1. Securities Markets Chapter 4
Charles P. Jones, Investments: Analysis and Management,
Twelfth Edition, John Wiley & Sons

2. The Role of Financial Markets
Channel funds from savers to borrowers
Help firms and governments raise cash by selling securities (financial claims on issuer)
Provide a place where investors can earn a return
Help allocate cash to where it is most productive
Help lower the cost of exchange

3. Primary Markets New securities are issued in a primary market
Initial public offerings versus seasoned new issues
Average investors do not often benefit much from IPOs
Issue facilitated by investment banker
Intermediaries between issuer and investor
Buy securities from issuer at a discount, sell them to investors
Difference between two amounts is spread

4. Investment Banking
Client advice includes type and features of security, offer price, and timing of sale
Underwriting services
By purchasing securities, investment bankers assume risk of selling securities to investors
May form syndicates to reduce risk
Coordinates marketing by helping issuer register securities, issue prospectus, and sell securities

5. Issuer
Originating investment banker
Underwriting syndicate (group) of investment bankers
Selling group of underwriting syndicate + selected retail brokerage houses
Investors

6. Investment Banking
Automatic Shelf Registration allows certain issuers to sell new securities over time after filing a single registration
Private placement means new securities are sold directly to investors, bypassing the open market
Registration not required
Can be cheaper and faster for issuer
Can lead to higher costs, restrictions

7. Secondary Markets
Markets where investors trade previously issued securities
Allow for trading of stocks, bonds, derivatives
New York Stock Exchange/Euronext and NASDAQ are major US exchanges
Investors are represented by brokers who facilitate trades between buyers and sellers for a fee

8. Stock Exchanges NYSE NASDAQ Has physical location in New York City
Recently acquired the American Stock Exchange, now called NYSE Amex, which focuses on small companies
NASDAQ
Electronic market of dealers (“market makers”) who trade directly with each other and customers
Gathers and consolidates quotes and orders from participants

9. Other Secondary Markets
Over-the-Counter (OTC)
Not organized marketplace or exchange
Forum for securities not listed on a U.S. exchange
Better Alternative Trading System (BATS)
Appeals to hedge funds, others who want speed
Electronic Communication Networks (ECNs)
Offer automation, lower costs, anonymity

10. Foreign Markets
US equity markets account for a decreasing share of world’s stock market capitalization
Foreign markets include developed and emerging markets
Emerging markets
Often offer large potential for profits and large risks
Illiquidity, lack of information, political uncertainty
China and Brazil have grown and attracted investor attention

11. Stock Market Indexes
Measure only the change in prices of a defined group of stocks over a period of time
Do not include dividends and therefore generally understate total returns
However, price changes are primary way to describe the performance of equity markets

12. Stock Market Indexes Dow Jones Industrial Average
Composed of 30 “blue-chip” stocks
Only major market index that is price weighted
Weights high-priced stocks more than low-priced stocks
Oldest, most well-known measure
Percentage change in index matters: the level of the index does not

13. Stock Market Indexes Standard & Poor’s 500 Composite Index
Accounts for about 75% of U.S. stock-market value
Expressed as index number relative to a base index value of 10 ( )
Capitalization-weighted index: Prices and shares outstanding considered
NASDAQ Indexes
Russell 1000 Index
Wilshire 5000 Total Market Index
4-13

14. Stock Market Indexes
The “correct” index depends on the investor’s purpose
DJIA and S&P 500 best for measuring performance of large stocks
NASDAQ indexes best for measuring performance of NASDAQ stocks
Wilshire 5000 best for measuring performance of U.S. stocks in the broadest sense
4-14

15. Foreign Stock Market Indicators
MSCI EAFE Index
Essentially a non-American world index (without Brazil or India)
Dow Jones World Stock Index
Capitalization-weighted (unlike the DJIA)
Represents about 80% of world’s stock markets
Global Dow Index
Euro STOXX 50 and Euro STOXX 600
4-15

16. Bond and Derivatives Markets
Secondary bond markets
Necessary or investors might avoid bonds
Primarily an over-the-counter network of dealers
Bond brokers often buy for their own accounts and resell
Derivatives
Options trade on exchanges
Futures markets mostly electronic

17. Market Globalization
Electronic trading systems allow for after- hours trading
Stock prices can change even when exchanges are closed
Bonds also being traded around the clock
Individual investors can benefit from globalization
Can trade in foreign markets and in foreign currencies

18. Copyright 2013 John Wiley & Sons, Inc. All rights reserved
Copyright 2013 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back- up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.