McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1919 Securities Markets: Financing and Investing Opportunities 19-1

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Capital Markets Primary Markets (IPO's)Primary Markets (IPO's) Secondary MarketsSecondary Markets

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Market Fluctuations Bull Market Bear Market

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Exchanges Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Exchanges Organization whose members can buy and sell (exchange) securities for companies and investorsOrganization whose members can buy and sell (exchange) securities for companies and investors –Brokerage firms purchase memberships (seats) on the exchanges Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Organized Securities Exchanges  New York Stock Exchange (NYSE)  American Stock Exchange (AMEX)  NASDAQ  Foreign Stock Exchanges

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Exchanges New York Stock Exchange (NYSE)New York Stock Exchange (NYSE) –Largest stock exchange in U.S. –Floor-based exchange –Often referred to as the Big Board –Has a fixed number of memberships –Membership price varies with strength of the market Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Exchanges American Stock Exchange (AMEX)American Stock Exchange (AMEX) –Second largest stock exchange in U.S. Regional ExchangesRegional Exchanges –Chicago,, Philadelphia, Cincinnati, Spokane, and Salt Lake City –Chicago, San Francisco, Philadelphia, Cincinnati, Spokane, and Salt Lake City NASDAQNASDAQ Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Foreign Exchanges Japan NIKKEIJapan NIKKEI Germany DAXGermany DAX France CAC-40France CAC-40 Britain FTSE 100Britain FTSE 100 Euro Zone DJ Euro StoxxEuro Zone DJ Euro Stoxx Hong Kong ---- Hang SengHong Kong ---- Hang Seng India Bombay SensexIndia Bombay Sensex Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. BONDS (Debt)

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. $Principal $Interest Rate $Term $Issue Date $Maturity Date Bond Terms

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. $Classes ¢Unsecured ¢Debenture ¢Secured ¢Mortgage Bond Classes

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Special Bond Features Sinking FundSinking Fund CallableCallable ConvertibleConvertible

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Bonds Advantages No Vote No Vote Interest is Tax- Deductible Interest is Tax- Deductible Can be repaid before maturity with call provision Can be repaid before maturity with call provision Disadvantages XIncrease Debt XLegal Obligation to Pay Interest XRepaid on Maturity Date

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. STOCKS (Equity)

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What is Stock? Ownership Dividends Common and Preferred

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Common Stock Most basic form of ownership and includes the rights:Most basic form of ownership and includes the rights: –To vote for company’s board of directors and on important issues –To share in the company’s profits through dividends –Preemptive rights give common stockholders first right to purchase any new shares of common stock Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Preferred Stock Stock that gives its owners preference in payment of dividends and earlier claim on assetsStock that gives its owners preference in payment of dividends and earlier claim on assets Does not include voting rightsDoes not include voting rights May be called a hybrid investment (stock/bond)May be called a hybrid investment (stock/bond) Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Preferred Stock Differences from Common Stock:Differences from Common Stock: –Par value is basis for dividend firm is willing to pay –Dividends on preferred stock must be paid in full before any common stock dividends can be paid Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Preferred Stock Preferred stocks and Bonds are rated according to Risk by Standard & Poor’s and Moody’s Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Preferred Stock Differences between Preferred Stock and Bonds:Differences between Preferred Stock and Bonds: –Preferred stock dividends do not legally have to be paid –Stock never has to be repurchased –Both types increase in market value, but stocks generally increase at a higher percentage than bonds Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Issuing Preferred Stock Special Features of Preferred Stock:Special Features of Preferred Stock: –Preferred stock can be callable –Preferred stock can be convertible –With cumulative preferred stock missed dividends can be accumulated if not paid Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Advantages No RepaymentNo Repayment No Legal ObligationNo Legal Obligation Does Not Create DebtDoes Not Create DebtDisadvantages Voting RightsVoting Rights Dividends not Tax-DeductibleDividends not Tax-Deductible Management Works to Keep Stockholders HappyManagement Works to Keep Stockholders Happy

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Features of Stock Market Order Limit Order

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Splits

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. How Stock Splits Work 100 shares of ABC stock $ shares of ABC stock $ shares 100  3 for 1 Stock Split Declared 3 for 1 Stock Split Declared  Lower Price increases Demand   Increased demand increases price  How Much Potential Profit Has Been Made?

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Buying Stock On Margin

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Any financial paper has stock quotes that will look something like the image below: quotes

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Quotes % Change in YTD Price High/Low Price – 52 weeks Company Name & Stock Symbol Last Dividend Per Share Dividend Yield P/E Ratio # of Shares Traded – in 100s Closing Price Net Change - Closing Price Previous Trading Day

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Market Indicators Dow Jones Industrial Average (DJIA) – –30 Industrial, 20 Transportation, 15 Utility Standard & Poor’s 500 – –400 Industrial, 40 Financial, 40 Utility, 20 Transportation NASDAQ Big Charts.com