1. PowerPoint Presentation by Charlie Cook Copyright © 2005 Prentice Hall, Inc. All rights reserved. Chapter 15 Understanding Securities and Investments

2. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–2 Key Topics Primary and secondary securities markets Common and preferred stock Various types of bonds Mutual funds and commodities Buying and selling securities Regulation of securities markets

3. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–3 Securities: Stocks and Bonds Holders of stocks and bonds have a stake in the company that issued them.  Stocks: An ownership stake  Bonds: A financial stake Primary Securities Market Secondary Securities Market

4. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–4 Investment Banks Help Bring New Securities to the Market They advise companies on the timing and financial terms of new issues. They underwrite—or buy—new securities, bearing some of the risks of issuing them. They distribute new securities through banks and brokers to individual investors. New securities must be approved by the SEC!

5. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–5 Common Stock: High Risk, High Potential Return Par Value  The face value of a share of stock at the time it is originally issued Market Value  The current price of a share in the stock market Book Value  Stockholder’s equity divided by the number of shares

6. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–6 Blue Chip Stocks : A Changing Perspective? “Old” Economy  Established firm  Sound financial history  Stable pattern of dividends “New” Economy  Rapid growth in market value

7. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–7 Preferred Stock: Lower Risk, Lower Potential Return Fixed dividend First claim on assets No voting rights Possible features:  Callable  Cumulative

8. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–8 Stock Exchanges: Institutional Settings for Trading Stocks Brokers  Full service brokers  Discount brokers  On-line trading

9. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–9 New York Stock Exchange Foreign Stock Exchanges American Stock Exchange Over-the- Counter Market Regional Stock Exchanges Nasdaq and NASD The Major Exchanges and the OTC Market

10. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–10 Bonds Represent a promise by the issuer to pay the buyer a certain amount of money by a specified future date.  U.S. Government Bonds  Municipal Bonds  Corporate Bonds Nearly all secondary trading in bonds occurs in the OTC market.

11. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–11 Bearer Bonds Debentures Registered Bonds Secured Bonds Types of Bonds

12. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–12 Mutual Funds: Pooled Investments Mutual funds control about 20% of the stock market, but new cash inflows dropped 90% in 2001  Load Funds  No-Load Funds Source: Stock Fund Inflows Plunge 90% in 2001, Los Angeles Times, C1, January 31, 2002

13. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–13 The S&P 500 The Nasdaq Composite Dow Jones Industrial Average Market Indexes

14. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–14 Investing in the Securities Markets Placing Orders  Market Order  Limit Order  Stop Order  Round Lot  Odd Lot Financing Choices  Margin Trading  Short Sales High risk alert!

15. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–15 Securities Market Regulation Self-Regulation  Circuit breakers Securities and Exchange Commission  Prospectuses  Insider trading State Government Regulation  Blue Sky laws

16. Copyright © 2005 Prentice Hall, Inc. All rights reserved.15–16 Chapter Review Explain the difference between primary and secondary securities markets. Discuss common and preferred stock. Distinguish among the various types of bonds. Describe mutual funds and commodities. Explain the buying and selling process for securities. Explain securities market regulation.