© 2013 Pearson Education, Inc. All rights reserved.12-1 Chapter 12 Securities Markets

© 2013 Pearson Education, Inc. All rights reserved. 12-1

Chapter 12

Securities Markets


Securities Markets

• Securities—stocks and bonds—are issued by corporations to raise money.

• Securities Markets—a place where you buy and sell securities—primary and secondary markets.

• After the initial issue, securities are traded among investors.


Primary Markets

• Place where new securities are traded

• Initial public offering (IPO)

• Seasoned new issues

• Investment Banker

• Underwriter

• Tombstone advertisement

• Prospectus


Secondary Markets—Stocks

• Markets in which previously issued securities are traded.

• Organized exchange—a physical location where stocks trade.

• Over-the-counter market—transactions conducted over phone or computer.

• Regional stock exchanges


Secondary Markets - Stocks

• New York Stock Exchange (NYSE)• American Stock Exchange (AMEX)

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


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.


Regulation of theSecurities 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


Order Characteristics

• Order Size– Odd lots <100 shares– Round lots

• Time Period for Which the Order Will Remain Outstanding– Day orders– Open orders or Good-till-cancelled (GTC) orders– Discretionary account


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.


Short Selling

• Short selling—the more the price drops, the more money your make.

• Borrow stock from the broker and then sell it.

• Margin requirement—collateral

• 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.


Figure 12.3 Profits from Purchasing Versus Selling Short


Types of Brokers

• Full-Service Brokers or Account Executive—paid commissions based on sales volume.

• Discount and Online Brokers—execute trades but do not provide advice. – Premium discount brokers– Deep discount brokers


Cash Versus Margin Accounts

• Cash Accounts

• Margin Accounts

• Margin or Initial Margin

• Maintenance margin

• Margin call


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


Online Trading

• Day traders—trade, generally on internet, with a very short-term time horizon.

• Be prepared to suffer severe financial losses.

• Don’t confuse day trading with investing.

• Don’t believe claims of easy profits.

• Watch out for “hot tips” or “expert advice.”


Table 12.3 Great Sources of Investment Information on the Web

Documents

© 2013 Pearson Education, Inc. All rights reserved.12-1 Chapter 12 Securities Markets