1. Chapter 12
Securities Markets

2. Security Markets The primary markets Secondary markets -- stocks
Secondary markets -- bonds

3. The Primary Market -- Two Forms of Issues
Initial public offerings (IPO) -- the very first shares ever issued by a company.
Seasoned new issues -- new shares being issued by a company that is already publicly traded.
Investment bankers serve as underwriters.

4. Secondary Markets Trade previously owned shares of stock.
Consist of organized exchanges and an over-the-counter market.

5. Secondary Markets: The Organized Exchanges
Are used to facilitate trading between investors
New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
Regional stock exchanges

6. Regional Stock Exchanges
Pacific Stock Exchange
Chicago Stock Exchange
Philadelphia Stock Exchange
Cincinnati Stock Exchange
Intermountain Stock Exchange
Spokane Stock Exchange
Boston Stock Exchange

7. Make-up of the New York Stock Exchange
Over 200 years old
Limited to 1,366 seats since 1953; highest price of a seat was $2.6 million.
Over 3,000 listed companies
$12.3 trillion (that’s 12 zeros) worth of shares
80% of typical trading volume

8. Requirements for NYSE Listing, 1999
Profitability -- $2.5 million before tax earnings
Size -- $40.0 million net tangible assets
Market value -- $40.0 million publicly held stock
Public ownership million publicly held common shares

9. Make-up of the American Stock Exchange
600 seats
780 firms listed
Trading only 3% of the volume of the NYSE.
Daily dollar trading less than some regional exchanges.

10. Secondary Markets: Over-the-Counter (OTC) Market
Consists of an electronic network of dealers used to execute trades

11. Secondary Markets: Over-the-Counter (OTC) Market
Trades executed by:
“Pink sheets”
National Association of Securities Dealer Automated Quotations System (NASDAQ)
National Market System (NASDAQ/NMS)
Handles 35,000 smaller, less frequently traded securities with no listing requirements

12. Secondary Markets -- Bonds
No organized secondary bond market, as little demand among individual investors.
Individual investors must work through a broker, who buys or sells with a bond dealer.
Government bond trading is dominated by investment houses, commercial banks, and the Federal Reserve.

13. International Markets
International bond market exceeds $25 trillion
To buy international stocks
NYSE, AMEX, NASDAQ trade some companies
Trade American depository receipts (ADRs) -- international shares are held on deposit by foreign banks and the ADRs are sold to investors as a representative ownership of the shares
Invest directly through

14. Regulation of the Securities Markets
Securities and Exchange Commission (SEC) regulation.
Securities Act of requires disclosure of relevant information in a timely manner.
Securities Exchange Act of established the SEC.

15. Regulation of the Securities Markets (cont’d)
Investment Advisors Act of 1940 – regulates advisor activity.
Investor Protection Act of (SIPC) provides investor insurance similar to FDIC bank deposit insurance.

16. Self-Regulation
“Circuit breakers” -- triggers that momentarily stop trading to prevent disastrous market slides.
Insider trading and market abuses
insider trading -- use of non-public information for personal gain in the market
churning -- excessive trading without benefit to the client used to increase commissions.

17. How Securities are Traded
Specialists
Buy and sell orders
Brokers
Brokerage services
Cash and margin accounts

18. Role of the Specialist in an Organized Exchange
To maintain order in the market. To reduce fluctuation, NYSE specialists represent almost 20% of the share volume traded.
To track and process buy and sell orders.
To maintain an inventory of assigned stock.
To maintain bid and ask prices of their assigned stock.

19. Order Characteristics
Order sizes
Time period for which the order will remain outstanding
Order types

20. Order Sizes Round lots -- orders of 100 shares
Odd lots -- orders of 1 to 99 shares
Discretionary account: Broker authorized to make trades for you. Exercise caution, or avoid.

21. Time Period the Order Will Remain Outstanding
Day orders -- good until the end of the trading day.
Open orders (GTC) -- good until filled or canceled.
Fill or kill orders -- must be filled or canceled immediately.

22. Order Types
Market orders -- an order to sell or buy a specific number of shares at the best available price.
Limit orders -- an order to sell or buy a specific number of shares at a certain price or better.

23. Order Types (cont’d)
Stop (or stop-loss) orders -- an order to sell a specific number of shares if the stock falls below a certain price or buy a specific number of shares if the stock rises above a certain price.
Use care to set prices to safeguard against major fluctuations.

24. Short Selling -- Sell High and Buy Low
An almost reverse investment strategy which involves selling stock you don’t own and then buying it back later -- at a lower price.
Desirable when the market is expected to drop.

25. Short Selling -- Sell High and Buy Low (cont’d)
Must meet margin requirement.
Because you sold the broker’s stock, you must repurchase the stock and you also must repay any dividends to the original owner.

26. Dealing with Brokers Brokerage accounts Types of brokers; choosing one
Cash versus margin accounts
Registration: street name or your name
Joint accounts
Brokers and individual investors
The cost of trading
On-line trading

27. Asset Management Account
Brokerage firm comprehensive financial services package:
Checking account
Credit card and loans
Money market mutual fund
Brokerage services

28. Types of Brokerage Firms
Full service brokers
Discount service brokers – 50% to70% discount
Deep discount brokers – 90% discount
On-line discount and deep discount brokers – Low cost, immediate trading

29. Account Types
Cash accounts -- use your money to pay for the purchase in-full within 3 business days
Margin accounts -- use the brokerage firm’s money to purchase part of the stock. This can amplify both gains and losses.
Maintenance margin
Margin call

30. Account Types (cont’d)
Automated Clearing House (ACH) Network -- electronic payment system among 14,000 financial institutions that can be linked to your brokerage firm. Cheap, convenient, fast payment.

31. Accounts Types (cont’d)
Street name registration -- shares of stock remain in the broker’s custody. May be charged “maintenance fee” for dormant accounts.
Joint accounts -- shares owned with a spouse or partner
Joint tenancy with the right of survivorship
Tenancy-in-common

32. Working With a Broker
Remember Axiom 12: The Agency Problem in Personal Finance.
Do your homework and take responsibility.
Keep transaction costs to a minimum.
Use a discount broker or consider mutual funds.
For bonds, go full service or buy direct.

33. Choosing a Broker Integrity, intelligence, and efficiency
Experience in both up- and down-markets
Someone who understands your investment philosophy
Reputation for allowing customers to say no without undue pressure
Up front regarding costs and commissions

34. The Cost of Trading Commissions Transaction fees Inactive account fees
Annual fees
Maintenance fees

35. On-line Trading Cheap, easy trading, but do your investment homework.
For fast moving stocks, use limit orders not market orders.

36. On-line Trading (cont’d)
Make sure all cancellations were processed.
If your account falls below the maintenance margin requirement, your securities can be sold without a margin call.
No regulations govern the time for executing a trade.

37. Day-trading Cautions Be prepared for financial losses.
Don’t confuse day trading with investing – it’s speculating.
Don’t believe claims of easy profits.
Watch out for “hot tips” and “expert advice” for day traders.

38. Sources of Investment Information
Corporate sources of information
Brokerage firm reports
The press
The Wall Street Journal
Magazines
Investment publications
Internet sources
Investment clubs

39. Summary Primary securities markets Secondary securities markets
Initial public offerings
Seasoned new issues
Secondary securities markets
New York Stock Exchange
American Stock Exchanges
Regional Exchanges
Over-the-counter markets

40. Summary (cont’d) Securities market regulation
Order size, duration, and type
Round lots and odd lots
Day, GTC, or fill-or-kill orders
Market, limit, and stop orders
Cash or margin accounts

41. Summary (cont’d) Types of brokerage firms, services, and fees
Work with a broker or trade on-line?
Day trading cautions
Sources of investment information