INTRODUCTION TO BUSINESS

Chapter 19Securities Markets

What Are Securities Markets? Financial markets for stocks and bonds

Assist businesses in finding capital Provide private investors with a “store” to buy

and sell investments Problems with our current markets

Companies sell securities only once – the “primary market” Investors buy and sell on the secondary market

– companies only make money from this on stocks that they own in other companies.

The Need for Capital

Businesses would rather take out loans or work off of retained earnings

Businesses instead sometimes have to go to the public money markets Issue stocks or bonds to raise money.

People in the Investment Process Investment bankers

Those who assist in the purchase and sale of investments Lehman Brothers, Solomon Brothers,

Merrill Lynch ALL GONE Goldman Sachs and Morgan Stanley only

ones left

Bonds

Sort of like corporate IOUs

Promises repayment of future amount, plus interest

Bonds are rated in terms of the risk of their repayment (yes, sometimes, they are not repaid, in situations of bankruptcy)

A $1000 bond with 5% interest allows the holder to receive $50 each year until the maturity date, when they receive their $1000 back.

Pros and Cons of Bonds

Pros Bonds allow the firm to maintain its equity Interest is tax-deductible

Cons Bonds increase the debt load of the firm Bonded companies are legally responsible

for paying the debt back.

Some bonds can be converted into common stock.

Stock

Stock refers to a “certificate” of partial ownership in a company. Dividends are part of a company’s profits

that may be paid out to shareholders.

Preferred stock Get promise of dividends; first dibs on

company assets; but no voting rights Common stock

Voting rights; no promise of dividends; last to be paid in a liquidation

Pros and Cons of Stock

Pros: Stockholders never have to be repaid (they

do, however, have a right to their share of the company’s assets)

Selling stock does not add to the company’s debt load

Cons: Stockholders vote on the future direction of

the company; control is given up Dividends are not tax-deductible

Stock Exchanges

NYSE New York Stock Exchange About $70 billion in securities traded

here each day, market value of each > $50M

Represents $22 trillion in market capitalization

NASDAQ Used to only deal with small firms

(market value $8M and up), now those small firms are big!

Stock Market Terms

Bull market: Stocks are on the rise, great time to buy

Bear market: Stocks are expect to fall

Capital gains: What you have made on stocks since you bought them

Splits: The company offers two stocks for every

outstanding share, to induce demand for lower priced stock

The Role of the SEC

SEC = Securities and Exchange Commission

Regulates securities trading Requires prospectus Requires public disclosure of health and

behavior Watches for insider trading

How to Invest

Is it the right time to invest? Warren Buffett on timing the market Taking a look at the health of the market

Online Options Fidelity Sharebuilder Scottrade

***Remember, you don’t know anything that isn’t already built in to the price of the stock*** Don’t expect to gain money because you like Nike shoes;

you have to look deeper and see whether you believe in a company's long-term ability to grow.