20-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh Nickels Cover

20-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 2020 Securities Markets: Financing and Investing Opportunities 20-2

20-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Functions of Securities Markets Long-Term Funding for Businesses Place to Buy/Sell Securities (Investments)

20-4 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

20-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.  Preferred or Common  Investment never has to be repaid  Not legally obligated to pay dividends  Secured or Debenture  Must be repaid on maturity date  Interest must be paid whenever specified Debt vs Equity Financing Debt Financing Equity Financing

20-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Investment Banker  Assist Sale/Issue of New Securities  Underwrite issues  Sells to Institutional Investors

20-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. $Coupon/Interest Rate $Denomination ($1,000) $Principal $Maturity Date $Types ¢Unsecured/Debenture ¢Secured ¢Mortgage Bond Market

20-8 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 Temporary Source of Funds Temporary Source of FundsDisadvantages XIncrease Debt XLegal Obligation to Pay Interest XRepaid on Maturity Date

20-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Special Bond Features Sinking FundSinking Fund CallableCallable ConvertibleConvertible

20-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What is Stock? OwnershipOwnership CertificateCertificate Par ValuePar Value DividendsDividends Common vs. PreferredCommon vs. Preferred

20-11 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

20-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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)  Foreign Stock Exchanges

20-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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)

20-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NASDAQ vs NYSE ( Electronic - (Trading No Trading Floor) Floor) Floor) Capitalization $2.9 Trill. $13.5 Trill. # of Firms Listed 3,800 2,800 NASDAQ NYSE

20-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Securities Regulation Securities Act of Prospectus Securities Exchange Act of Insider Trading

20-16 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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

20-17 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Warning Signs Your Broker is Cheating Promises of set returns on usually volatile investmentsPromises of set returns on usually volatile investments Guarantees against lossesGuarantees against losses Claims to have “inside information”Claims to have “inside information” Irregularities on account statementsIrregularities on account statements High pressure sales tacticsHigh pressure sales tactics Source: St. Louis-Dispatch, “How to Sniff Out Investing Scams”, Feb. 17, 2002.

20-18 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Components for Optimal Portfolio Performance DiversificationTimelines Safety & Risk Income & Total Return

20-19 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Investment Criteria RiskYieldDurationLiquidity Tax Consequences

20-20 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Bonds Corporate Bonds Municipal Bonds US Treasury Bonds From 1 to 20 years From 1 to 40 years From 2 to 30 years Taxable Exempt from federal taxes and some state and local taxes Exempt from state and local taxes May be riskier than government bonds, but may have higher yields Attractive to investors in high tax brackets Government backing provides maximum safety

20-21 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Features of Stock Growth vs. IncomeGrowth vs. Income –Capital Gain vs. Dividend Blue Chip vs. PennyBlue Chip vs. Penny Market OrderMarket Order Limit OrderLimit Order Stock SplitStock Split

20-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Market Fluctuations Bull Market Bear Market

20-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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?

20-24 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Fund Facts $6 Trillion Amount U.S. Investors Have in Mutual Funds 94 Million Number of U.S. Investors in Mutual Funds 1.4% Average Annual Expense for Mutual Fund Assets $84 Billion Estimate of Annual Fund Management Fees Source: Forbes, “Safe At Any Speed”, December 23, 2002, p. 336.

20-25 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Fund Owners Source: USA Today, 10/16/2000

20-26 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds Pool Investors’ MoneyPool Investors’ Money Best for Small InvestorsBest for Small Investors Index FundIndex Fund DiversificationDiversification No-Load vs. LoadNo-Load vs. Load Open-End vs. Closed-EndOpen-End vs. Closed-End

20-27 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 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 –Junk Bonds –Commodities

20-28 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

20-29 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Measures of Investment Stock Indexes- Big Charts.comStock Indexes- Big Charts.comBig Charts.comBig Charts.com -DJIA -S & P 500 -Amex -NASDAQ Stock QuotationsStock Quotations Bond QuotationsBond Quotations Mutual Fund QuotationsMutual Fund Quotations

20-30 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Quotes % Change in YTD Price% Change in YTD Price High/Low PriceHigh/Low Price Company Name & Stock SymbolCompany Name & Stock Symbol Last Dividend Per ShareLast Dividend Per Share Dividend YieldDividend Yield P/E RatioP/E Ratio # of Shares Traded# of Shares Traded Closing PriceClosing Price Net Change- PriceNet Change- Price

20-31 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Fund Quotations Fund NameFund Name Net Asset Value (NAV)Net Asset Value (NAV) Net Change in NAVNet Change in NAV YTD ReturnYTD Return Long-Term ReturnLong-Term Return

20-32 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Original 12 Dow Stocks(1896)  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.

20-33 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Dow Milestones

20-34 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. DJIA Biggest % Jumps 10/06/ /30/ /21/ /21/ /03/ /11/ /14/ /18/ GainsLosses Date Points % Date Points % Date Points % 10/19/ /28/ /29/ /06/ /18/ /12/ /14/ /26/

20-35 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. DJIA Biggest Net Jumps 07/25/ % 07/29/ /08/ /28/ /01/ /02/ /23/ /03/ GainsLosses Date Points % 09/17/ /27/ /31/ /19/ /27/ /04/ /10/ /15/

20-36 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What Adults Believe About Wall Street Key Players % Adults That Agree With the Statement Source: Source: USA Today