Chapter 12

Securities Markets

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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 guaranteedbut the first step to becoming rich through a great investment is learning how to make that investment.

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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.

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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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Figure 12.1 Five Best and Worst IPOs of 2010

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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

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Secondary Markets - Stocks

New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Over-the-Counter (OTC) Market Bid price Ask price

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Table 12.1 Initial Listing Requirements for the NYSE, 2011

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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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Figure 12.2 The World Stock Market

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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

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The Role of the Specialist in Securities Trading

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.

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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

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Types of Orders
Market Ordersbuy or sell immediately at the best price available. Limit Orderstrade is to be made only at a certain price or better. Stop Orders or Stop-Loss Orderorder 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 sellingthe 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.
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Figure 12.3 Profits from Purchasing Versus Selling Short

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Dealing with Brokers

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

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Types of Brokers
Full-Service Brokers or Account Executive paid commissions based on sales volume. Discount and Online Brokersexecute trades but do not provide advice.
Premium discount brokers Deep 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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Checklist 12.1

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Registration: Street Name or Your Name

Securities can be registered in your name or street name. Street Nameregistered 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.

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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 Accountthe deceaseds 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 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

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Checklist 12.2

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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 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.

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Checklist 12.3

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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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Table 12.2 Major Stock Exchanges: Year Ended 31 December 2010

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Table 12.3 Great Sources of Investment Information on the Web

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