Salaar - FinanceINVESTMENTS BBA SPRING Semester 2012 Lahore School of Economics Salaar farooq – Assistant Professor

Salaar - Finance Securities Markets

Salaar - Finance Chapter 3 Indirect Investing Summary What is Indirect Investing? Direct Investing Indirect Investing What is an Investment Company? What are Types of Investment Companies? What are Types of Mutual Funds? What are the mechanics of Investing Indirectly? What is Investment Company Performance? What are Exchange Traded Funds?

Salaar - Finance Chapter 4 Securities Markets Learning Objectives Why are Financial Markets Important? What are Primary Markets? What are Secondary Markets? What are Types Markets?

Salaar - Finance What is the investment environment? There are 2 main areas: Financial Markets & the economy a) Consumption Timing b) Allocation of Risk c) Separation of ownership Clients of the Financial System a) Household Sector (provide money by investing) b) Business Sector (raise money to invest) c) Government Sector (finance expenditures by borrowing)

Salaar - Finance What is the investment environment? Financial Markets & the Economy Consumption Timing (High Earning vs low earning) Financial Markets allow this to happen

Salaar - Finance What is the investment environment? Financial Markets & the Economy Consumption Timing (High Earning vs low earning) If Individuals earn more than they spend as opposed to retirees, then what can be done with the excess money? Q: How do you shift your purchasing power from high earnings period to low earnings period? High Earning Period:a) You can store your wealth in financial assets Low Earning Period:b) You can sell these assets to consume Financial Markets allow this to happen

Salaar - Finance What is the investment environment? Financial Markets & the Economy Allocation of Risk (High vs Low) Financial Markets allow this to happen

Salaar - Finance What is the investment environment? Financial Markets & the Economy Allocation of Risk (High vs Low) Financial Markets allow the distribution of risk according to investor preferences. High Risk:a) Is absorbed by high risk investors seeking high returns Low Risk:b) Investors with little risk appetite are accommodated Financial Markets allow this to happen

Salaar - Finance What is the investment environment? Financial Markets & the Economy Separation of Ownership & Management Financial Markets allow this to happen

Salaar - Finance What is the investment environment? Financial Markets & the Economy Separation of Ownership & Management Financial Markets allow funds to flow from suppliers to users with ease Result:a) Larger scale of business & growth potential. b) Investors can participate in ownership without management. c) Mutually beneficial for both suppliers & users Financial Markets allow this to happen

Salaar - Finance What are Financial Markets? Financial Market Purpose of Financial Markets

Salaar - Finance What are Financial Markets? Financial Market –Mechanism to bring Buyers & Sellers together dealing in Debt, Equity & other financial products. Purpose of Financial Markets –The purpose of financial markets is to efficiently allocate flow of funds from savings to ultimate users.

Salaar - Finance What are Financial Markets? Basic Types –Primary Markets (underwriters) –Secondary Markets (create liquidity) –Dealer vs Auction markets

Salaar - Finance What are Financial Markets? Basic Types –Primary Markets (underwriters) Original (initial) sale of securities – IPO’s – raises capital –Secondary Markets (create liquidity) Buying & Selling of securities after initial sale has occurred – capital gains & dividends –Dealer vs Auction markets Dealers buy & sell for themselves Brokers Auctions match buyers & sellers

Salaar - Finance Flow of Funds in the Economy INVESTMENT SECTOR FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET

Salaar - Finance Flow of Funds in the Economy FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET SAVINGSSECTOR Households Businesses Government INVESTMENT SECTOR

Salaar - Finance Flow of Funds in the Economy FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET SECONDARYMARKET Security Exchanges OTC Market INVESTMENT SECTOR

Salaar - Finance Flow of Funds in the Economy FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET INVESTMENTSECTOR Businesses Government Households INVESTMENT SECTOR

Salaar - Finance Flow of Funds in the EconomyFINANCIALINTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET FINANCIALINTERMEDIARIES Commercial Banks Savings Institutions Insurance Cos. Pension Funds Finance Companies Mutual Funds INVESTMENT SECTOR

Salaar - Finance Flow of Funds in the Economy FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET FINANCIALBROKERS Investment Bankers Mortgage Bankers INVESTMENT SECTOR

Salaar - Finance Financial Markets? Primary Markets Primary Market Initial Public Offering (IPO)

Salaar - Finance Financial Markets? Primary Markets Primary Market Market for new issues of securities (investment bankers) Issuers receive funds (raise capital) Buyers receive financial claims Initial Public Offering (IPO) Process of initial sale of new securities After initial sale, securities trade in the secondary markets

Salaar - Finance INVESTMENT BANKERS Specialize in design & sale of securities Work with issuers to bring a new issue to market— legal, accounting, pricing, and so forth Involved in other matters, such as advising firms on mergers and acquisitions, or reorganizations

Salaar - Finance INVESTMENT BANKING Investment bankers form a syndicate to sell the new securities--multiple investment bankers Investment bankers underwrite an issue, purchasing the securities from the issuer and assuming the risk of reselling them to investors profitably Investment bankers profit from spread between price they pay and the price they sell the issue for

Salaar - Finance Financial Markets? Investment Banking Performed by 2 groups: Securities Firms Firm specializing in the distribution of new securities to the public & also in secondary mkts as brokers & dealers Commercial Banks Also underwrite securities.

Salaar - Finance Investment Banking How they make money? 1.Commissions 2.Fees 3.Spread Income Also from: Money management Mergers & Acquisitions Trading of securities etc.

Salaar - Finance Financial Markets? Under-writing Process 3 Main Areas: 1.Advising the issuer on terms & timing of offering 2.Buying Securities from issuer 3.Distributing the securities to public

Salaar - Finance Financial Markets? Under-writing Process Buying securities: Firm Commitment: Investment Bank agrees to buy from issuer at fixed price Best efforts under-writing When the IB does not buy the securities but provides expertise Gross Spread – Discount (4-7%) Difference b/w price paid to issuer & price received from public

Salaar - Finance issuer Originating investment banker Underwriting Syndicate (group of invest bankers) Selling group (syndicate + selected retail brokers) INVESTORS BUYING IN PRIMARY MKT

Salaar - Finance Financial Markets? Investment Banker Firm specializing in the sale of new securities to the public Underwriting Process by which investment bankers purchase an issue of securities from a firm and resell it to the public PROSPECTUS: Provides info about the IPO to the customers

Salaar - Finance Privatization?

Salaar - Finance Privatization? Offering securities of Govt owned companies to public… Thereby liquidating Govt ownership Also performed by Investment Banks

Salaar - Finance Arbitrage? Another activity of Investment Banks

Salaar - Finance Arbitrage? Another activity of Investment Banks Trading discrepancies in same security at different locations… Example… JNJ at in NY JNJ at in LDN Locking a profit with no risk

Salaar - Finance Financial Markets? Global Investment Banking & Private Placements Global Investment Banker Private Placements

Salaar - Finance Financial Markets? Global Investment Banking & Private Placements Global Investment Banker Firm specializing in the sale of new international securities to the public Private Placements Debt securities are issued directly to financial institutions bypassing the open market. No SEC filing required Investment banking fees is saved

Salaar - Finance Financial Markets? Secondary Markets Markets where existing securities are traded For investments to be attractive, they must have liquidity & secondary markets provide that.

Salaar - Finance Financial Markets? US Securities Markets for Equities Where are these exchanges? Equity NYSE AMEX NASDAQ ECN’S BONDS NYSE & AMEX Bond markets

Salaar - Finance Financial Markets? US Securities Markets for Equities Equity NYSE (New York Stock Exchange) AMEX (American Stock Exchange) NASDAQ (National Association of Securities Dealers) ECN’S (Electronic Communications Network) BONDS NYSE & AMEX Bond markets

Salaar - Finance Financial Markets? US Securities Markets for Equities Equity NYSE – 1366 seats (1.5mil$)-2800 co’s valued 13 trillion-Dvol 1.5Bil AMEX – 807 seats – 760 companies – 2% of ttl value – 200mil vol NASDAQ co’s – 1bil vol – computerized mkt network ECN’S (Electronic Communications Network)-linked to all OTC – Not listed but registered, 3000 co’s – dealer network linked BONDS NYSE & AMEX Bond markets

Salaar - Finance Financial Markets? US Securities Markets for Equities Bid price Offer Price Block trades Program trading

Salaar - Finance Financial Markets? US Securities Markets for Equities Bid price Px some one will buy for Offer Price Px someone will sell for Block trades Trades of 10,000 or more Program trading Computer generated buy & sell signals for $1 mil or more

Salaar - Finance Financial Markets? US Securities Markets for Equities OTC (Over the counter mkts) ECN’s After Hours Trading

Salaar - Finance Financial Markets? US Securities Markets for Equities OTC (Over the counter mkts) Stocks not listed on an exchange but traded on closed computer networks ECN’s Computerized trading network for large traders & brokers – computer matched orders After Hours Trading Normal hrs: 9.30 – 1600 AHT hrs:

Salaar - Finance Financial Markets? US Securities Markets for Equities Dow Jones Industrial Average Standard & Poor’s (S&P 500) Nasdaq

Salaar - Finance Financial Markets? US Securities Markets for Equities Dow Jones Industrial Average 30 Blue chip stocks – stock price weighted average Standard & Poor’s (S&P 500) 500 stock composite Nasdaq 100 Large cap companies

Salaar - Finance The Dow Jones Industrial Average consists of the following 30 companies: 3M Co. (NYSE: MMM) ALCOA Inc. (NYSE: AA) (aluminium) Altria Group, Inc. (NYSE: MO) (tobacco) AIG(NYSE: AIG) American Express Co. (NYSE: AXP) (credit services) AT&T Inc. (NYSE: T) (telecoms) Boeing Co., The (NYSE: BA) (aerospace/defense) Caterpillar, Inc. (NYSE: CAT) (farm & construction equipment) Citigroup, Inc. (NYSE: C) (money center banks) Coca-Cola Co. (NYSE: KO) (beverages) E.I. du Pont de Nemours & Co. (NYSE: DD) (chemicals) Exxon Mobil Corp. (NYSE: XOM) (major integrated oil & gas) General Electric Co. (NYSE: GE) (conglomerates, media) General Motors Corporation (NYSE: GM) (auto manufacturers) Hewlett-Packard Co. (NYSE: HPQ) (diversified computer systems) Home Depot, Inc. (NYSE: HD) (home improvement stores) Honeywell International, Inc. (NYSE: HON) (conglomerates) Intel Corp. (NYSE: INTC) (semiconductors) International Business Machines Corp. (NYSE: IBM) (diversified computer systems) JPMorgan Chase and Co. (NYSE: JPM) (money center banks) Johnson & Johnson Inc. (NYSE: JNJ) (consumer and health care products conglomerate) McDonald's Corp. (NYSE: MCD) (restaurant franchise) Merck & Co., Inc. (NYSE: MRK) (drug manufacturers) Microsoft Corp. (NYSE: MSFT) (software) Pfizer, Inc. (NYSE: PFE) (drug manufacturers) Procter & Gamble Co. (NYSE: PG) (consumer goods) United Technologies Corp. (NYSE: UTX) (conglomerates) Verizon Communications (NYSE: VZ) (telecoms) Wal-Mart Stores, Inc. (NYSE: WMT) (discount, variety stores) Walt Disney Co., The (NYSE: DIS) (entertainment)

Salaar - Finance Chapter 4 Securities Markets Learning Summary Why are Financial Markets Important? What are Primary Markets? What are Secondary Markets? What are Types Markets?

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