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Acquiring and Using Funds to Maximize Value LO1 What is the role of financial markets in the U.S. economy? Who are the key players? LO2 What are the key laws that govern the way financial markets operate and what is the impact of these laws? LO3 What are the major types of securities that are traded in securities markets? LO4 How are securities issued in the primary market and traded in secondary markets? LO5 What strategies do investors use to invest securities? LO6 How do you interpret the information provided in the stock quotes available on financial websites? Finance: Acquiring and Using Funds to Maximize Value

The Role of Financial Markets Financial markets transfer funds from savers to borrowers Companies access financial resources to invest, meet payroll, and develop new products Individuals, organizations and YOU are all key players in financial markets

Financial Institutions Depository Institutions Commercial banks Credit unions Savings and loan associations Nondepository Financial Institutions Institutional investors Securities brokers Securities dealers Investment Banks

Regulating Financial Markets to Protect Investors and Improve Stability Savers and borrowers need confidence in financial institutions The crisis of 2008 is an example of the financial markets malfunctioning U.S. experienced bank failures in 1907, early 1930s, and 1908s

Financial Regulation Early Efforts: Recent Developments: Federal Reserve Act of 1913 – created the FED Banking Act of 1933/Glass-Steagall Act – established the Federal Deposit Insurance Corporation Financial Services Modernization Act of 1999/Gramm- Billey-Leach Act – reversed Glass-Steagall Recent Developments: Sarbanes-Oxley Act of 2002 – fair external audits Dodd-Frank Act of 2010 – extended authority over nondepository institutions Source: Public Company Accounting Oversight Board website: http://pcaobus.org/Pages/default.aspx,“Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” United States Senate Committee on Banking, Housing and Urban Affairs website: http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf

Investing in Financial Securities Three major types of securities that are traded in markets: Common Stock Preferred Stock Bonds

Corporate Ownership

The basic form of ownership in a corporation Common Stock The basic form of ownership in a corporation Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets

Preferred Stock: Getting Preferential Treatment Stock that gives its holder preference over common stockholders No Voting Rights Claim on Assets Payment of Dividends (stated amount) Cumulative Feature

Bonds: Earning Your Interest Long-term debt issued by a corporation or government Maturity Date – the date the bond comes due Par Value – face value Premium – bond is above par Discount – bond is below par Coupon Rate – interest payment as percentage of par value Current Yield – interest payment as percentage of current market price Bonds are a legal obligation. Companies issued century bonds in the 1990s. Source: “Are Bond Buyers This Crazy?” by Dan Caplinger, Motley Fool website: http://www.fool.com/investing/dividends-income/2010/08/26/are-bond-buyers-this-crazy.aspx

Convertible Securities Convertible securities – bonds or preferred stock that investors exchange for common stock Conversion rate is the number of shares exchanged for each convertible security Conversion rate of 20 Each security can be exchanged for 20 shares

Mutual Funds and ETFs: Diversification Made Easy Exchange Traded Funds Features of stocks and mutual fund Ownership in a “market basket” of stocks You can buy and sell ETFs any time of the day, unlike Mutual Funds Mutual Funds Diversification Professional Management Variety Liquidity Janus website

The Primary Securities Market: Where Securities Are Issued Public Offering: Securities are sold to anyone in the investing public Private Placement: Ownership by a small number of people

Trading Securities: The Secondary Market Security Exchanges New York Stock Exchange NASDAQ Currently the two largest exchanges in the U.S. A wave of mergers of exchanges are taking place Over the Counter Market Electronic Communication Networks

Over-the-Counter Market Many corporations do not meet requirements to list on organized exchanges Listing can be expensive OTC are traded through a system of market makers The market for OTC stocks is much less active than exchanges

Electronic Communications Networks Computer-based securities market ECNs automatically match buyers and sellers Individuals open an account with a broker-dealer Investors can trade “after hours”

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 do you have for risk? DIVERSIFICATION

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 Once you decide on a broker, you open an account

Place limits on the price Buying Securities Market Orders – buy or sell a security at the current market price Limit Orders – Place limits on the price at which orders are executed

Strategies for Investing in Securities Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding

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.

Major Stock Price Indices

Looking Back What is the role of financial markets in the U.S. economy? Who are the key players? What are the key laws that govern the way financial markets operate and what is the impact of these laws? What are the major types of securities that are traded in securities markets? How are securities issued in the primary market and traded in secondary markets? How do you interpret the information provided in the stock quotes available on financial websites?