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McGraw-Hill/Irwin Understanding Business, 8e. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nickels McHugh McHugh. *. *. Securities Markets: Financing and Investing Opportunities. *. CHAPTER. 19. *. *. 1- 1. Functions of Securities Markets.

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  1. McGraw-Hill/Irwin Understanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nickels McHugh McHugh * * Securities Markets: Financing and Investing Opportunities * CHAPTER 19 * * 1-1

  2. Functions ofSecurities Markets • Long-Term Funding for Businesses • Place to Buy/Sell Securities (Investments)

  3. Capital Markets • Primary Markets (IPO's) • Secondary Markets

  4. Investment Banker • Assist Sale/Issue of New Securities • Underwrite issues • Sells to Institutional Investors

  5. Bond Market • Coupon/Interest Rate • Denomination ($1,000) • Principal • Maturity Date • Classes • Unsecured/Debenture • Secured

  6. Advantages No Vote Interest is Tax-Deductible Temporary Source of Funds Can be repaid before maturity with call provision Disadvantages Increase Debt Legal Obligation to Pay Interest Repaid on Maturity Date Bonds

  7. Special Bond Features • Sinking Fund • Callable • Convertible

  8. Equity Financing Preferred or Common Investment never has to be repaid Not legally obligated to pay dividends Debt Financing Secured or Debenture Must be repaid on maturity date Interest must be paid whenever specified Debt vs. Equity Financing

  9. What is Stock? • Ownership • Certificate • Par Value • Dividends • Common vs. Preferred

  10. Advantages No Repayment No Legal Obligation Does Not Create Debt Disadvantages Voting Rights Dividends not Tax-Deductible Management Works to Keep Stockholders Happy Stock

  11. Organized Securities Exchanges • New York Stock Exchange (NYSE) • American Stock Exchange (AMEX) • Over-the-Counter (OTC) • NASDAQ

  12. Top European Companiesby Market Value Source: Financial Times, March 7, 2005

  13. Own Stocks? Source: USA Today

  14. Investment Criteria • Risk • Yield • Duration • Liquidity • Tax Consequences

  15. Investing in Bonds

  16. Likelihood of Investing In Bonds Source: USA Today

  17. S & P’s Top Credit AAA-Rated Companies • Automatic Data Processing • Exxon Mobil • General Electric • Johnson & Johnson • Pfizer • United Parcel Service Compared to having 32 Top Companies in the ’80s Source: Business Week, 2006

  18. Investing in Stock • Growth vs. Income • Capital Gain vs. Dividend • Blue Chip vs. Penny • Market Order • Limit Order • Stock Split

  19. How Stock Splits Work 100 shares of ABC stock selling at $80 2 for 1Stock Split Declared 100 shares @ $40 100 shares @ $40 Lower Price increases Demand Increased demand increases price 100 shares @ $45 100 shares @ $45 How Much Profit Has Been Made?

  20. Return From MostWidely Held Stock Source: Money, January 2006

  21. Mutual Funds • Pool Investors’ Money • Best for Small Investors • Index Fund • Diversification • No-Load vs. Load • Open-End vs. Closed-End

  22. Sales of Mutual Funds Worldwide (In Billions) Source: USA Today, 10/16/2000 Source: Investors Business Daily, February 10, 2006

  23. Traditional Stocks/Bonds Gov’t Securities/CDs Money Market or Mutual Funds Real Estate High-Risk Stock on Margin Junk Bonds Commodities Types of Investments

  24. Components for Optimal Portfolio Performance • Diversification • Timelines • Safety & Risk • Income & Total Return

  25. Do Corporations Provide Enough Information? Source: USA Today

  26. How does Buying Stock on Margin work? The investor finds he is able to buy the stock with a 40% margin An investor wishes to buy 100 shares at $100 per share Step 1 Step 3 The investor puts up $4,000 and borrows $6,000 from the broker However, the investor has only $4,000 available to invest Step 4 Step 2

  27. Measures of Investment • Stock Quotations • Bond Quotations • Mutual Fund Quotations

  28. Stock Quotes • % Change in YTD Price • High/Low Price • Company Name & Stock Symbol • Last Dividend Per Share • Dividend Yield • P/E Ratio • # of Shares Traded • Closing Price • Net Change- Price

  29. Mutual Fund Quotations • Fund Name • Net Asset Value (NAV) • Net Change in NAV • YTD Return • Long-Term Return

  30. American Cotton Oil American Sugar Refining Co. American Tobacco Chicago Gas Distilling & Cattle Feeding Co. General Electric Co. Laclede Gas Light Co. National Lead North American Co. Tennessee Coal, Iron, & Railroad Co. U.S. Leather U.S. Rubber Co. Original 12 Dow Stocks (1896)

  31. How MuchHave They Grown? accounts funds assets Source: Fortune, 2004

  32. What Adults Believe AboutWall Streets’ Key Players % Adults That Agree With the Statement Source: USA Today

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