1. Prentice-Hall, Inc.1 Chapter 12 Securities Markets

2. Prentice-Hall, Inc.2 Security Markets  The primary markets  Secondary markets -- stocks  Secondary markets -- bonds

3. Prentice-Hall, Inc.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. Prentice-Hall, Inc.4 Secondary Markets  Trade previously owned shares of stock.  Consist of organized exchanges and an over-the-counter market.

5. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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 -- 1.1 million publicly held common shares

9. Prentice-Hall, Inc.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. Prentice-Hall, Inc.10 Secondary Markets: Over-the- Counter (OTC) Market  Consists of an electronic network of dealers used to execute trades

11. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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 www.intltrader.com

14. Prentice-Hall, Inc.14 Regulation of the Securities Markets  Securities and Exchange Commission (SEC) regulation.  Securities Act of 1933 -- requires disclosure of relevant information in a timely manner.  Securities Exchange Act of 1934 -- established the SEC.

15. Prentice-Hall, Inc.15 Regulation of the Securities Markets (cont’d)  Investment Advisors Act of 1940 – regulates advisor activity.  Investor Protection Act of 1970 -- (SIPC) provides investor insurance similar to FDIC bank deposit insurance.

16. Prentice-Hall, Inc.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. Prentice-Hall, Inc.17 How Securities are Traded  Specialists  Buy and sell orders  Brokers  Brokerage services  Cash and margin accounts

18. Prentice-Hall, Inc.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. Prentice-Hall, Inc.19 Order Characteristics  Order sizes  Time period for which the order will remain outstanding  Order types

20. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.27 Asset Management Account  Brokerage firm comprehensive financial services package:  Checking account  Credit card and loans  Money market mutual fund  Brokerage services

28. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.34 The Cost of Trading  Commissions  Transaction fees  Inactive account fees  Annual fees  Maintenance fees

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

36. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.39 Summary  Primary 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. Prentice-Hall, Inc.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. Prentice-Hall, Inc.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