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
Makeup 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 100.0 million publicly held stock
• Public ownership 1.1 million publicly held
  common shares
• 2,000 holders of 100 or more shares

9
Makeup of the American Stock Exchange

• 660 seats
• 800 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 CharacteristicsSizes

• 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 these
  types of arrangements.

21
Order CharacteristicsTime Period 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 CharacteristicsTypes

• Market order an order to sell or buy a specific
  number of shares at the best available price
• Limit order an order to sell or buy a specific
  number of shares at a certain price or better
• Stop (or stop-loss) order 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

23
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
• 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

24
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

25
Asset Management Account

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

26
Types of Brokerage Firms

• Full service brokers
• Discount service brokers 50 to 70 discount
• Deep discount brokers 90 discount
• On-line discount and deep discount brokers low
  cost, immediate trading

27
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

28
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.

29
Accounts Types (contd)

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

30
Working With a Broker

• Remember Principle 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.

31
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
• Upfront regarding costs and commissions

32
The Cost of Trading

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

33
On-line Trading

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

34
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.

35
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.

36
Sources of Investment Information

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

37
Summary

• Primary securities markets
• Initial public offerings
• Seasoned new issues
• Secondary securities markets
• New York Stock Exchange
• American Stock Exchange
• Regional Exchanges
• Over-the-counter markets

38
Summary (contd)

• Securities market regulation
• Order size, duration, and type
• Round lots and odd lots
• Day, GTC, or fill-or-kill orders
• Market, limit, and stop orders
• Cash or margin accounts

39
Summary (contd)

• Types of brokerage firms, services, and fees
• Work with a broker or trade on-line?
• Day trading cautions
• Sources of investment information