McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved ChapterTwenty Securities Markets: Financing & Investing Opportunities

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Types of Investments  Traditional  Stocks/Bonds  Gov’t Securities/CDs  Money Market or Mutual Funds  Real Estate  High-Risk  Stock on Margin  Commodities  Futures  Junk Bonds

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Functions of Securities Market Equity Financing Investment Banker Debt Financing

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved What Adults Believe About Wall Streets’ Key Players % Adults That Agree With the Statement Source: Source: USA Today

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Broker/Brokerage*  Full Service = $480  Discount = $170  On-Line= $ 20 *Cost to Trade 500 Shares of Price of $101.50

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Number of Households That Own Mutual Funds Source: The Freep.com

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Mutual Fund Owners Source: USA Today, 10/16/2000

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Bond Market  Coupon Rate/Interest Rate  Denomination  Principal  Maturity Date  Types -Unsecured/Debenture -Secured I. O. U.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Bonds Advantages  No Vote  Interest is Tax- Deductible  Temporary Source of Funds Disadvantages  Increase Debt  Legal Obligation  Repaid on Maturity Date

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Bond Features  Sinking fund  Callable  Convertible  Discount vs. Premium

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Capital Markets  Primary Markets (IPOs)  Secondary Markets  Common vs. Preferred  Underwriting

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved What is Stock?  Ownership  Certificate  Par Value  Dividends

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Stock Advantages  No Repayment  No Legal Obligation  Does Not Create Debt Disadvantages  Voting Rights  Dividends not Tax-Deductible  Management Works to Keep Stockholders Happy

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Features of Stock  Growth vs. Income  Capital Gain vs. Dividend  Blue Chip vs. Penny  Market Order  Limit Order  Stock Split

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Organized Securities Exchanges  New York Stock Exchange (NYSE)  Over-the-Counter (OTC/NASDAQ)  American Stock Exchange (AMEX)  Regional Stock Exchange  Foreign Stock Exchange

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Founding Dates of U.S. Exchanges Philadelphia Stock Exchange (1790) New York Stock Exchange (1792) Boston Stock Exchange (1834) Chicago Stock Exchange (1882) NASDAQ (1971) Chicago Board Options Exchange (1973) International Securities Exchange (2000)

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved The Original 12 Dow Stocks  American Cotton Oil  American Sugar Refining Co.  American Tobacco  Chicago Gas  Distilling & Cattle Feeding Co.  General Electric Co.  Laclede Gas Light Co.  National Lead  North American Co.  Tennessee Coal, Iron, & Railroad Co.  U.S. Leather  U.S. Rubber Co.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved DJIA Biggest Net Jumps 09/08/ /28/ /01/ /02/ /23/ /03/ /02/ /01/ GainsLosses Date Points % 10/27/ /31/ /19/ /27/ /04/ /10/ /15/ /30/

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved DJIA Biggest % Jumps 10/06/ /30/ /21/ /21/ /03/ /11/ /14/ /18/ GainsLosses Date Points % 10/19/ /28/ /29/ /06/ /18/ /12/ /14/ /26/

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved NASDAQ vs. NYSE Daily Share Volume696 Million513 Million Market Capitalization$1.95 Trillion $8.7 Trillion # of Firms Listed 5,499 3,006 Market Cap./Firm $354 Million $2,894 Million NASDAQ NYSE

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Stock Market Fluctuations  Bull Market  Bear Market

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Securities Regulation  Securities Act of Prospectus  Securities Exchange Act of Insider Trading  What is Regulated -Prospectus -Insider Trading

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Measures of Investment  Stock Indexes -DJIA -S & P 500 -Amex -NASDAQ  Stock Quotations  Bond Quotations

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Investment Criteria  Risk  Yield  Duration  Liquidity  Tax Consequences

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Investment Options- Risky to Safe  Commodities  Stocks  Mutual Funds  Corporate Bonds  Government Securities  Diversification

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Components for Optimal Portfolio Performance  Diversification  Timeliness  Safety & Risk  Income & Total Return

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Debt vs. Equity Financing  Secured or Debenture  Must be repaid on maturity date  Interest must be paid whenever specified  Preferred or Common  Investment never has to be repaid  Not legally obligated to pay dividends Debt Financing Equity Financing

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Paying Dividends Through Thick & Thin Source: Source: Standard & Poor’s Corp. Washington Gas Light1852 J. P. Morgan1892 Westvaco1892 General Electric1899 PPG Industries1899 Bristol-Myers Squibb1900 Company Dividends Paid Since

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved How Stock Splits Work 100 shares of stock selling at 100 shares of stock selling at 100 shares 100 shares  3 for 1 Stock Split Declared 3 for 1 Stock Split Declared  Lower Price increases Demand   Increased demand increases price  How Much Profit Has Been Made?

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved Buying Stock on Margin How does the investor make money? Step 1 An investor wishes to buy 100 shares at $100 per share Step 2 However, the investor has only $4,000 available to invest Step 3 The investor finds he is able to buy the stock with a 40% margin Step 4 The investor puts up $4,000 and borrows $6,000 from the broker