Securities Markets

12-2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Objectives 1. Identify and describe the primary and secondary securities markets. 2. Trade securities using a broker. 3. Locate and use several different sources of investment information to trade securities.

12-3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Introduction One way to improve changes of success is to understand how the securities markets work. Success cannot be guaranteed—but the first step to becoming rich through a great investment is learning how to make that investment.

12-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

12-5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Primary Markets Place where new securities are traded. Initial public offering (IPO) Seasoned new issues Investment Banker Underwriter Tombstone advertisement Prospectus

12-6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 12.1

12-7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 12.2

12-8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

12-9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Secondary Markets - Stocks New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Over-the-Counter (OTC) Market Bid price Ask price

12-10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 12. 1

12-11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

12-12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall International Markets Around for centuries. Some foreign shares traded on exchanges in the U.S. American Depository Receipt (ADR) International stocks can be traded through ADRs.

12-13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 12.3

12-14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

12-15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall How Securities Are Traded Examine the different types of trades and trading mechanisms. Refer to all securities as stocks as most common but trading mechanisms apply to different securities

12-16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall The Role of the Specialist Continuous markets—markets in which trading can occur at any time, with prices free to fluctuate as trading occurs. Specialist—an exchange member who oversees the trading in one or more stocks—to “maintain a fair and orderly market”.

12-17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Order Characteristics Order Size Odd lots Round lots Time Period for Which the Order Will Remain Outstanding Day orders Open orders or Good-till-cancelled (GTC) orders Discretionary account

12-18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

12-19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

12-20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 12.4

12-21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Dealing with Brokers Most common way to purchase stock is through stockbroker—licensed to buy or sell stocks for others. Brokerage Accounts Asset Management Accounts

12-22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

12-23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Cash Versus Margin Accounts Cash Accounts Margin Accounts Margin or Initial Margin Maintenance margin Margin call

12-24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 12.1

12-25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Registration: Street Name or Your Name Securities can be registered in your name or “street name.” Street Name – registered securities remain in the broker’s custody and are a computer entry in your name. More convenient to sell. May have maintenance fee for inactivity. Avoid fee by registering stock in your name.

12-26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Joint Accounts Joint Tenancy with Right of Survivorship – when one owner dies, the other receives full ownership of assets in the account. Tenancy-in-Common Account – the deceased’s portion of the account goes to the heirs of the deceased, not the surviving account holder.

12-27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Choosing a Broker Using a full-service broker—personal service and advice but for higher price. Using a discount broker—keep transaction costs down because cost 10 to 20 times less personal service but some offer free research reports. Making the decision

12-28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 12.2

12-29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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

12-30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.”

12-31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Checklist 12.3

12-32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Sources of Investment Information Corporate Sources Brokerage Firm Reports The Press Investment Advisory Services Internet Sources Investment Clubs

12-33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 12.5

12-34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Summary Primary securities markets is where new securities are sold. Previously issued securities are traded in the secondary markets which can be organized exchanges. Investors must specify time period for orders in day orders, open orders, or fill-or-kill orders.

12-35 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Summary Short selling involves borrowing stocks from a broker, selling high and buying back low, making a profit, and returning the stocks to the broker. Be careful on where you get information to make investment decisions.

12-36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.