Chapter 12 Securities Markets

Securities Markets Securities—stocks and bonds—are issued by corporations to raise money. Securities Markets—a place where you buy and sell securities—primary and secondary markets. After the initial issue, securities are traded among investors.

Primary Markets Place where new securities are traded Initial public offering (IPO) Seasoned new issues Investment Banker Underwriter Tombstone advertisement Prospectus

Secondary Markets—Stocks Markets in which previously issued securities are traded. Organized exchange—a physical location where stocks trade. Over-the-counter market—transactions conducted over phone or computer. Regional stock exchanges

Secondary Markets - Stocks New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Over-the-Counter (OTC) Market Bid price Ask price

Secondary Markets - Bonds Tend to be for smaller, individual investors. Some bonds trade at the NYSE, most trading by bond dealers deal directly with large financial institutions. Small investors access bond dealers through broker. Volume of trading for government bonds is enormous dominated by Federal Reserve, commercial banks, financial institutions.

Regulation of the Securities Markets Aimed at protecting investors so that all have a fair chance of making money. Securities and Exchange Commission (SEC) Self-regulation Insider trading and market abuses churning

Order Characteristics Order Size Odd lots <100 shares Round lots Time Period for Which the Order Will Remain Outstanding Day orders Open orders or Good-till-cancelled (GTC) orders Discretionary account

Types of Orders Market Orders—buy or sell immediately at the best price available. Limit Orders—trade is to be made only at a certain price or better. Stop Orders or Stop-Loss Order—order to sell if the price drops below a specified level or to buy if the price climbs above a specified level.

Short Selling Short selling—the more the price drops, the more money your make. Borrow stock from the broker and then sell it. Margin requirement—collateral Sell high and later buy low and return stock to broker. If price increases, you buy back for more than the sold price, and lose money.

Figure 12.3 Profits from Purchasing Versus Selling Short

Types of Brokers Full-Service Brokers or Account Executive— paid commissions based on sales volume. Discount and Online Brokers—execute trades but do not provide advice. Premium discount brokers Deep discount brokers

Cash Versus Margin Accounts Cash Accounts Margin Accounts Margin or Initial Margin Maintenance margin Margin call

The Cost of Trading Sales commission to buy stock Commission to sell stock Transaction fee Annual fee for inactive accounts Use discount broker for large purchases

Online Trading Day traders—trade, generally on internet, with a very short-term time horizon. Be prepared to suffer severe financial losses. Don’t confuse day trading with investing. Don’t believe claims of easy profits. Watch out for “hot tips” or “expert advice.”

Table 12.3 Great Sources of Investment Information on the Web