* * Chapter Nineteen Using Securities Markets for Financing and Investing Opportunities Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

* * Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: 1. Assist businesses in finding long-term funding to finance capital needs. 2. Provide private investors a place to buy and sell securities such as stocks and bonds. The BASICS of SECURITIES MARKETS The Function of Securities Markets LG1 19-2

* * Stocks -- Shares of ownership in a company. Stock Certificate -- Evidence of stock ownership. Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares. LEARNING the LANGUAGE of STOCKS Learning the Language of Stocks LG3 19-3

* * Stockholders are owners of a firm and never have to be repaid their investment. There’s no legal obligation to pay dividends. Issuing a stock can improve a firm’s balance sheet since stock creates no debt. ADVANTAGES of ISSUING STOCKS Advantages & Disadvantages of Issuing Stock LG3 19-4

* * Stockholders have the right to vote for a company’s board of directors. Issuing new shares of stock can alter the control of the firm. Dividends are paid from after-tax profits and are not tax deductible. The need to keep stockholders happy can affect management’s decisions. DISADVANTAGES of ISSUING STOCKS Advantages & Disadvantages of Issuing Stock LG3 19-5

* * Common Stock -- The most basic form; holders have the right to vote for the board of directors and share in the profits if dividends are approved. Preferred Stock -- Owners are given preference in the payment of company dividends before common stock dividends are distributed. Preferred stock can also be:  Callable  Convertible  Cumulative TWO CLASSES of STOCK Issuing Shares of Common Stock LG3 19-6

* * Bond -- A corporate certificate indicating that an investor has lent money to a firm. LEARNING the LANGUAGE of BONDS Learning the Language of Bonds LG4 The principal is the face value of the bond. Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money. 19-7

* * Bondholders are creditors, not owners of the firm and can’t vote on corporate matters. Bond interest is tax deductible. Bonds are a temporary source of funding and are eventually repaid. Bonds can be repaid before the maturity date if they contain a call provision. ADVANTAGES of ISSUING BONDS Advantages & Disadvantages of Issuing Bonds LG4 19-8

* * Bonds increase debt and can affect the market’s perception of the firm. Paying interest on bonds is a legal obligation. If interest isn’t paid, bondholders can take legal action. The face value of the bond must be repaid on the maturity date. DISADVANTAGES of ISSUING BONDS Advantages & Disadvantages of Issuing Bonds LG4 19-9

* * Corporations can issue two classes of bonds: 1. Unsecured bonds (debenture bonds): not backed by specific collateral. DIFFERENT CLASSES of CORPORATE BONDS Different Classes of Bonds LG4 2. Secured bonds: backed by collateral (land or equipment)

* * 1. Investment risk 2. Yield 3. Duration 4. Liquidity 5. Tax consequences FIVE INVESTMENT CRITERIA Choosing the Right Investment Strategy LG

* * Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for. Investors can also choose stocks according to their strategy:  Blue-chip stocks  Growth stocks  Income stocks  Penny stocks SELECTING STOCKS Investing in Stocks LG

* * Stock Splits -- An action by a company that gives stockholders two or more shares of additional stock for every share that’s outstanding. Splits cause no change in the firm’s ownership structure and no change in investment’s value. Firms can never be forced to spilt their stocks. STOCK SPLITS Stock Splits LG

* * Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors’ money and buys stocks according to the fund’s purpose. Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges but themselves are traded more like stocks than mutual funds. INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS LG8 Investing in Mutual Funds & Exchange- Traded Funds 19-14