2. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Financial Markets: Allocating Financial Resources Explain the role of financial markets in the U.S. economy and identify the key players in these markets Identify the key laws that govern the way financial markets operate and explain the impact of each law Describe and compare the major types of securities that are traded in securities markets 2 10-1 10-2 10-3

3. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Financial Markets: Allocating Financial Resources Explain how securities are issued in the primary market and traded on secondary markets Compare several strategies that investors use to invest in securities Interpret the information provided in the stock quotes available on financial websites 3 10-4 10-5 10-6

4. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Markets and the U.S. Economy ￭ Financial markets: Transfer funds from savers to borrowers ￭ Depository institutions: Obtain funds by accepting checking and savings deposit and lending those funds  Commercial banks  Credit unions  Savings and loan associations 4

5. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Markets and the U.S. Economy ￭ Nondepository financial institutions  Institutional investors: Amass financial capital and acquire a portfolio of different assets  Securities brokers: Agents for investors who want to trade in financial securities  Securities dealers: Buy and sell stocks and bonds for their own account  Investment banks: Help firms issue new securities to raise financial capital 5

6. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Web-link: Non-Depository Institution Supervision Database ￭ This link gives details on non-depository institution supervision database explained by the Consumer Financial Protection Bureau http://www.consumerfinance.gov/privacy- office/non-depository-institution- supervision-database/ 6

7. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Markets: Key Laws and Impacts Federal Reserve Act of 1913 Created Federal Reserve System to serve as the central bank in the United States Primary responsibility of overseeing the nation’s banking system Banking Act of 1933 Or the Glass-Steagall Act established the Federal Deposit Insurance Corporation Insured depositors against financial losses when a bank failed Banned commercial banks from competing with nondepository institutions 7

8. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Markets: Key Laws and Impacts Securities Act of 1933 Dealt mainly with the process of issuing new securities Required firms issuing new stock in a public offering to file a registration statement with the SEC Securities Exchange Act of 1934 Regulated the trading of previously issued securities Securities and Exchange Commission: Oversee the securities industry 8

9. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Deregulation During the 1980s and 1990s ￭ Financial Services Modernization Act of 1999  Reversed the Glass-Steagall Act’s prohibition of banks selling insurance or acting as investment banks  Known as the Gramm-Bliley-Leach Act 9

10. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Re-regulation in the Aftermath of Financial Turmoil Sarbanes-Oxley Act in 2002 Ensured that external auditors offered fair opinions while examining a company’s financial statements SEC’s authority was increased to regulate financial markets Dodd-Frank Act of 2010 Expanded the Fed’s regulatory authority over nondepository financial institutions Established the Financial Stability Oversight Council to identify emerging risks 10

11. Reality TV Video Slide 11 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. www.cengage.com/introbusiness/book_content/97812 85187822_kelly/videos/10wallstreetwarriors.html

12. © iStockphoto.com / DNY59 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ￭ What is the fundamental role of a hedge fund, and how do the activities of the individuals featured in the video contribute to fulfilling that role? ￭ Why should wealthy investors be concerned about putting their money into a hedge fund? 12

13. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets: An Overview ￭ Common stock: Basic form of ownership in a corporation  Voting rights  Right to dividends  Capital gains: Received when the price of the stock goes over the amount paid for it  Preemptive right  Right to a residual claim on assets 13

14. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets: An Overview ￭ Preferred stocks - Holders get preferential treatment  Claim on assets  Payment of dividends  Can be cumulative  Company’s stronger earnings do not ensure greater gains for the holder 14

15. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets: An Overview ￭ Bonds - Formal IOU issued by a corporation or government entity  Maturity date: Date a bond comes due  Par value: Amount at maturity  Coupon rate: Annual interest payment as a percentage of the bond’s par value  Current yield: Bond’s interest payment as a percentage of the bond’s current market price rather than its par value 15

16. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Securities Markets: An Overview ￭ Convertible securities - Shares of preferred stock that investors exchange for a number of shares of the issuing corporation’s common stock  Conversion ratio - Number of common stock shares exchanged for each security ￭ Financial diversification: Holding many different securities in different sectors 16

17. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mutual Funds 17 Issues a fixed number of shares and invests the money received from selling them in a portfolio of assets Closed-end fund Issues additional shares when demand increases or redeems old shares when investors cash in Based on net asset value per share Open-end mutual fund

18. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exchange Traded Funds ￭ Allows investors to buy ownership in a market basket of many different securities  Market basket - Reflects the composition of a broad-based stock index 18

19. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Primary Securities Market ￭ Corporations raise additional financial capital by selling newly issued securities ￭ Public offering: Securities sold to the investing public  Initial public offering: First time a corporation sells its stock in a public offering  Underwrite: Investment bank purchases all the shares at a specified price guaranteeing the firm new funds 19

20. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Primary Securities Market  Registration statement: Firm’s statement with the SEC on its financial statements ￭ Private placement: Securities sold to one or more accredited investors  Accredited investors: Individuals or other organizations that meet specific financial requirements set by the SEC  Under terms negotiated between the issuing firm and the private investors 20

21. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Secondary Securities Markets 21 Organized venue to trade listed stocks and securities Market makers: Securities dealers who continuously buy and sell specific NASDAQ-listed stocks with an ask-price and bid-price Stock exchange Where securities that are not listed on exchanges are traded Over-the-counter market Entirely automated and computerized trading systems that allow traders to bypass the market makers used in the NASDAQ and OTC markets Electronic Communications Networks

22. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing a Broker Perform market research, investment advice, and tax planning Full service broker Provide basic services needed to trade in securities Offer fewer additional services Discount brokers 22

23. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Buying Securities ￭ Market orders: Instruct brokers to buy or sell a security at the current market price ￭ Limit orders: Limits the prices at which orders are executed  Buy limit order - Buying at a specified value  Sell limit order - Selling at a specified value 23

24. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How to Invest In Securities? Focus on buying bonds and preferred stocks Investing for income Use of analytical techniques to predict fall/rise in prices of specific stocks Market timing Find stocks that are undervalued in the market, to generate a capital gain Value investing Look for companies that have the potential to grow leading to a steady rise in price Investing for growth Purchasing diversified securities and holding them for a long period of time Buying and holding 24

25. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Market Trends and Performance Tracking ￭ Stock index: Tracks prices of a large group of stocks that meet defined criteria  Dow Jones Industrial Average (DJIA): Adjusted average price of 30 stocks picked by the editors of The Wall Street Journal  Standard & Poor’s 500: With 500 stocks it is a much broader index than the DJIA 25

26. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Market Trends and Performance Tracking ￭ To check out a specific stock, type its stock symbol into a “Get Quote” box  Last trade - Price of firm’s common stock for the most recent trade  Change - Last trade of the firm’s stock  Bid and ask - Highest/lowest price currently offered to buy/sell the firm’s stock  Day’s range - Highest stock price during the day  Market Cap - Total market value of all shares 26

27. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Market Trends and Performance Tracking  52-week range - Highest price for the stocks over the previous 52 weeks  Volume - Shares of the stock that have been traded in the current trading session  Price-to-earnings ratio - Divide the stock’s price per share by its earnings per share  Earnings per share - Divide net income by the number of shares outstanding  Div and yield - Sum of dividends paid by the firm in the previous 12 months 27

28. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Explain the role of financial markets in the U.S. economy and identify the key players in these markets Identify the key laws that govern the way financial markets operate and explain the impact of each law Describe and compare the major types of securities that are traded in securities markets 28 10-1 10-2 10-3

29. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Explain how securities are issued in the primary market and traded on secondary markets Compare several strategies that investors use to invest in securities Interpret the information provided in the stock quotes available on financial websites 29 10-4 10-5 10-6