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1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Nickels McHugh McHughNickels McHugh McHugh
**Securities Securities Markets: Markets:
Financing and Financing and Investing Investing
OpportunitiesOpportunities19
CH
AP
TE
R*
* *
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Functions ofFunctions of Securities MarketsSecurities Markets
• Long-Term Funding for Businesses
• Place to Buy/Sell Securities (Investments)
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Capital MarketsCapital Markets
• Primary Markets (IPO's)Primary Markets (IPO's)
• Secondary MarketsSecondary Markets
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Investment BankerInvestment Banker
• Assist Sale/Issue of Assist Sale/Issue of New SecuritiesNew Securities
• Underwrite issuesUnderwrite issues
• Sells to Institutional Sells to Institutional InvestorsInvestors
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• Coupon/Interest RateCoupon/Interest Rate
• Denomination ($1,000)Denomination ($1,000)
• PrincipalPrincipal
• Maturity DateMaturity Date
• ClassesClasses
• Unsecured/DebentureUnsecured/Debenture
• SecuredSecured
Bond MarketBond Market
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BondsBondsAdvantagesAdvantages
• No VoteNo Vote
• Interest is Tax-Interest is Tax-DeductibleDeductible
• Temporary Temporary Source of FundsSource of Funds
• Can be repaid Can be repaid before maturity before maturity with call with call provisionprovision
DisadvantagesDisadvantages
• Increase DebtIncrease Debt
• Legal Obligation Legal Obligation to Pay Interestto Pay Interest
• Repaid on Repaid on Maturity DateMaturity Date
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*** Special Bond FeaturesSpecial Bond Features
• Sinking FundSinking Fund
• CallableCallable
• ConvertibleConvertible
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Equity Financing
• Preferred or Common
• Investment never has to be repaid
• Not legally obligated to pay dividends
Debt Financing
• Secured or Debenture
• Must be repaid on maturity date
• Interest must be paid whenever specified
Debt vs. Equity FinancingDebt vs. Equity Financing
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What is Stock?What is Stock?
• OwnershipOwnership
• CertificateCertificate
• Par ValuePar Value
• DividendsDividends
• Common vs. PreferredCommon vs. Preferred
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StockStock
AdvantagesAdvantages
• No RepaymentNo Repayment
• No Legal ObligationNo Legal Obligation
• Does Not Create Does Not Create DebtDebt
DisadvantagesDisadvantages
• Voting RightsVoting Rights
• Dividends not Tax-Dividends not Tax-DeductibleDeductible
• Management Works Management Works to Keep Stockholders to Keep Stockholders HappyHappy
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Organized Organized Securities ExchangesSecurities Exchanges
• New York Stock New York Stock Exchange (NYSE)Exchange (NYSE)
• American Stock American Stock Exchange (AMEX)Exchange (AMEX)
• Over-the-Counter Over-the-Counter (OTC)(OTC)
• NASDAQNASDAQ
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Top European CompaniesTop European Companies by Market Valueby Market Value
0 50 100 150 200 250
Royal Bank of Scotland
Nestle
Sanofi-Aventis
Novartis
GlaxoSmithKline
Total
Vodafone
HSBC
Royal Dutch/Shell
BP
Source: Financial Times, March 7, 2005
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Own Stocks?Own Stocks?
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
'83 '89 '92 '95 '99 '02 '05
Source: USA Today
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Investment CriteriaInvestment Criteria
• RiskRisk
• YieldYield
• DurationDuration
• LiquidityLiquidity
• Tax ConsequencesTax Consequences
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Investing in BondsInvesting in BondsCorporate Corporate
BondsBondsMunicipal Municipal
BondsBondsUS Treasury US Treasury
BondsBonds
From 1 to 20 yearsFrom 1 to 20 years From 1 to 40 yearsFrom 1 to 40 years From 2 to 30 yearsFrom 2 to 30 years
TaxableTaxable
Exempt from federal Exempt from federal taxes and some taxes and some
state and local taxesstate and local taxes
Exempt from state Exempt from state
and local taxesand local taxes
May be riskier than May be riskier than government bonds, government bonds, but may have higher but may have higher
yieldsyields
Attractive to Attractive to
investors in high tax investors in high tax
bracketsbrackets
Government backing Government backing
provides maximum provides maximum
safetysafety
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Likelihood of Likelihood of Investing In BondsInvesting In Bonds
0% 5% 10% 15% 20% 25% 30% 35%
Mortgage-backed
Corporate
General
High-yield
Money markets
Government
Tax-free
Source: USA Today
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S & P’s Top Credit S & P’s Top Credit AAA-Rated Companies AAA-Rated Companies
1.1. Automatic Data ProcessingAutomatic Data Processing
2.2. Exxon MobilExxon Mobil
3.3. General ElectricGeneral Electric
4.4. Johnson & JohnsonJohnson & Johnson
5.5. PfizerPfizer
6.6. United Parcel ServiceUnited Parcel Service
Compared to having 32 Top Companies in
the ’80s
Source: Business Week, 2006
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Investing in StockInvesting in Stock
• Growth vs. IncomeGrowth vs. Income• Capital Gain vs. Capital Gain vs.
DividendDividend
• Blue Chip vs. PennyBlue Chip vs. Penny
• Market OrderMarket Order
• Limit OrderLimit Order
• Stock SplitStock Split
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How Stock Splits WorkHow Stock Splits Work100 shares of 100 shares of
ABC stock ABC stock selling at selling at
$80$80
100 shares @ 100 shares @ $40$40
100 shares @ 100 shares @ $40$40
100 shares 100 shares @ $45@ $45
100 shares 100 shares @ $45@ $45
2 for 12 for 1 Stock Split Stock Split
DeclaredDeclared
Lower Price Lower Price increases increases DemandDemand
Increased Increased demand demand
increases priceincreases price
How Much Profit Has Been How Much Profit Has Been Made?Made?
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Return From MostReturn From Most Widely Held StockWidely Held Stock
RankRank PricePrice One Year Total One Year Total ReturnReturn
General ElectricGeneral Electric $34.66$34.66 -2.2%-2.2%
MicrosoftMicrosoft 27.9727.97 4.14.1
PfizerPfizer 21.3521.35 -21.0-21.0
ExxonMobilExxonMobil 57.3857.38 17.017.0
Cisco SystemsCisco Systems 17.3717.37 -11.1-11.1
Johnson & JohnsonJohnson & Johnson 63.3463.34 5.65.6
IntelIntel 25.1125.11 4.64.6
CitigroupCitigroup 47.9447.94 7.67.6
Source: Money, January 2006
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Mutual FundsMutual Funds• Pool Investors’ Pool Investors’
MoneyMoney
• Best for Small Best for Small InvestorsInvestors
• Index FundIndex Fund
• DiversificationDiversification
• No-Load vs. LoadNo-Load vs. Load
• Open-End vs. Open-End vs. Closed-EndClosed-End
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Sales of Mutual Funds Worldwide
Q4, ’03Q4, ’03 Q2, ’04Q2, ’04 Q4, ‘04Q4, ‘04 Q2. ‘05Q2. ‘05
All FundsAll Funds $73$73 $22$22 $166$166 $166$166
EquityEquity 116116 7575 100100 6565
BondBond -4-4 -12-12 4343 4949
Money MarketMoney Market -67-67 -58-58 -10-10 **
Balanced/mixedBalanced/mixed 2323 44 2424 2626
OtherOther 55 1313 88 2525Source: USA Today, 10/16/2000
Source: Investors Business Daily, February 10, 2006
(In Billions)
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Types of InvestmentsTypes of Investments
TraditionalTraditional
• Stocks/BondsStocks/Bonds
• Gov’t Gov’t Securities/CDsSecurities/CDs
• Money Market or Money Market or Mutual FundsMutual Funds
• Real EstateReal Estate
High-RiskHigh-Risk• Stock on Stock on
MarginMargin
• Junk BondsJunk Bonds
• CommoditiesCommodities
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Components for OptimalComponents for Optimal Portfolio Performance Portfolio Performance
• DiversificationDiversification
• TimelinesTimelines
• Safety & RiskSafety & Risk
• Income & Total Income & Total ReturnReturn
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Do Corporations ProvideDo Corporations Provide Enough Information?Enough Information?
80%
15%
5%
NOYESNOT SURE
Source: USA Today
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How does Buying Stock How does Buying Stock on Margin work?on Margin work?
Step 1Step 1
An investor An investor wishes to wishes to buy 100 buy 100
shares at shares at $100 per $100 per
shareshare
Step 2Step 2
However, the However, the investor has investor has only $4,000 only $4,000 available to available to
investinvest
Step 3Step 3
The investor The investor finds he is finds he is able to buy able to buy the stock the stock
with a 40% with a 40% marginmargin
Step Step 44
The investor The investor puts up puts up
$4,000 and $4,000 and borrows borrows
$6,000 from $6,000 from the brokerthe broker
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Measures of InvestmentMeasures of Investment
• Stock QuotationsStock Quotations
• Bond QuotationsBond Quotations
• Mutual Fund QuotationsMutual Fund Quotations
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Stock QuotesStock Quotes
• % Change in YTD Price% Change in YTD Price
• High/Low PriceHigh/Low Price
• Company Name & Stock SymbolCompany Name & Stock Symbol
• Last Dividend Per ShareLast Dividend Per Share
• Dividend YieldDividend Yield
• P/E RatioP/E Ratio
• # of Shares Traded# of Shares Traded
• Closing PriceClosing Price
• Net Change- PriceNet Change- Price
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Mutual Fund QuotationsMutual Fund Quotations
• Fund NameFund Name
• Net Asset Value Net Asset Value (NAV)(NAV)
• Net Change in Net Change in NAVNAV
• YTD ReturnYTD Return
• Long-Term Long-Term ReturnReturn
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***Original 12 Dow Stocks (1896)Original 12 Dow Stocks (1896)
• American Cotton OilAmerican Cotton Oil
• American Sugar American Sugar Refining Co.Refining Co.
• American TobaccoAmerican Tobacco
• Chicago GasChicago Gas
• Distilling & Cattle Distilling & Cattle Feeding Co.Feeding Co.
• General Electric Co.General Electric Co.
• Laclede Gas Light Laclede Gas Light Co.Co.
• National LeadNational Lead
• North American Co.North American Co.
• Tennessee Coal, Iron, Tennessee Coal, Iron, & Railroad Co.& Railroad Co.
• U.S. LeatherU.S. Leather
• U.S. Rubber Co.U.S. Rubber Co.
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How MuchHow Much Have They Grown?Have They Grown?
19551955 2003/20042003/2004
S&P 500S&P 500 45.4845.48 1126.21(’04)1126.21(’04)
NYSENYSE $207.7 Billion$207.7 Billion $17.8 Trill (’03)$17.8 Trill (’03)
Mutual Mutual Fund Fund IndustryIndustry
1 Million1 Million 250 Mill (’03)250 Mill (’03)
100100 8,0008,000
$2.5 Billion$2.5 Billion $7 Trill$7 Trill
accounts
funds
assets
Source: Fortune, 2004
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What Adults Believe AboutWhat Adults Believe About Wall Streets’ Key PlayersWall Streets’ Key Players
40 45 50 55 60 65 70 75
Essential to theEconomy
Only Want to Make $
Most Firms Would Breakthe Law to Make More $
Dominated by Greed
Most are Honest
Successful OnesDeserve High Pay
Good for USA
% Adults That % Adults That Agree With the Agree With the
StatementStatement
Source: Source: USA Today
