1. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold Securities are usually exchanged with the help of an account executive or stockbroker The primary market –A market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities Investment banking firm—an organization that assists corporations in raising funds, usually by helping sell new issues of stocks, bonds, or other financial securities High-risk investment—an investment (e.g., an IPO) made in the uncertain hope of earning a relatively large profit in a short time 20 | 1

2. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold (cont’d) The secondary market –A market for existing financial securities that are traded between investors –Securities exchange—a marketplace where member brokers meet to buy and sell securities New York Stock Exchange (NYSE), American Stock Exchange, regional exchanges, foreign exchanges –Over-the-counter (OTC) market—a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange Nasdaq—computerized electronic exchange system through which most over-the-counter stocks are traded 20 | 2

3. Copyright © Cengage Learning. All rights reserved Criteria a Firm Must Meet Before Being Listed on the NYSE Source: New York Stock Exchange, www.nyse.com, February 9, 2003. 20 | 3

4. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold (cont’d) The role of an account executive –An individual, sometimes called a stockbroker or registered representative, who buys and sells securities for clients Full-service broker—provides personal investment advice and other market and investing information Discount broker—simply executes buy and sell orders for lower commissions than a full-service broker; does not offer advice 20 | 4

5. Copyright © Cengage Learning. All rights reserved Steps in a Typical Stock Transaction on the NYSE 20 | 5

6. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold (cont’d) The mechanics of a transaction –Market order A request that a security be purchased or sold at the current market price –Limit order A request that a security be bought or sold at a price that is equal to or better than some specified price –Discretionary order An order to buy or sell a security that lets the broker decide when to execute the transaction and at what price 20 | 6

7. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold (cont’d) Online security transactions –Software can help investors evaluate potential investments, manage investments, monitor value, and place buy and sell orders online –Investors must still analyze the information and make decisions –Online trading generally has lower costs –Program trading—a computer-driven program that monitors the market value of particular stocks and enters buy or sell orders when those stocks reach specified prices 20 | 7

8. Copyright © Cengage Learning. All rights reserved How Securities Are Bought and Sold (cont’d) Commissions –Most brokerage firms have a minimum commission –Additional commission charges are based on the number of shares and the value of stock bought and sold –Generally, online transactions are less expensive when compared to trading through a full-service brokerage firm –Full-service brokerages charge a percentage of the transaction amount (as much as 1.5 to 2.0%) –Commissions for bonds, commodities, and options are lower than for stocks 20 | 8

9. Copyright © Cengage Learning. All rights reserved Typical Commission Costs 20 | 9 Source: TD Ameritrade website, www.tdameritrade.com, accessed October 23, 2008.

10. Copyright © Cengage Learning. All rights reserved Regulation of Securities Trading A regulatory pyramid of four different levels exists to make sure investors are protected –1 st level: Federal regulation by the U.S. Congress Securities Act of 1933 (Truth in Securities Act) Provides for full disclosure Requires registration statement about the corporation and a prospectus describing the new security Legislation to curb insider trading Sarbanes-Oxley Act –2 nd level: Securities and Exchange Commission (SEC) The agency that enforces federal securities regulations –3 rd level: State regulation States require registration of stock issues and licensing of brokers and securities dealers 20 | 10

11. Copyright © Cengage Learning. All rights reserved Regulation of Securities Trading (cont’d) A regulatory pyramid of four different levels exists to make sure investors are protected (cont’d) –4 th level: Self-regulation by securities exchanges and brokerage firms NYSE has published rules, policies, and standards of conduct Standards apply to every member Each member firm the NYSE conducts business with is examined yearly Individual brokerage firms are responsible to ensure their employees are highly trained and meet rigorous ethical standards 20 | 11