© 2009 South Western, a division of Cengage Learning 1 Chapter 10:SECURITIES MARKETS Trading Financial Resources

© 2009 South Western, a division of Cengage Learning 2 SECURITIES MARKETS Stocks & Bonds Primary Securities Market Investors Corporations Funds Securities Debt & Equity Long term financing Additional Funds Support:  Expansion of facilities  Research and Product Development  Adoption of New Technologies  Other strategic initiatives Returns to Investors: Dividends, Interest, Capital Gains

© 2009 South Western, a division of Cengage Learning 3 COMMON STOCK: A SHARE OF CORPORATE OWNERSHIP Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets The basic form of ownership is a corporation

© 2009 South Western, a division of Cengage Learning 4 PREFERRED STOCK Stock that gives its holder preference over common stockholders. –No Voting Rights –Claim on Assets –Payment of Dividends –Cumulative Feature

© 2009 South Western, a division of Cengage Learning 5 THAT’S SOME CLASSY STOCK! Some corporations issue more than one class of common stock. Google has two classes of common stock. –Class A stock is actively traded –Class B shares are not traded and are all held by a small group of investors, including Google’s chief executive officer and co-founders Class A stock has 1 vote, but each share of Class B stock has 10 votes.

© 2009 South Western, a division of Cengage Learning 6 BONDS: A FORMAL IOU Long-term debt issued by a corporation or government –Maturity Date –Par Value –Coupon Rate

© 2009 South Western, a division of Cengage Learning 7 CHARACTERISTICS OF BONDS Most bonds are secured with a pledge of specific assets Methods of retiring bonds: –Serial bonds have unique maturity dates and help spread out repayments –Companies may establish sinking fund to assist in repayment Callable bonds have provisions for early redemption Convertible bonds allow bonds to be transferred into shares of common stock

© 2009 South Western, a division of Cengage Learning 8 JUNK BONDS Junk bonds are bonds that are rated Ba or lower in Moody’s classification Junk bonds offer a higher rate of interest. In December, 2006, Delta Airlines, Ford Motor Company, and General Motors all had bond issues that were in the junk bond category. The Wall Street Journal tactfully refers to these securities as “high yield bonds.”

© 2009 South Western, a division of Cengage Learning 9 TRADING SECURITIES: THE SECONDARY MARKET Security Exchanges –New York Stock Exchange Traditionally an “auction market” –NASDAQ Electronic exchange Over the Counter Market Electronic Communication Networks

© 2009 South Western, a division of Cengage Learning 10 NEW YORK STOCK EXCHANGE The largest securities exchange in the United States. It is typically referred to as NYSE.

© 2009 South Western, a division of Cengage Learning 11 HYBRID MARKET Response to customer demands, new regulations and growth in transaction size Brokers can participate both physically and electronically on the trading floor NYSE+ Direct is the technology that has been expanded for the Hybrid Market NYSE Hybrid Market - a new trading system to allow investors to execute trading through an automated trading system as well as on the floor.

© 2009 South Western, a division of Cengage Learning 12 NASDAQ A major stock exchange that handles trades through a computerized network

© 2009 South Western, a division of Cengage Learning 13 COMPARING THE EXCHANGES

© 2009 South Western, a division of Cengage Learning 14 PERSONAL INVESTING What are your short-term and long-term goals? How much are you able to invest? How concerned are you about the tax implications? How much tolerance do you have for risk?

© 2009 South Western, a division of Cengage Learning 15 FULL SERVICE VS DISCOUNT BROKERS Individuals must use a broker to trade stocks on the organized exchanges and OTC market Full Service Brokers –Provide a range of services like research, advice and tax planning Discount Brokers –Basic buy/sell capabilities The competition between brokers is intense and both attempt to offer more services.

© 2009 South Western, a division of Cengage Learning 16 DIRECT STOCK PURCHASE PLANS Many Corporations offer Direct Stock Purchase Plans Purchase stock direct from company Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

© 2009 South Western, a division of Cengage Learning 17 STRATEGIES FOR INVESTING IN SECURITIES Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding

© 2009 South Western, a division of Cengage Learning 18 OTHER SECURITIES-RELATED INVESTMENTS: MUTUAL FUNDS Diversification Relatively Low Cost Professional Management Variety Liquidity

© 2009 South Western, a division of Cengage Learning 19 KEEPING TABS ON THE MARKET: STOCK INDICES Stock Index – tracks how the prices of a specific set of stocks have changed. Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors. Standard and Poor’s 500 – tracks 500 stocks and weighs the total market value of each stock.

© 2009 South Western, a division of Cengage Learning 20 STOCK QUOTES ONLINE

© 2009 South Western, a division of Cengage Learning 21 PLAN YOUR INVESTMENT STRATEGY Besides diversification, how can investors reduce their risk? What resources are available to investors to manage their investments? Would you personally consider hiring a broker?