1. ©2013 Cengage Learning. All Rights Reserved
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Acquiring and Using Funds to Maximize Value
LO1 What is the role of financial markets in the U.S. economy? Who are the key players?
LO2 What are the key laws that govern the way financial markets operate and what is the impact of these laws?
LO3 What are the major types of securities that are traded in securities markets?
LO4 How are securities issued in the primary market and traded in secondary markets?
LO5 What strategies do investors use to invest securities?
LO6 How do you interpret the information provided in the stock quotes available on financial websites?
Finance:
Acquiring and Using Funds to Maximize Value

3. The Role of Financial Markets
Financial markets transfer funds from savers to borrowers
Companies access financial resources to invest, meet payroll, and develop new products
Individuals, organizations and YOU are all key players in financial markets

4. Financial Institutions
Depository Institutions
Commercial banks
Credit unions
Savings and loan associations
Nondepository Financial Institutions
Institutional investors
Securities brokers
Securities dealers
Investment Banks

5. Regulating Financial Markets to Protect Investors and Improve Stability
Savers and borrowers need confidence in financial institutions
The crisis of 2008 is an example of the financial markets malfunctioning
U.S. experienced bank failures in 1907, early 1930s, and 1908s

6. Financial Regulation Early Efforts: Recent Developments:
Federal Reserve Act of 1913 – created the FED
Banking Act of 1933/Glass-Steagall Act – established the Federal Deposit Insurance Corporation
Financial Services Modernization Act of 1999/Gramm- Billey-Leach Act – reversed Glass-Steagall
Recent Developments:
Sarbanes-Oxley Act of 2002 – fair external audits
Dodd-Frank Act of 2010 – extended authority over nondepository institutions
Source: Public Company Accounting Oversight Board website: Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” United States Senate Committee on Banking, Housing and Urban Affairs website:

7. Investing in Financial Securities
Three major types of securities that are traded in markets:
Common Stock
Preferred Stock
Bonds

8. Corporate Ownership

9. The basic form of ownership in a corporation
Common Stock
The basic form of ownership in a corporation
Voting Rights
Right to Dividends
Capital Gains
Preemptive Rights
Right to Residual Claim on Assets

10. Preferred Stock: Getting Preferential Treatment
Stock that gives its holder preference over common stockholders
No Voting Rights
Claim on Assets
Payment of Dividends (stated amount)
Cumulative Feature

11. Bonds: Earning Your Interest
Long-term debt issued by a corporation or government
Maturity Date – the date the bond comes due
Par Value – face value
Premium – bond is above par
Discount – bond is below par
Coupon Rate – interest payment as percentage of par value
Current Yield – interest payment as percentage of current market price
Bonds are a legal obligation. Companies issued century bonds in the 1990s.
Source: “Are Bond Buyers This Crazy?” by Dan Caplinger, Motley Fool website:

12. Convertible Securities
Convertible securities – bonds or preferred stock that investors exchange for common stock
Conversion rate is the number of shares exchanged for each convertible security
Conversion rate of 20
Each security can be exchanged for 20 shares

13. Mutual Funds and ETFs: Diversification Made Easy
Exchange Traded Funds
Features of stocks and mutual fund
Ownership in a “market basket” of stocks
You can buy and sell ETFs any time of the day, unlike Mutual Funds
Mutual Funds
Diversification
Professional Management
Variety
Liquidity
Janus website

14. The Primary Securities Market: Where Securities Are Issued
Public Offering:
Securities are sold to anyone in the investing public
Private Placement:
Ownership by a small number of people

15. Trading Securities: The Secondary Market
Security Exchanges
New York Stock Exchange
NASDAQ
Currently the two largest exchanges in the U.S.
A wave of mergers of exchanges are taking place
Over the Counter Market
Electronic Communication Networks

16. Over-the-Counter Market
Many corporations do not meet requirements to list on organized exchanges
Listing can be expensive
OTC are traded through a system of market makers
The market for OTC stocks is much less active than exchanges

17. Electronic Communications Networks
Computer-based securities market
ECNs automatically match buyers and sellers
Individuals open an account with a broker-dealer
Investors can trade “after hours”

18. Personal Investing What are your short-term and long-term goals?
Given your budget, how much are you able to invest?
How long can you leave your money invested?
How concerned are you about the tax implications of your investments?
How much tolerance do you have for risk?
DIVERSIFICATION

19. Choosing a Broker: Access to the Markets
Individuals must use a broker to trade stocks on the organized exchanges and OTC market
Full Service Brokers
Provide a range of services
Discount Brokers
Basic buy/sell capabilities
The competition between brokers is intense and both attempt to offer more services
Once you decide on a broker, you open an account

20. Place limits on the price
Buying Securities
Market Orders –
buy or sell a security
at the current
market price
Limit Orders –
Place limits on the price
at which orders
are executed

21. Strategies for Investing in Securities
Investing for Income
Market Timing
Value Investing
Investing for Growth
Buying and Holding

22. Stock Indices: Tracking the Trends
Stock Index:
Tracks how the prices of a specific set of stocks have changed
Standard and Poor’s 500:
Tracks 500 stocks and weighs the total market value of each stock
Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by The Wall Street Journal editors.

23. Major Stock Price Indices

24. Looking Back
What is the role of financial markets in the U.S. economy? Who are the key players?
What are the key laws that govern the way financial markets operate and what is the impact of these laws?
What are the major types of securities that are traded in securities markets?
How are securities issued in the primary market and traded in secondary markets?
How do you interpret the information provided in the stock quotes available on financial websites?