Securities Markets

1
Chapter 12

• Securities Markets

2
Security Markets

• The primary markets
• Secondary markets -- stocks
• Secondary markets -- bonds

3
The Primary Market -- Two Forms of Issues

• Initial public offerings (IPO) -- the very first
  shares ever issued by a company.
• Seasoned new issues -- new shares being issued by
  a company that is already publicly traded.
• Investment bankers serve as underwriters.

4
Secondary Markets

• Trade previously owned shares of stock.
• Consist of organized exchanges and an
  over-the-counter market.

5
Secondary Markets The Organized Exchanges

• Are used to facilitate trading between investors
• New York Stock Exchange (NYSE)
• American Stock Exchange (AMEX)
• Regional stock exchanges

6
Regional Stock Exchanges

• Pacific Stock Exchange
• Chicago Stock Exchange
• Philadelphia Stock Exchange
• Cincinnati Stock Exchange
• Intermountain Stock Exchange
• Spokane Stock Exchange
• Boston Stock Exchange

7
Make-up of the New York Stock Exchange

• Over 200 years old
• Limited to 1,366 seats since 1953 highest price
  of a seat was 2.6 million.
• Over 3,000 listed companies
• 12.3 trillion (thats 12 zeros) worth of shares
• 80 of typical trading volume

8
Requirements for NYSE Listing, 1999

• Profitability -- 2.5 million before tax earnings
• Size -- 40.0 million net tangible assets
• Market value -- 40.0 million publicly held stock
• Public ownership -- 1.1 million publicly held
  common shares

9
Make-up of the American Stock Exchange

• 600 seats
• 780 firms listed
• Trading only 3 of the volume of the NYSE.
• Daily dollar trading less than some regional
  exchanges.

10
Secondary Markets Over-the-Counter (OTC) Market

• Consists of an electronic network of dealers used
  to execute trades

11
Secondary Markets Over-the-Counter (OTC) Market

• Trades executed by
• Pink sheets
• National Association of Securities Dealer
  Automated Quotations System (NASDAQ)
• National Market System (NASDAQ/NMS)
• Handles 35,000 smaller, less frequently traded
  securities with no listing requirements

12
Secondary Markets -- Bonds

• No organized secondary bond market, as little
  demand among individual investors.
• Individual investors must work through a broker,
  who buys or sells with a bond dealer.
• Government bond trading is dominated by
  investment houses, commercial banks, and the
  Federal Reserve.

13
International Markets

• International bond market exceeds 25 trillion
• To buy international stocks
• NYSE, AMEX, NASDAQ trade some companies
• Trade American depository receipts (ADRs) --
  international shares are held on deposit by
  foreign banks and the ADRs are sold to investors
  as a representative ownership of the shares
• Invest directly through www.intltrader.com

14
Regulation of the Securities Markets

• Securities and Exchange Commission (SEC)
  regulation.
• Securities Act of 1933 -- requires disclosure of
  relevant information in a timely manner.
• Securities Exchange Act of 1934 -- established
  the SEC.

15
Regulation of the Securities Markets (contd)

• Investment Advisors Act of 1940 regulates
  advisor activity.
• Investor Protection Act of 1970 -- (SIPC)
  provides investor insurance similar to FDIC bank
  deposit insurance.

16
Self-Regulation

• Circuit breakers -- triggers that momentarily
  stop trading to prevent disastrous market slides.
• Insider trading and market abuses
• insider trading -- use of non-public information
  for personal gain in the market
• churning -- excessive trading without benefit to
  the client used to increase commissions.

17
How Securities are Traded

• Specialists
• Buy and sell orders
• Brokers
• Brokerage services
• Cash and margin accounts

18
Role of the Specialist in an Organized Exchange

• To maintain order in the market. To reduce
  fluctuation, NYSE specialists represent almost
  20 of the share volume traded.
• To track and process buy and sell orders.
• To maintain an inventory of assigned stock.
• To maintain bid and ask prices of their assigned
  stock.

19
Order Characteristics

• Order sizes
• Time period for which the order will remain
  outstanding
• Order types

20
Order Sizes

• Round lots -- orders of 100 shares
• Odd lots -- orders of 1 to 99 shares
• Discretionary account Broker authorized to make
  trades for you. Exercise caution, or avoid.

21
Time Period the Order Will Remain Outstanding

• Day orders -- good until the end of the trading
  day.
• Open orders (GTC) -- good until filled or
  canceled.
• Fill or kill orders -- must be filled or canceled
  immediately.

22
Order Types

• Market orders -- an order to sell or buy a
  specific number of shares at the best available
  price.
• Limit orders -- an order to sell or buy a
  specific number of shares at a certain price or
  better.

23
Order Types (contd)

• Stop (or stop-loss) orders -- an order to sell a
  specific number of shares if the stock falls
  below a certain price or buy a specific number of
  shares if the stock rises above a certain price.
• Use care to set prices to safeguard against major
  fluctuations.

24
Short Selling -- Sell High and Buy Low

• An almost reverse investment strategy which
  involves selling stock you dont own and then
  buying it back later -- at a lower price.
• Desirable when the market is expected to drop.

25
Short Selling -- Sell High and Buy Low (contd)

• Must meet margin requirement.
• Because you sold the brokers stock, you must
  repurchase the stock and you also must repay any
  dividends to the original owner.

26
Dealing with Brokers

• Brokerage accounts
• Types of brokers choosing one
• Cash versus margin accounts
• Registration street name or your name
• Joint accounts
• Brokers and individual investors
• The cost of trading
• On-line trading

27
Asset Management Account

• Brokerage firm comprehensive financial services
  package
• Checking account
• Credit card and loans
• Money market mutual fund
• Brokerage services

28
Types of Brokerage Firms

• Full service brokers
• Discount service brokers 50 to70 discount
• Deep discount brokers 90 discount
• On-line discount and deep discount brokers Low
  cost, immediate trading

29
Account Types

• Cash accounts -- use your money to pay for the
  purchase in-full within 3 business days
• Margin accounts -- use the brokerage firms money
  to purchase part of the stock. This can amplify
  both gains and losses.
• Maintenance margin
• Margin call

30
Account Types (contd)

• Automated Clearing House (ACH) Network --
  electronic payment system among 14,000 financial
  institutions that can be linked to your brokerage
  firm. Cheap, convenient, fast payment.

31
Accounts Types (contd)

• Street name registration -- shares of stock
  remain in the brokers custody. May be charged
  maintenance fee for dormant accounts.
• Joint accounts -- shares owned with a spouse or
  partner
• Joint tenancy with the right of survivorship
• Tenancy-in-common

32
Working With a Broker

• Remember Axiom 12 The Agency Problem in
  Personal Finance.
• Do your homework and take responsibility.
• Keep transaction costs to a minimum.
• Use a discount broker or consider mutual funds.
• For bonds, go full service or buy direct.

33
Choosing a Broker

• Integrity, intelligence, and efficiency
• Experience in both up- and down-markets
• Someone who understands your investment
  philosophy
• Reputation for allowing customers to say no
  without undue pressure
• Up front regarding costs and commissions

34
The Cost of Trading

• Commissions
• Transaction fees
• Inactive account fees
• Annual fees
• Maintenance fees

35
On-line Trading

• Cheap, easy trading, but do your investment
  homework.
• For fast moving stocks, use limit orders not
  market orders.

36
On-line Trading (contd)

• Make sure all cancellations were processed.
• If your account falls below the maintenance
  margin requirement, your securities can be sold
  without a margin call.
• No regulations govern the time for executing a
  trade.

37
Day-trading Cautions

• Be prepared for financial losses.
• Dont confuse day trading with investing its
  speculating.
• Dont believe claims of easy profits.
• Watch out for hot tips and expert advice for
  day traders.

38
Sources of Investment Information

• Corporate sources of information
• Brokerage firm reports
• The press
• The Wall Street Journal
• Magazines
• Investment publications
• Internet sources
• Investment clubs