securities markets. 12-2 copyright © 2010 pearson education, inc. publishing as prentice hall...

Securities Markets

12-2Copyright © 2010 Pearson Education, Inc.  Publishing as Prentice Hall

Learning Objectives

1. Identify and describe the primary and secondary securities markets.

2. Trade securities using a broker.

3. Locate and use several different sources of investment information to trade securities.

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Introduction

One way to improve changes of success is to understand how the securities markets work.

Success cannot be guaranteed—but the first step to becoming rich through a great investment is learning how to make that investment.

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Securities Markets

Securities—stocks and bonds—are issued by corporations to raise money.

Securities Markets—a place where you buy and sell securities—primary and secondary markets.

After the initial issue, securities are traded among investors.

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Primary Markets

Place where new securities are traded.

Initial public offering (IPO)

Seasoned new issues

Investment Banker

Underwriter

Tombstone advertisement

Prospectus

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Secondary Markets—Stocks

Markets in which previously issued securities are traded.

Organized exchange—a physical location where stocks trade.

Over-the-counter market—transactions conducted over phone or computer.

Regional stock exchanges

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Secondary Markets - Stocks

New York Stock Exchange (NYSE)American Stock Exchange (AMEX)

Over-the-Counter (OTC) MarketBid priceAsk price

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Secondary Markets - Bonds

Tend to be for smaller, individual investors.

Some bonds trade at the NYSE, most trading by bond dealers deal directly with large financial institutions.

Small investors access bond dealers through broker

Volume of trading for government bonds is enormous dominated by Federal Reserve, commercial banks, financial institutions.

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International Markets

Around for centuries.

Some foreign shares traded on exchanges in the U.S.

American Depository Receipt (ADR)

International stocks can be traded through ADRs.

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Regulation of theSecurities Markets

Aimed at protecting investors so that all have a fair chance of making money.

Securities and Exchange Commission (SEC)

Self-regulation

Insider trading and market abuseschurning

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How Securities Are Traded

Examine the different types of trades and trading mechanisms.

Refer to all securities as stocks as most common but trading mechanisms apply to different securities

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The Role of the Specialist

Continuous markets—markets in which trading can occur at any time, with prices free to fluctuate as trading occurs.

Specialist—an exchange member who oversees the trading in one or more stocks—to “maintain a fair and orderly market”.

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Order CharacteristicsOrder Size

Odd lotsRound lots

Time Period for Which the Order Will Remain OutstandingDay ordersOpen orders or Good-till-cancelled (GTC) ordersDiscretionary account

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Types of Orders

Market Orders – buy or sell immediately at the best price available.

Limit Orders – trade is to be made only at a certain price or better.

Stop Orders or Stop-Loss Order – order to sell if the price drops below a specified level or to buy if the price climbs above a specified level.

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Short Selling Short selling – the more the price drops,

the more money your make.

Borrow stock from the broker and then sell it.

Margin requirement—collateral

Sell high and later buy low and return stock to broker.

If price increases, you buy back for more than the sold price, and lose money.

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Dealing with Brokers

Most common way to purchase stock is through stockbroker—licensed to buy or sell stocks for others.

Brokerage AccountsAsset Management Accounts

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Types of Brokers

Full-Service Brokers or Account Executive—paid commissions based on sales volume.

Discount and Online Brokers—execute trades but do not provide advice. Premium discount brokersDeep discount brokers

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Cash Versus Margin Accounts

Cash Accounts

Margin Accounts

Margin or Initial Margin

Maintenance margin

Margin call

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Registration: Street Nameor Your Name

Securities can be registered in your name or “street name.”

Street Name – registered securities remain in the broker’s custody and are a computer entry in your name. More convenient to sell.May have maintenance fee for inactivity.

Avoid fee by registering stock in your name.

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Joint Accounts

Joint Tenancy with Right of Survivorship – when one owner dies, the other receives full ownership of assets in the account.

Tenancy-in-Common Account – the deceased’s portion of the account goes to the heirs of the deceased, not the surviving account holder.

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Choosing a Broker

Using a full-service broker—personal service and advice but for higher price.

Using a discount broker—keep transaction costs down because cost 10 to 20 times less personal service but some offer free research reports.

Making the decision

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The Cost of Trading

Sales commission to buy stock.

Commission to sell stock.

Transaction fee

Annual fee for inactive accounts

Use discount broker for large purchases

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Online Trading

Day traders—trade, generally on internet, with a very short-term time horizon.

Be prepared to suffer severe financial losses.

Don’t confuse day trading with investing.

Don’t believe claims of easy profits.

Watch out for “hot tips” or “expert advice.”

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Sources of Investment Information

Corporate Sources

Brokerage Firm Reports

The Press

Investment Advisory Services

Internet Sources

Investment Clubs

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Summary

Primary securities markets is where new securities are sold.

Previously issued securities are traded in the secondary markets which can be organized exchanges.

Investors must specify time period for orders in day orders, open orders, or fill-or-kill orders.

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Summary

Short selling involves borrowing stocks from a broker, selling high and buying back low, making a profit, and returning the stocks to the broker.

Be careful on where you get information to make investment decisions.

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