1. Using Securities Markets for Financing & Investing Opportunities*
Chapter Nineteen *
Using Securities Markets for Financing & Investing Opportunities
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. WARREN BUFFETT Berkshire Hathaway*
WARREN BUFFETT Berkshire Hathaway
Profile *
With a net worth of $50 billion, Buffett was the richest person in the world in 2008.
Got his big break when he gained control of Berkshire Hathaway.
He invests in undervalued companies with strong management.
Buffett lives a modest lifestyle and has pledged to give away the bulk of his fortune to charity.
19-2

3. The BASICS of SECURITIES MARKETS*
The BASICS of SECURITIES MARKETS
The Function of Securities Markets *
LG1
Securities markets are financial marketplaces for stocks and bonds and serve two primary functions:
Assist businesses in finding long-term funding to finance capital needs.
Provide private investors a place to buy and sell securities such as stocks and bonds.
See Learning Goal 1: Describe the role of securities markets, and of investment bankers.
19-3

4. TYPES of SECURITIES MARKETS*
TYPES of SECURITIES MARKETS
The Function of Securities Markets *
LG1
Securities markets are divided into primary and secondary markets:
Primary markets handle the sale of new securities.
Secondary markets handle the trading of securities between investors with the proceeds of the sale going to the seller.
Initial Public Offering (IPO) -- The first offering of a company’s stock.
See Learning Goal 1: Describe the role of securities markets, and of investment bankers.
19-4

5. INVESTMENT BANKERS and INSTITUTIONAL INVESTORS*
INVESTMENT BANKERS and INSTITUTIONAL INVESTORS
The Role of Investment Bankers *
LG1
Investment Bankers -- Specialists who assist in the issue and sale of new securities.
Institutional Investors -- Large organizations such as pension funds or mutual funds that invest their own funds or the funds of others.
See Learning Goal 1: Describe the role of securities markets, and of investment bankers.
Investment bankers help companies by: (1) gaining approval from the SEC for a firm to issue stocks or bonds and (2) underwriting.
19-5

6. *
STOCK EXCHANGES
Stock Exchanges *
LG2
Stock Exchange -- An organization whose members can buy and sell securities on behalf of companies and individual investors.
Over-the-Counter (OTC) Market -- Provides companies and investors with a means to trade stocks not listed on the national securities exchanges.
NASDAQ -- A telecommunications network that links dealers across the nation so they can exchange securities.
See Learning Goal 2: Identify the stock exchanges where securities are traded.
The NYSE Euronext is the world’s largest stock exchange.
19-6

7. * * TOP STOCK EXCHANGES NYSE Euronext NASDAQ London Stock Exchange
LG2
NYSE Euronext
NASDAQ
London Stock Exchange
Tokyo Stock Exchange
Deutsche Borse
See Learning Goal 2: Identify the stock exchanges where securities are traded.
Top Stock Exchanges
This slide profiles the largest stock exchanges in the world.
To be listed on the NYSE, the company must have at least 2200 shareholders, average daily volume of at least 100,000 shares, a market cap of $750 million, or pretax earnings of $10 million.
NASDAQ is an acronym which stands for the National Association of Securities Dealers Automated Quotations.
London Exchange merged with the Italian Exchange, both of which have been operating for over 200 years.
Tokyo exchange operated a trading floor for 120 years. In 1999, the trading floor was closed as the Tokyo Stock Exchange went to all electronic trading similar to NASDAQ.
The Deutsche Borse is located in Frankfurt, Germany.
19-7

8. The SECURITIES and EXCHANGE COMMISSION*
The SECURITIES and EXCHANGE COMMISSION
Securities Regulations and the SEC *
LG2
Securities and Exchange Commission (SEC) - - The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act.
Prospectus -- A detailed registration statement that includes extensive economic and financial information that must be sent to prospective investors.
See Learning Goal 2: Identify the stock exchanges where securities are traded.
The Securities and Exchange Act also prohibits insider trading by using knowledge or information gained through a person’s position in a firm that allows them to benefit unfairly.
19-8

9. * * PROGRESS ASSESSMENT
What’s the primary purpose of a stock exchange?
Can you name the world’s largest stock exchange?
What does NASDAQ stand for? How does this exchange work?
What’s the primary purpose of a stock exchange? The primary purpose of a stock exchange is to allow members of the exchange to buy or sell securities on behalf of investors.
Can you name the world’s largest stock exchange? NYSE Euronext is the largest stock exchange with exchanges in six different countries.
What does NASDAQ stand for? How does this exchange work? National Association Securities Dealers Automated Quotations. This exchange is completely electronic allowing for orders to be quickly matched up via computers.
19-9

10. WAGGING the DOG Making Ethical Decisions*
WAGGING the DOG Making Ethical Decisions *
After 35 years at Laddie Come Home, you’re ready to retire as CEO and your compensation package includes a bonus if the company’s stock price reaches a certain amount.
Another company would like to acquire the company at a price that exceeds the bonus level.
If you encourage the board to sell the company, many jobs could be lost. What do you do?
See Learning Goal 2: Identify the stock exchanges where securities are traded.
19-10

11. The WIDE, WIDE WORLD of INVESTING Reaching Beyond Our Borders*
The WIDE, WIDE WORLD of INVESTING Reaching Beyond Our Borders *
With apprehensions after the financial crisis of , why would we want to invest in less familiar global stocks?
Analysts suggest investing money globally. From , markets in China and Brazil outperformed the U.S.
Reviewing suggestions in the text are a good idea if you want to invest globally.
See Learning Goal 2: Identify the stock exchanges where securities are traded.
19-11

12. LEARNING the LANGUAGE of STOCKS*
LEARNING the LANGUAGE of STOCKS
Learning the Language of Stocks *
LG3
Stocks -- Shares of ownership in a company.
Stock Certificate -- Evidence of stock ownership.
Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares.
See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
One share of stock equals one vote.
19-12

13. ADVANTAGES of ISSUING STOCKS*
ADVANTAGES of ISSUING STOCKS
Advantages & Disadvantages of Issuing Stock *
LG3
Stockholders are owners of a firm and never have to be repaid their investment.
There’s no legal obligation to pay dividends.
Issuing stock can improve a firm’s balance sheet since stock creates no debt.
See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
19-13

14. DISADVANTAGES of ISSUING STOCK*
DISADVANTAGES of ISSUING STOCK
Advantages & Disadvantages of Issuing Stock *
LG3
Stockholders have the right to vote for a company’s board of directors.
Issuing new shares of stock can alter the control of the firm.
Dividends are paid from after-tax profits and are not tax deductible.
The need to keep stockholders happy can affect management’s decisions.
See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
19-14

15. *
TWO CLASSES of STOCK
Issuing Shares of Common Stock *
LG3
Common Stock -- The most basic form; holders have the right to vote for the board of directors and share in the profits if dividends are approved.
Preferred Stock -- Owners are given preference in the payment of company dividends before common stock dividends are distributed. Preferred stock can also be:
Callable
Convertible
Cumulative
See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
In the event of bankruptcy, the rights of common stock holders are subordinated to preferred stock holders.
19-15

16. * * PROGRESS ASSESSMENT
Name at least two advantages and disadvantages of issuing stock as a form of equity financing.
What are the major differences between common stock and preferred stock?
Name at least two advantages and disadvantages of issuing stock as a form of equity financing. Advantages: equity never has to be repaid and the company is under no legal obligation to pay dividends. Disadvantages: equity holders have the right to vote and dividends are not tax deductible.
What are the major differences between common stock and preferred stock? Common stock holders have the right to vote, while preferred stock holders do not. Preferred stock holders have rights if the company enters bankruptcy. Preferred stock holders receive a fixed dividend, while common holders are not guaranteed to be paid a dividend.
19-16

17. LEARNING the LANGUAGE of BONDS*
LEARNING the LANGUAGE of BONDS
Learning the Language of Bonds *
LG4
Bond -- A corporate certificate indicating that an investor has lent money to a firm.
The principal is the face value of the bond.
Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money.
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
Unlike dividends, interest payments are tax deductible.
19-17

18. ADVANTAGES of ISSUING BONDS*
ADVANTAGES of ISSUING BONDS
Advantages & Disadvantages of Issuing Bonds *
LG4
Bondholders are creditors, not owners of the firm and can’t vote on corporate matters.
Bond interest is tax deductible.
Bonds are a temporary source of funding and are eventually repaid.
Bonds can be repaid before the maturity date if they contain a call provision.
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
19-18

19. DISADVANTAGES of ISSUING BONDS*
DISADVANTAGES of ISSUING BONDS
Advantages & Disadvantages of Issuing Bonds *
LG4
Bonds increase debt and can affect the market’s perception of the firm.
Paying interest on bonds is a legal obligation.
If interest isn’t paid, bondholders can take legal action.
The face value of the bond must be repaid on the maturity date.
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
19-19

20. * * BOND RATINGS Rating Moody’s Standard & Poor’s Description Aaa AAA
Advantages & Disadvantages of Issuing Bonds *
LG4
Rating
Moody’s
Standard & Poor’s
Description
Aaa
AAA
Highest Quality Aa AA
High Quality A
Upper-Medium Grade
Baa
BBB
Medium Grade Ba BB
Lower-Medium Grade B
Speculative
Caa
CCC, CC
Poor Ca C
Highly Speculative D
Lowest Grade
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
The rating agencies of Moody’s and Standard & Poor’s have been under fire with many money managers alleging a conflict of interest, since companies pay the rating agencies.
19-20

21. DIFFERENT CLASSES of CORPORATE BONDS*
DIFFERENT CLASSES of CORPORATE BONDS
Different Classes of Bonds *
LG4
Corporations can issue two classes of bonds:
Unsecured bonds (debenture bonds): not backed by specific collateral.
Secured bonds: backed by collateral (land or equipment).
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
19-21

22. SPECIAL FEATURES in BOND ISSUES*
SPECIAL FEATURES in BOND ISSUES
Special Bond Features *
LG4
Sinking Fund -- Reserve account set up to ensure that enough money will be available to repay bondholders on the maturity date.
Callable bonds permit bond issuers to pay off the principal before the maturity date.
Convertible bonds allow bondholders to convert their bonds into shares of common stock.
See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
19-22

23. * * PROGRESS ASSESSMENT
Why are bonds considered a form of debt financing?
What does it mean if a firm issues a 9% bond due in 2025?
Explain the difference between an unsecured and secured bond.
Why are convertible bonds attractive to investors?
Why are bonds considered a form of debt financing? Bonds are considered debt financing, since they must be paid back when the bond matures.
What does it mean if a firm issues a 9% bond due in 2025? The bond has a coupon rate or interest rate of 9 percent and matures in 2025.
Explain the difference between an unsecured and secured bond. A secured bond is backed by some form of collateral. While an unsecured bond or debenture is not backed or secured by any collateral.
Why are convertible bonds attractive to investors? Convertible bonds are attractive, because they give bondholders the option to convert their bonds into equity. This is attractive since equity tends to appreciate faster than bonds do.
19-23

24. *
BUYING SECURITIES
How Investors Buy Securities *
LG5
Stockbroker -- A registered representative who works as a market intermediary to buy and sell securities for clients.
Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds.
See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
19-24

25. PRIMARY INVESTMENT SERVICES CONSUMERS NEED*
PRIMARY INVESTMENT SERVICES CONSUMERS NEED
Major Services Consumers Seek from Financial Advisers *
LG5
Savings and investing advice
Help with 401k plans
Retirement planning
Tax planning
Estate planning
Education expense planning
See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
Primary Investment Services Consumers Need
This slide presents the needs of consumers when it comes to financial planning.
Today’s brokers provide more than simply the buying and selling of stocks and bonds.
Companies like Charles Schwab and Fidelity help individuals plan for the future.
Source: Investment Company Institute.
19-25

26. FIVE INVESTMENT CRITERIA*
FIVE INVESTMENT CRITERIA
Choosing the Right Investment Strategy *
LG5
Investment risk
Yield
Duration
Liquidity
Tax consequences
See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
Diversification helps spread risk by buying different types of investments.
19-26

27. AVERAGE ANNUAL RETURN of ASSET CLASSES (1926-2007)*
AVERAGE ANNUAL RETURN of ASSET CLASSES ( )
Choosing the Right Investment Strategy *
LG5
Investment
Return
Small company stocks
12.2%
Large company stocks
9.5%
Corporate bonds
6.0%
Long-term government bonds
5.8%
Treasury bills
4.1%
See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
Average Annual Return of Asset Classes
This slide profiles average returns since 1926 for various assets classes.
Although the bear market of 2008 has been harsh, this chart shows that over the long-term equity is a solid investment.
Have students discuss why they think small companies have a higher rate of return than any other asset class.
Source: Ibbotson Associates and Morningstar.
19-27

28. * * PROGRESS ASSESSMENT
What’s the key advantage of investing through online brokers? What’s the key disadvantage?
What’s the primary purpose of diversifying investments?
What’s the key advantage of investing through online brokers? What’s the key disadvantage? The main advantage to investing through online brokers is that the fees charged tend to be lower than traditional brokers. The key disadvantage is that investors must generally do their own research and make their own investment decisions without direct assistance from their broker.
What’s the primary purpose of diversifying investments? The goal of diversification is to reduce the overall risk an investor assumes.
19-28

29. PERCEPTIONS of the MARKET*
PERCEPTIONS of the MARKET
Investing in Stocks *
LG6
Bulls: Investors who believe stock prices are going to rise.
Bears: Investors who expect stock prices to decline.
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
19-29

30. BEAR MARKET DECLINES in the S&P 500*
BEAR MARKET DECLINES in the S&P 500
Investing in Stocks *
LG6
Time Period
% Drop in Prices
52.5%
51%
48.2%
36.1%
33.5%
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
Bear Market Declines
This slide profiles the bear market declines over the past forty years.
The past decade has been abysmal with two significant bear markets.
Have students think about the times when bear markets have caused declines in the S&P. What was going on in the country or world at these times? What might have been the causes of these bear markets? What were the effects?
Source: Stock Traders Almanac 2009.
19-30

31. *
SELECTING STOCKS
Investing in Stocks *
LG6
Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for.
Investors can also choose stocks according to their strategy:
Blue-chip stocks
Growth stocks
Income stocks
Penny stocks
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
19-31

32. *
STOCK SPLITS
Stock Splits *
LG6
Stock Splits -- An action by a company that gives stockholders two or more shares of additional stock for every share that’s outstanding.
Splits cause no change in the firm’s ownership structure and no change in the investment’s value.
Firms can never be forced to spilt their stocks.
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
An important point to note is investment value does not change immediately after the stock split. The investor has the same original dollar value as before the split. The hope for the investor is that as the demand for the stock increases, the value of the stock rises (which will increase their total investment value since they have more shares due to the stock split). Dividend rates are also divided according to the degree of split. Most stock splits are two-for-one splits. Since 1980, Wal-Mart has split their shares on eight different occasions. If an individual investor purchased 100 shares in 1980 they would own 25,600 shares after adjusting for splits!
19-32

33. * * BUYING STOCK on MARGIN
LG6
Buying Stock on Margin -- Borrowing some of the stock’s purchase cost from the brokerage firm.
Margin is the portion of the stock’s purchase price that the investor must pay with their own money.
If a broker issues a margin call, the investor has to come up with money to cover losses.
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
Students should know the risk associated with buying stocks on margin. Investors purchasing on margin are increasing their purchasing power, so they can own more stock without fully paying for it. Margin exposes investors to the following risks:
You can lose more money than you invested.
You may have to deposit additional cash or securities in your account on short notice to cover market losses.
You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities.
Your brokerage firm may sell some or all of your securities without consulting you to pay off the loan it made to you.
Know that your firm charges you interest for borrowing money which will affect the total return on your investments.
19-33

34. UNDERSTANDING STOCK QUOTATIONS*
UNDERSTANDING STOCK QUOTATIONS
Understanding Stock Quotations *
LG6
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
Stock quotations are now readily available on numerous websites.
19-34

35. TOP FINANICIAL NEWS and RESEARCH SITES*
TOP FINANICIAL NEWS and RESEARCH SITES
Understanding Stock Quotations *
LG6
Yahoo Finance
AOL Money and Finance
MSN Money
Forbes
Dow Jones & Co.
See Learning Goal 6: Analyze the opportunities stocks offer as investments.
Top Financial News and Research Sites
Financial information is now readily available. This slide lists some of the sites where information can be easily gathered.
If time allows, encourage students to visit these Web sites and evaluate their usefulness.
Ask students: Which of these Web sites was the best? Why would it be a good idea to consult more than one of these Web sites before deciding to invest?
Source: Entrepreneur Magazine, March 2009.
19-35

36. IMPORTANT BOND QUESTIONS*
IMPORTANT BOND QUESTIONS
Investing in Bonds *
LG7
First-time bond investors generally ask two questions:
Do you have to hold a bond until the maturity date?
How can I assess the investment risk of a particular bond issue?
Junk Bonds -- Bonds that have a high risk and high default rates.
See Learning Goal 7: Analyze the opportunities bonds offer as investments.
A junk bond has a rating of BB or less.
19-36

37. INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS*
INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors’ money and buys stocks according to the fund’s purpose.
Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges but themselves are traded more like stocks than mutual funds.
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
19-37

38. PERCENTAGE of HOUSEHOLDS OWNING MUTUAL FUNDS*
PERCENTAGE of HOUSEHOLDS OWNING MUTUAL FUNDS
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
Year
% of Households
1980 5%
1990
24%
2000
43%
2005
42%
2009
44%
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
Percentage of Households Owning Mutual Funds
This slide presents the percentage of US households owning mutual funds by year.
Ask the students – Do you or your parents own mutual funds? How did they get involved in purchasing them, and what type of research do they do before buying them? Did they develop investment objectives or was it based on some tip or advice?
It should be pointed out to the students that people may get into investing for the right reasons and with right intentions (retirement, savings for college, vacations, home buying, etc.). However, it is very important to maintain discipline. Many people, if not most, deviate from these investment objectives and start to invest based on the so-called “hot tip.” Mutual funds should be treated as investments which you commit to based on researched information and not hot tip or quick hit gambling.
Source: Investment Company Institute.
19-38

39. THREE VARIETIES of ETFs*
THREE VARIETIES of ETFs
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
ETF
Description
Traditional
Most common; include large U.S. stocks, small U.S. stocks, international stocks, or investment-grade bonds.
Niche
Focus on an individual sector like healthcare, high-yield bonds, or a single country.
Exotic
Invest in unusual, more volatile sectors such as commodities like gold and concepts like clean technology.
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
Three Varieties of ETFs
This slide lists the three varieties of ETFs that are available.
ETFs have numerous benefits when compared to mutual funds. If time permits, have students prepare a list of and/or discuss the advantages of ETFs. (Transparent pricing, lower fees, and returns at least equal to index that the ETF tracks are just some of the advantages students might discuss.)
Traditional ETFs include: SPY which tracks the S&P 500 and TIP which tracks inflation protected government bonds.
Niche ETFs include: IXJ which tracks the S&P Global Healthcare Sector.
Exotic ETFs include: FXA which tracks the Australian Dollar and GLD which tracks the price of gold.
Source: Schwab and E*Trade.
19-39

40. UNDERSTANDING MUTUAL FUND QUOTATIONS*
UNDERSTANDING MUTUAL FUND QUOTATIONS
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
The price per share for a mutual fund is referred to as the net asset value or NAV.
19-40

41. INVESTING with INTEGRITY Thinking Green*
INVESTING with INTEGRITY Thinking Green *
A number of socially responsible investment funds (SRIs) are prospering.
SRIs invest only in companies with exceptional environmental, social and governance practices.
SRIs are good investments for long-term investors - they’re lower risk than alternative investments.
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
19-41

42. GROWTH of SOCIALLY RESPONSIBLE INVESTING*
GROWTH of SOCIALLY RESPONSIBLE INVESTING
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
Year
Number of SRIs
Total Net Assets
1995 50
$10 Billion
1997
130
$90 Billion
2001
175
$170 Billion
2004
200
$210 Billion
2007
250
$260 Billion
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
Growth of Socially Responsible Investing
This slide shows the growth over the past 15 years of Socially Responsible Investing.
Investors now have many choices in how to invest their money. More and more investors are choosing mutual funds and/or exchange traded funds that invest in socially responsible companies.
Ask students: Why do you think more and more people are investing in socially responsible companies? How do you think these investments stack up to more traditional investments?
Source: Charles Schwab on Investing.
19-42

43. COMPARING INVESTMENTS*
COMPARING INVESTMENTS
Investing in Mutual Funds & Exchange-Traded Funds *
LG8
See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
19-43

44. * * PROGRESS ASSESSMENT
What’s a stock split? Why do companies sometimes split their stock?
What does buying stock on margin mean?
What are mutual funds and ETFs?
What’s the key benefit to investors in investing in a mutual fund or ETF?
What’s a stock split? Why do companies sometimes split their stock? When a company splits its stock 2 for 1 the shareholders receive two shares of stock for each share they own. The current share price is cut in half, so the number of shares increases, the total value of the investment remains the same. A board may decide to split their stock 2 for 1, 3 for 2 or any other ratio they determine is appropriate. The reason that a company splits its stocks is to reduce the price of the stock which will hopefully increase the demand for the stock.
What does buying stock on margin mean? When an investor buys on margin they use money borrowed from their broker to purchase stock.
What are mutual funds and ETFs? A mutual fund is an investment fund that buys stock and bonds then sells shares in those securities to the public. The pooling of funds allows small investors to invest in a broader selection of stocks and bonds. Most mutual funds are professionally managed. ETFs are similar to mutual funds, but are traded on exchanges like individual stocks and are passively managed.
What’s the key benefit to investors in investing in a mutual fund or ETF? The key benefit to investing in a mutual fund or ETF is that the investor gets instant diversification.
19-44

45. KEY STOCK MARKET INDICATORS*
KEY STOCK MARKET INDICATORS
Understanding Stock Market Indicators *
LG9
Dow Jones Industrial Average -- The average cost of 30 selected industrial stocks.
Critics say the 30-company Dow is too small a sample and suggest following the S&P 500.
S&P 500 tracks the performance of 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks.
See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
The Dow Jones Industrial Average is the oldest index which was originally created in 1896 by Charles Dow and Edward Jones. The original average had twelve companies one of which, GE, is still in the Dow Jones Industrial average after all these years.
19-45

46. * * MARKET TURMOIL The stock market has its shares of ups and downs:
Investing Challenges in the 21st Century Market *
LG9
The stock market has its shares of ups and downs:
October 29, Black Tuesday; the market lost 13% of its value.
October 19, The market suffered its worst one-day drop when it lost 22% of its value.
October 27, Fears of an economic crisis in Asia cause widespread panic and losses.
See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
19-46

47. *
TURMOIL in the 2000s
Investing Challenges in the 21st Century Market *
LG9
The market collapsed into a deep decline in with the dot-com bubble burst.
Investors lost $7 trillion in market value.
In , the collapse of the real estate market sent financial markets into panic.
The U.S. government made significant investments in private banks and offered a large stimulus package to re- energize the economy.
See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
19-47

48. WHO’S at FAULT for the ECONOMIC CRISIS?*
WHO’S at FAULT for the ECONOMIC CRISIS?
Investing Challenges in the 21st Century Market *
LG2
Wall Street - Issued exotic securities; paid excessive compensation based on bonuses; and investment banks got the SEC to relax capital requirement.
Main Street - Americans lived beyond their means; lenders gave favorable loans to homebuilders; greedy homeowners took out equity loans; and teaser mortgage rates let people live large.
Washington - Gramm-Leach-Billey Act allowed commercial and investment banks to partner; housing interest rates were kept low; and Community Reinvestment Act forced lending to people with bad credit.
See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
Who’s at Fault for the Economic Crisis?
This slide reviews some of the players in the economic crisis.
Like all complex problems this crisis was not caused by one group.
You could actually include another culprit (not listed on this slide): worldwide saving surplus. Gulf States, China, Japan and Brazil all reinvested export earnings in US dominated assets primarily government bonds. This had the effect of keeping interest low, thus allowing consumers and the United States Government (as well as many state and local governments) to spend beyond their means racking up massive consumer and federal debt.
To discuss the crisis ask students: Who’s at fault for the economic crisis? When discussing this highly charged topic it is important to make sure students understand that the fault lies not just with Wall Street and Washington but with consumers including themselves.
Source: Fortune Magazine,
19-48

49. GAMBLING with INVESTORS’ SECURITY Legal Briefcase*
GAMBLING with INVESTORS’ SECURITY Legal Briefcase *
Fannie Mae bought huge numbers of mortgages and bundled them into securities they sold.
Loans were riskier and more complex.
Borrowers didn’t fully understand and unqualified borrowers were granted loans they couldn’t afford.
As borrowers defaulted on loans, real estate prices fell. Financial institutions were left with loans that wouldn’t be repaid.
See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
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50. * * PROGRESS ASSESSMENT
What does the Dow Jones Industrial Average measure? Why is it important?
Why do the 30 companies comprising the Dow change periodically?
Explain program trading and the problems it can create.
What does the Dow Jones Industrial Average measure? Why is it important? The Dow Jones Industrial Average is the average price of 30 specific stocks. It is important because it allows followers of the market to track the general direction of the stock market.
Why do the 30 companies comprising the Dow change periodically? The Dow will delete and add new companies to the Dow Jones Industrial Average to reflect increased economic importance of a particular company or industry. Recently, Cisco and Travelers replaced Citi and GM.
Explain program trading and the problems it can create. Program trading occurs when investors give instructions to their computers to execute a sell order if the stock price dips to a certain point. Many attribute the stock market crash of to program trading as computer sell orders caused many stocks to fall to incredible levels.
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