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. Functions of Securities Markets Long-Term Funding for Businesses Place to Buy/Sell Securities (Investments)

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 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 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. Over-The-Counter Market Exchange provides means to trade stocks not listed on national exchangesExchange provides means to trade stocks not listed on national exchanges –NASDAQ is nationwide electronic system that communicates OTC trades to brokers –Originally dealt with small firms that could not qualify for national listing –Intel and Microsoft traded on OTC market –Also handles corporate and government bonds –Stocks can be de-listed if exchange minimum requirements not held up 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 Callable Convertible

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Bond Considerations Sinking Fund Bonds are rated according to risk by Standard & Poor and Moody’s

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 Similarities between Preferred Stock and Bonds:Similarities between Preferred Stock and Bonds: –Both have a Face (or Par) Value, and both have a fixed rate of return –Preferred stocks are rated according to Risk by Standard & Poor and Moody’s just like 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 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. 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. Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading. Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock. Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends. Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share. Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial. Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed. Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock. Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay. Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.stockcommon stockpreferred stockticker tapestock quotes YieldPrice/Earnings Ratioguaranteed

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

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Stock Market Indicators Big Charts.com