prentice-hall, inc.1 chapter 12 securities markets
TRANSCRIPT
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Chapter 12
Securities Markets
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Security Markets
The primary markets
Secondary markets -- stocks
Secondary markets -- bonds
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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.
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Secondary Markets
Trade previously owned shares of stock.
Consist of organized exchanges and an over-the-counter market.
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Secondary Markets: The Organized Exchanges
Are used to facilitate trading between investors
New York Stock Exchange (NYSE)American Stock Exchange (AMEX)Regional stock exchanges
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Regional Stock Exchanges
Pacific Stock ExchangeChicago Stock ExchangePhiladelphia Stock ExchangeCincinnati Stock Exchange Intermountain Stock ExchangeSpokane Stock ExchangeBoston Stock Exchange
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Make-up of the New York Stock Exchange
Over 200 years oldLimited to 1,366 seats since 1953;
highest price of a seat was $2.6 million.Over 3,000 listed companies$12.3 trillion (that’s 12 zeros) worth of
shares80% of typical trading volume
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Requirements for NYSE Listing, 1999
Profitability -- $2.5 million before tax earnings
Size -- $40.0 million net tangible assetsMarket value -- $40.0 million publicly
held stockPublic ownership -- 1.1 million publicly
held common shares
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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.
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Secondary Markets: Over-the-Counter (OTC) Market
Consists of an electronic network of dealers used to execute trades
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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
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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.
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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
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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.
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Regulation of the Securities Markets (cont’d)
Investment Advisors Act of 1940 – regulates advisor activity.
Investor Protection Act of 1970 -- (SIPC) provides investor insurance similar to FDIC bank deposit insurance.
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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.
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How Securities are Traded
Specialists Buy and sell orders Brokers Brokerage services Cash and margin
accounts
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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.
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Order Characteristics
Order sizes Time period for
which the order will remain outstanding
Order types
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Order Sizes
Round lots -- orders of 100 sharesOdd lots -- orders of 1 to 99 shares
Discretionary account: Broker authorized to make trades for you. Exercise caution, or avoid.
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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.
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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.
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Order Types (cont’d)
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.
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Short Selling -- Sell High and Buy Low
An almost reverse investment strategy which involves selling stock you don’t own and then buying it back later -- at a lower price.
Desirable when the market is expected to drop.
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Short Selling -- Sell High and Buy Low (cont’d)
Must meet margin requirement.Because you sold the broker’s stock,
you must repurchase the stock and you also must repay any dividends to the original owner.
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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
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Asset Management Account Brokerage firm
comprehensive financial services package:
Checking account Credit card and loans Money market mutual
fund Brokerage services
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Types of Brokerage Firms
Full service brokersDiscount service brokers – 50% to70%
discountDeep discount brokers – 90% discountOn-line discount and deep discount
brokers – Low cost, immediate trading
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Account Types
Cash accounts -- use your money to pay for the purchase in-full within 3 business days
Margin accounts -- use the brokerage firm’s money to purchase part of the stock. This can amplify both gains and losses.– Maintenance margin– Margin call
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Account Types (cont’d)
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.
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Accounts Types (cont’d)
Street name registration -- shares of stock remain in the broker’s 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
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Working With a BrokerRemember 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.
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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
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The Cost of Trading
Commissions Transaction fees Inactive account
fees Annual fees Maintenance fees
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On-line Trading
Cheap, easy trading, but do your investment homework.
For fast moving stocks, use limit orders not market orders.
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On-line Trading (cont’d)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.
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Day-trading Cautions
Be prepared for financial losses.Don’t confuse day trading with investing
– it’s speculating.Don’t believe claims of easy profits.Watch out for “hot tips” and “expert
advice” for day traders.
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Sources of Investment Information
Corporate sources of informationBrokerage firm reportsThe press
– The Wall Street Journal– Magazines– Investment publications
Internet sources Investment clubs
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SummaryPrimary securities markets
– Initial public offerings– Seasoned new issues
Secondary securities markets– New York Stock Exchange– American Stock Exchanges– Regional Exchanges– Over-the-counter markets
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Summary (cont’d)
Securities market regulationOrder 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
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Summary (cont’d)
Types of brokerage firms, services, and fees
Work with a broker or trade on-line?Day trading cautionsSources of investment information