Securities Markets

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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-2

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

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

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-3

Securities Markets
Securitiesstocks and bondsare issued by corporations to raise money.
Securities Marketsa place where you buy and sell securitiesprimary and secondary markets. After the initial issue, securities are traded among investors.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-4

Primary Markets
Place where new securities are traded. Initial public offering (IPO) Seasoned new issues

Investment Banker
Underwriter

Tombstone advertisement
Prospectus
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-5

Figure 12.1

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-6

Figure 12.2

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-7

Secondary MarketsStocks
Markets in which previously issued

securities are traded.

Organized exchangea physical location

where stocks trade.

Over-the-counter markettransactions

conducted over phone or computer.

Regional stock exchanges

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-8

Secondary Markets - Stocks

New York Stock Exchange (NYSE)

American Stock Exchange (AMEX)

Over-the-Counter (OTC) Market
Bid price
Ask price

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-9

Table 12. 1

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-10

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.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-11

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.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-12

Figure 12.3

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-13

Regulation of the Securities 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 abuses
churning
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-14

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

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-15

The Role of the Specialist

Continuous marketsmarkets in which trading can occur at any time, with prices free to fluctuate as trading occurs.
Specialistan exchange member who oversees the trading in one or more stocksto maintain a fair and orderly market.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-16

Order Characteristics
Order Size
Odd lots Round lots

Time Period for Which the Order Will Remain Outstanding

Day orders Open orders or Good-till-cancelled (GTC) orders

Discretionary account

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-17

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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-18

Short Selling
Short selling the more the price drops,

the more money your make.

Borrow stock from the broker and then sell it. Margin requirementcollateral 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.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-19

Figure 12.4

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-20

Dealing with Brokers

Most common way to purchase stock is through stockbrokerlicensed to buy or sell stocks for others.
Brokerage Accounts
Asset Management Accounts

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-21

Types of Brokers
Full-Service Brokers or Account Executivepaid commissions based on sales volume.
Discount and Online Brokersexecute trades but do not provide advice. Premium discount brokers
Deep discount brokers

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-22

Cash Versus Margin Accounts

Cash Accounts Margin Accounts

Margin or Initial Margin

Maintenance margin Margin call
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-23

Checklist 12.1

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-24

Registration: Street Name or Your Name

Securities can be registered in your name or street name. Street Name registered securities remain in

the brokers 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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-25

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 deceaseds portion of the account goes to the heirs of the deceased, not the surviving account holder.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-26

Choosing a Broker
Using a full-service brokerpersonal service and advice but for higher price.
Using a discount brokerkeep transaction costs down because cost 10 to 20 times less personal service but some offer free research reports. Making the decision
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-27

Checklist 12.2

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-28

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
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-29

Online Trading
Day traderstrade, generally on internet,

with a very short-term time horizon.

Be prepared to suffer severe financial losses. Dont confuse day trading with investing. Dont believe claims of easy profits. Watch out for hot tips or expert advice.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-30

Checklist 12.3

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-31

Sources of Investment Information

Corporate Sources
Brokerage Firm Reports The Press Investment Advisory Services

Internet Sources
Investment Clubs
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-32

Figure 12.5

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-33

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.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-34

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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-35

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

12-36