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Chapter 12 – Securities Markets

Chapter 12 – Securities Markets. Where financial assets are traded Primary market – First time a security sold Initial Public Offering (IPO's) Secondary market – existing securities Investment bankers – financial advice to companies Underwrite – purchase entire new issue

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Chapter 12 – Securities Markets

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  1. Chapter 12 – Securities Markets • Where financial assets are traded • Primary market – First time a security sold • Initial Public Offering (IPO's) • Secondary market – existing securities • Investment bankers – financial advice to companies • Underwrite – purchase entire new issue • Merrill Lynch, Goldman Sachs, Citibank

  2. Terminology to Understand • Securities and Exchange Commission • Registration (prospectus) required by SEC • Fair, truthful, accurate info about new issues • Does not prohibit sale of risky assets • Organized exchanges such as NYSE • Has physical location; trades listed securities; generally of larger companies • Nine exchanges in the US

  3. Stock MarketsNYSE, NASDAQ, ECN’s • New York Stock Exchange • 2,800 listed stocks • Most liquid market • Humans (specialists) match bids and offers • Physical floor on Wall Street • Owned by 1,366 seat holders

  4. NASDAQ or Over-the-Counter • National Association of Securities Dealers Automated Quotation System • Trades 3,400 stocks • No formal listings • But traded companies must register with SEC • Traders at hundreds of locations • Loose federation of electronic traders

  5. Electronic Communications Networks (ECN’s) • Trade exchange-listed and NASDAQ stocks • Collect and post bids and offers • Match orders electronically • Execution is immediate • Have 7% of the trading volume in NYSE stocks and 83% of OTC stocks • Biggest: Instanet, Island and ArcaEx

  6. Regulation SEC plus self-regulation Securities Act of 1933 associated with new securities Securities Exchange Act – 1934 regulates secondary market and financial reporting Investment Advisors Act of 1940 – covers all types of advisors and mutual funds

  7. Stock Trading • Exchange assigns stock to a "specialist" who buys and sells the issue to "maintain a fair and orderly market". • Orders can take various forms • Short selling – borrow a stock, sell it in expectation of buying back at lower price • Market order – immediate at best possible price

  8. Brokers • Licensed by SEC • Can sanction rule-breakers; names in newspapers • Types – full service versus discount brokers • 500 shares @ $20 = $10,000 investment • Commissions: FS = $253; Discount $7 to 30 • Registration – you can hold paper certificates or broker can hold electronically

  9. Stock Brokers • A person who buys and sells stock on behalf of clients. • Operates as an agent • Doesn’t own the securities but matches buy and sell orders • Securities Investor Protection Corp (SPIC) insures customer accounts against financial failure of brokers

  10. SIPC • Securities Investor Protection Corp. • Federal agency but not like FIDC • Does not protect against loss of value • Replaces securities stolen by a broker or loss through failure of brokerage holding your securities • Up to $500,000; 99% recovery rate

  11. Brokerage Fees • Have been increasing • What can you do to hold down? • Do you even need a broker? • Trade online • Watch asset level- big balances help a lot • Consolidate household accounts • Opt for e-mail confirms

  12. Sources of Information • Annual reports to shareholders • (Full service) broker reports • Rating agencies • Press – WSJ, Barons, Fortune Value Line • SEC's online EDGAR • Watch out for "free advice"

  13. Registration • Book entry – completely electronic • No paper certificates • More convenient, less costly • Joint tenancy with Right of Survivorship • Surviving owner receives full ownership • Tenancy-in-Common - goes to heirs

  14. IPO Investment banker Exchanges vs OTC International Market Intent of regulation Market orders only Sources of info Key Topics

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