1. Financial Markets and Institutions 6th Edition
PowerPoint Slides for:
Financial Markets and Institutions 6th Edition
By Jeff Madura
Prepared by
David R. Durst
The University of Akron

2. Stock Offerings and Investor Monitoring10

3. Chapter Objectives
Describe the stock exchanges where stocks are traded
Analyze the process of the initial public offering of stock by a company
Be able to interpret a stock quote
Explain the institutional use of stock markets
Describe the globalization of stock markets

4. Background on Common Stock
Common stock = certificate representing equity or partial ownership in a corporation
Issued in primary market by corporations that
need long-term funds
Stock is then traded in the secondary market, creating liquidity for investors and company
evaluation for managers

5. Background on Common Stock
Owners of common stock vote on:
Election of board of directors
Authorization to issue new shares
Amendments to corporate charter
Other major events
Many investor assign their vote to management via a proxy
Households own about half of all common stock, the rest is owned by institutional investors
Ownership and Voting Rights

6. Background on Preferred Stock
Represents equity or ownership interest, but usually no voting rights
Trade voting rights for stated fixed annual dividend
Dividend paid before common if dividends are declared by board of directors
Dividend may be omitted
Cumulative provision
If common dividend paid, preferred dividend fixed

7. Public Placement of Stock
Initial public offerings (IPOs)
First-time offering of shares to the public
Firm must provide information to public
Registration statement to SEC
Prospectus
Firm is assisted by an investment banker
Performance of IPOs
Price generally rises on first day
Longer-term performance of IPOs is poor

8. Public Placement of Stock
Secondary stock offerings
New stock issued by firm that already has shares outstanding
Shelf Registration
1982 SEC rule
Allows firms to place securities without the time lag associated with registering with SEC

9. Stock Secondary Markets
Execute secondary market transactions
Examples: NYSE, AMEX, Midwest, Pacific
NYSE is largest, controlling 80 percent of value of all organized exchanges
Must own a seat on exchange in order to trade
Trading resembles an auction
Organized Exchanges

10. Stock Secondary Markets
Over-the-Counter Market
No trading floor or specific location
Telecommunications network
Nasdaq
National Association of Securities Dealers Automatic Quotations
Thousands of small firms, plus high-tech giants
Pink sheets
Tiny firms that do not meet requirements for NASDAQ

11. Stock Secondary Markets
Trend: Consolidation of stock exchanges
Market microstructure
Specialists, floor brokers, and market-makers
Role of specialists
Types of orders
Market order
Limit order
Stop order

12. Stock Secondary Markets
Changes in technology
Online trading
Real-time quotes
Company information
Electronic Communications Networks (ECNs)
Margin requirements
Specify amount of borrowed versus amount in cash

13. Stock Secondary Markets
Purchasing stock on margin
Borrow a portion of the funds from broker
Margin is the amount of equity an investor provide
Magnifies returns (both good and bad)
Short sales
Borrow stock and sell
Repay stock loan, hopefully at a lower price
Investor able to have potential profit from decline in stock price

14. Regulation of Trading on Stock Exchanges
Securities Act Of 1933 and 1934
Securities And Exchange Commission
National Association Of Securities Dealers (NASD)
Regulate minimum information for investor and broker/dealer business practices
Circuit breakers

15. Stock Quotation Stock Quotation
52-week price range (high/low and YTD% change)
Stock symbol
Dividend annualized and dividend yield
Price-earnings ratio
Volume in round lots
Previous day’s price close and net daily change
Remainders in cents, not eighths

16. Exhibit 10.6 a YTD % change Hi Lo Stock Sym DIV Yld% PE V ol 100s Last
Net Chg 1
10.3
121.88
80.06
IBM
.56 .6 20
71979
93.77
1.06 Y
ear-to-date
Highest
Lowest
Name
Annual
Dividend
Price- T
rading
Closing
Change in the
percentage
price
of stock
Symbol
dividend
yield, which
earnings
volume
stock
change in
of the
paid per
represents
ratio based
during the
on the previ-
stock price
year
the annual
on the
previous
ous trading
in this
dividend as
prevailing
trading day
day from the
a percentage
close on the
of the pre-
day before
vailing stock a

17. Stock Indexes Dow Jones Industrial Average
Price-weighted average
30 large U.S. firms
Standard and Poor’s (S&P) 500
Value-weighted
500 large U.S. firms
New York Stock Exchange Indexes
Other Stock Indexes
Amex, NASDAQ

18. Stock Indexes Investing in stock indexes
Indexing
Has become very popular
Lower transactions costs
Studies find that actively-managed funds do not outperform stock indexes
Examples of publicly traded stock indexes
SPDRs
Diamonds

19. Stock Market Performance
Comparing stock performance to bond performance

20. Investor Trading Decisions
Stock value = proportional value of total company
Investor return = dividend yield + capital gain/loss
New information translated into trading decisions impacting supply/demand for shares
New equilibrium price established until new information appears

21. Exhibit 10.8 a Increased Demand for Security Reduced Supply of
for Sale
New
Favorable
Information
Disclosed
to Investors
Unfavorable
Increased V
aluation of
Security
by Investors
Reduced
Increase in
Equilibrium
(Market)
Price of
Security
Reduced
Demand for
Security
Increased
Supply of
for Sale
Decrease in
Equilibrium
(Market)
Price of
Security

22. Institutional Participation in Stock Markets
Program trading by institutions
Simultaneously buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million
Most commonly used by securities firms
Program refers to the use of computers
Impact on stock volatility
Often blamed for rise or fall in stock market
Studies show that program trading does not increase volatility

23. Investor Monitoring of Firms in the Stock Market
Shareholder activism
An investor who is dissatisfied with the way managers are running a firm has three choices:
Sell
Do Nothing
Flush!
Shareholder Activism

24. Investor Monitoring of Firms in the Stock Market
Communication with the firm
Effort to place pressure on management
Institutional investors
CALPERS
TIAA
Proxy contest
Shareholder lawsuits

25. Corporate Monitoring of Firms in the Stock Market
Market for corporate control
Stock price declines due to poor management
subject to possible takeover
Barriers to market for corporate control
Antitakeover amendments
Poison pills
Golden parachutes

26. Corporate Monitoring of Their Own Stock in the Stock Market
Stock repurchases
Dividend alternative or undervalued stock
Excessive cash relative to +NPV investments
Leveraged buyouts (LBO)
If managers believe the stock price undervalued, they may buy the outstanding shares with borrowed funds
Stock offerings
Signals overvalued shares

27. Globalization of Stock Markets
Barriers to international stock trading have decreased
Reduction in information costs
Reduction in exchange rate risk
Foreign stock offerings in the United States
International placement process
Global stock exchange characteristics
Emerging stock markets

28. Globalization of Stock Markets
Methods used to invest in foreign shares
Direct purchases
American Depository Receipts (ADRs)
International mutual funds
World equity benchmark shares

29. Globalization of Stock Markets
Global diversification and integration among stock markets
Integration of markets during the 1987 crash
All major stock markets declined, indicating the underlying cause systematically affected all markets
Integration of markets during mini-crashes
Example: August 27, 1998 “Bloody Thursday”
Russian financial crisis
Increased integration associated with increased financial technology, competition, and lessened government regulation