1. 1 Chapter 12 – Securities Markets Where financial assets are traded Primary market – First time a security sold –Initial Public Offering (IPO's) Secondary market – existing securities Investment bankers – financial advice to companies –Underwrite – purchase entire new issue –Merrill Lynch, Goldman Sachs, Citibank

2. 2 Terminology to Understand Securities and Exchange Commission Registration (prospectus) required by SEC –Fair, truthful, accurate info about new issues –Does not prohibit sale of risky assets Organized exchanges such as NYSE –Has physical location; trades listed securities; generally of larger companies –Nine exchanges in the US

3. 3 Stock Markets NYSE, NASDAQ, ECN’s New York Stock Exchange –2,800 listed stocks –Most liquid market –Humans (specialists) match bids and offers –Physical floor on Wall Street –Owned by 1,366 seat holders

4. 4 NASDAQ or Over-the-Counter National Association of Securities Dealers Automated Quotation System –Trades 3,400 stocks –No formal listings –But traded companies must register with SEC –Traders at hundreds of locations –Loose federation of electronic traders

5. 5 Electronic Communications Networks (ECN’s) Trade exchange-listed and NASDAQ stocks Collect and post bids and offers Match orders electronically Execution is immediate Have 7% of the trading volume in NYSE stocks and 83% of OTC stocks Biggest: Instanet, Island and ArcaEx

6. 6 Regulation SEC plus self-regulation Securities Act of 1933 associated with new securities Securities Exchange Act – 1934 regulates secondary market and financial reporting Investment Advisors Act of 1940 – covers all types of advisors and mutual funds

7. 7 Stock Trading Exchange assigns stock to a "specialist" who buys and sells the issue to "maintain a fair and orderly market". Orders can take various forms Short selling – borrow a stock, sell it in expectation of buying back at lower price Market order – immediate at best possible price

8. 8 Brokers Licensed by SEC –Can sanction rule-breakers; names in newspapers Types – full service versus discount brokers –500 shares @ $20 = $10,000 investment –Commissions: FS = $253; Discount $7 to 30 Registration – you can hold paper certificates or broker can hold electronically

9. 9 Stock Brokers A person who buys and sells stock on behalf of clients. Operates as an agent –Doesn’t own the securities but matches buy and sell orders Securities Investor Protection Corp (SPIC) insures customer accounts against financial failure of brokers

10. 10 SIPC Securities Investor Protection Corp. Federal agency but not like FIDC Does not protect against loss of value Replaces securities stolen by a broker or loss through failure of brokerage holding your securities –Up to $500,000; 99% recovery rate

11. 11 Brokerage Fees Have been increasing What can you do to hold down? –Do you even need a broker? –Trade online –Watch asset level- big balances help a lot –Consolidate household accounts –Opt for e-mail confirms

12. 12 Sources of Information Annual reports to shareholders (Full service) broker reports Rating agencies Press – WSJ, Barons, Fortune Value Line SEC's online EDGAR Watch out for "free advice"

13. 13 Registration Book entry – completely electronic –No paper certificates –More convenient, less costly Joint tenancy with Right of Survivorship –Surviving owner receives full ownership Tenancy-in-Common - goes to heirs

14. 14 Key Topics IPO Investment banker Exchanges vs OTC International Market Intent of regulation Market orders only Sources of info