends in Securities and Securities Markets Rebuilding Investor Trust Chapter 21 Stronger Role

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Understanding Securities and Securities Markets Chapter 21 21 Chapter THE FUTURE OF BUSINESS Gitman & Mc. Daniel 5 th Edition Prepared by Deborah Baker Texas Christian University Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved

Learning Goals 1 How do common stock and preferred stock differ as investments? 2 What are bonds, and what investment advantages and disadvantages do they offer? 3 What other types of securities are available to investors? 4 What is the function of the securities markets? Chapter 21 5 Where can investors buy and sell securities, and how are these securities markets regulated? Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 2

Learning Goals 6 Which sources of investment information are the most helpful to investors? 7 What can investors learn from stock, bond, and mutual fund quotations? Chapter 21 8 What are the current trends in securities markets? Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 3

Stocks and Bonds 1 Securities Investment certificates that represent either equity or debt. Chapter 21 Stocks Bonds § Common § Corporate Bonds § Preferred § Government Securities Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 5

Stocks Chapter 21 1 Common Stock • Ownership that allows voting rights. • Can be bought and sold (liquidity). • May pay dividends Preferred Stock • Dividends set at issuance, and are paid before common stock dividends • Ownership does not allow voting rights. Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 6

2 Types of Corporate Bonds Collateral trust bonds Convertible bonds Debenture Equipment trust certificates Floating-rate bonds High-yield (junk) bonds Chapter 21 Mortgage bonds Zero-coupon bonds Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 8

Government Securities 2 Treasury Bills U. S. Treasury Notes Treasury Bonds Municipal Bonds General Obligation Bonds Chapter 21 Revenue Bonds Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 9

Other Types of Securities 3 Mutual Fund Financial-services company that pools investors’ funds to buy a selection of securities Legally binding obligations to buy or sell commodities or Futures Contracts financial instruments at later date Chapter 21 Options Contracts to buy or sell quantities of common stocks or financial instruments at later date Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 12

3 Appeal of Mutual Funds § Good way to hold a diversified, less risky, portfolio § Professional management Chapter 21 § May offer higher returns Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 13

Securities Market 4 Investment Bankers Chapter 21 Stockbroker Help companies raise long-term financing, a process called underwriting A person licensed to buy and sell securities on behalf of clients Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 15

Types of Markets Chapter 21 4 Primary Market New securities are sold to the public Secondary Market Old (already issued) securities are bought and sold, or traded, among investors Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 16

5 Learning Goal 5 Chapter 21 Where can investors buy and sell securities, and how are these security markets regulated? Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 17

Buying and Selling at Securities Exchanges 5 Organized Stock Exchanges Types of Securities Markets Chapter 21 Over-the-Counter Market Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 18

5 Global Trading and Foreign Exchanges London NYSE NASDAQ Tokyo Toronto Buenos Aires Frankfurt Hong Kong Montreal Zurich Chapter 21 Paris Sydney Taiwan Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 21

The Over-the-Counter Market 5 Over-the-Counter (OTC) Market Chapter 21 NASDAQ A telecommunications network that links dealers throughout the U. S. and enables them to trade securities The first electronic-based stock market and the fastest growing part of the stock market. Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 22

Bull or Bear Market? Chapter 21 5 Bull Market Prices rise. Better returns. Bear Market Prices go down. Low, or negative, returns. Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 23

Chapter 21 5 Regulation of Securities Markets Securities and Exchange Commission The main federal government agency responsible for regulating the U. S. securities industry. Insider Trading The use of information that is not available to the general public to make profits on securities transactions. Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 24

5 Securities Industry Violations • Insider trading • Misrepresenting or omitting information • Stealing customer funds or securities • Violating responsibilities to treat customers fairly Chapter 21 • Selling securities without proper SEC registration Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 25

Circuit Breakers 5 Circuit Breakers Measures that stop trading in the securities markets for a short period to limit the amount the market can drop in one day. Chapter 21 http: //www. sec. gov/answers/circuit. htm Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 26

6 Popular Sources of Investment Information Company financial statements Economic and financial publications Online information resources Chapter 21 Security price quotations Market averages and indexes Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 28

6 Economic and Financial Publications § Wall Street Journal § Barron’s § Business Week § Kiplinger’s Personal Finance § Forbes § Fortune § Smart Money Chapter 21 § Worth § Money Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 29

Online Information Sources Chapter 21 6 § CBS Marketwatch http: //www. marketwatch. com § CNN Money http: //money. cnn. com § EXCITE http: //money. excite. com § Yahoo! Finance http: //finance. yahoo. com § Morningstar http: //www. morningstar. com See Exhibit 21. 5 for more sources Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 30

Market Averages and Indexes Chapter 21 7 Market Averages Summarizes price behavior based on average price of groups of securities at a given point in time. Market Indexes Measures of the current price behavior of securities relative to a base value set at an earlier point. Dow Jones Industrial Average Measures the stock prices of 30 large well-known corporations that trade on the NYSE and NASDAQ Standard & Poor’s 500 stock index Market index that includes 400 industrials, 20 transportation, 40 public utility, and 40 financial stocks. Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 34

8 Trends in Securities and Securities Markets Rebuilding Investor Trust Chapter 21 Stronger Role Sarbanes-Oxley for the Act of 2002 SEC Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved 36