CHAPTER 1

StocksCHAPTER 3What are we going to learn in this chapter?StocksWhat does a stock represent?

What does it mean if you are a stockholder?

How do you gain wealth when you own a stock?

Common StocksStocksIncome Stocks

Blue-chip Stocks

Growth Stocks

Cyclical Stocks

Defensive StocksHow Stocks WorkSTEP ONEKoray decides to invest in the stock market.Berna decides to sell 300 shares of Fenerbahce stock to help pay for a new car, even though she has a rich husband.

STEP TWOKoray has been thinking of investing in the Fenerbahce. He calls his broker, who is a member of the Borsa Istanbul, to get a quote on Fenerbahce.Berna checksthe prices at Borsa Istanbul online.How Stocks WorkSTEP THREEKorays broker and Berna find out the current quote and price for Fenerbahce from an electronic data system that continually updates information directly from the Floor of the Borsa Istanbul.

How Stocks WorkSTEP FOURTaking into account what he already knows about Fenerbahce, Koray instructs his broker to purchase 300 shares of Fenerbahce at the current market price.

Berna logs into her online brokerage account, which is linked to a brokerage firm that is a member of the Borsa Istanbul, and places an order to sell her 300 shares at the current market price.How Stocks WorkSTEP FIVEBoth orders are sent electronically to the Borsa Istanbul Trading Floor.

STEP SIXA Designated Market Maker (DMM) uses enhanced technology to bring together buyers and sellers, improve prices and serve as a point of accountability.How Stocks WorkSTEP SEVENBorsa Istanbul trading engine automatically executes any market or limit order that is marketable against the exchange quote up to 1 million shares. This is called auto-execution.STEP EIGHTBoth orders are represented as auction market orders in order to have the opportunity for price improvement. The DMM oversees all orders to make sure the transactions are executed fairly and in an orderly manner.How Stocks WorkSTEP NINEAfter the transaction is executed, notices are sent to the firms originating the orders and to the consolidated tape so that a written record is made of every transaction.

STEP TENThe transaction is reported by computers and appears on the consolidated tape displays across the country and around the worldHow Stocks WorkSTEP ELEVENThe transaction is processed electronically, crediting Korays brokerage firm and debiting the account of Bernas brokerage firm. Korays broker calls him and tells him at what price he bought 300 shares of XYZ. In a couple of days, Koray receives a written confirmation.Berna receives confirmation from her brokerage firm electronically on her computer within seconds. These confirmations describe the trade and its details.How Stocks WorkSTEP TWELVEKoray settles his account within three business days after the transaction by submitting payment to his brokerage firm for the 300 shares of Fenerbahce, plus any applicable commissions.Bernas trade is also settled in three business days. Her account will be credited with the proceeds of the sale of stock, minus any applicable commissions.How do you think stock prices are determined?What Drives Stock PricesFinancial health of a company

Whose stocks would you consider for purchase?

Likelihood to lose moneyAnnouncementsHistorical behaviorFuture prospectsMergers & AcquisitionsWhat Drives Stock PricesIndustry

Even though HPs desktop sales are good, would you invest in it? Why? Why not?

Cyclical industries

When would you consider buying shares of Altnba?What Drives Stock PricesEconomic Trends

A very profitable firm in Greece: buy or sell?

Which signals would you consider?

Consumer Price Index (CPI)

Shrinking economyWhat Drives Stock PricesWorld news

FED Announcements

Egypt and TemSa

China improving investment conditions

Brazils rating being improvedHow to Read a Stock Table52 Week High and Low

Stock

Dividends

Yield %

P/E52 High52 LowStockDivYld %P/ESales 1000sHigh LowLastChg63.8835.31XYZ1.763.91516684045.7342.2044.58-0.07How to Read a Stock TableSales 1000s

High

Low

Last

Change52 weekLowStockDivYld %P/ESales 1000sHigh LowLastChg63.8835.31XYZ1.763.91516684045.7342.2044.58-0.07Why would investors buy stocks?How Firms Issue StocksPrimary market

Secondary market

Initial public offering

Seasoned equity offeringHow Firms Issue StocksInvestment Banking

Public offerings

Underwriters

How many underwriter/s?

Underwriting syndicateHow Firms Issue StocksAdvisory role

Preliminary registration statement

Red herring

Prospectus

Public announcement

Firm commitmentHow Firms Issue Stocks

How Firms Issue StocksPrivate Placements

Why bother?

Any disadvantages?

How Firms Issue StocksInitial Public Offerings

Investment bankers

Exchange approval

Prospectus

Road show

Bookbuilding

RevisionsHow Firms Issue StocksWhy do investors truthfully reveal their interest in an offering to the investment banker?

Might they be better off expressing little interest, in the hope that this will drive down the offering price?

Interest expressedAllocation sizeOptimismBookbuildingUnderpricingHow Firms Issue Stocks

Order TypesMarket Orders

Price-Contingent Orders

Stop OrdersStockMarket Indexes

Stock Market IndexesPrice-weighted index

Portfolio

Index

The portfolio and the index have.StockInitial PriceFinal PriceSharesI. V. StocksF.V. StocksABC253020500600XYZ10090110090TOTAL600690Stock Market IndexesMarket-value weighted index

Total market value

S&P500StockInitial PriceFinal PriceSharesI. V. StocksF.V. StocksABC253020500600XYZ10090110090TOTAL600690Stock Market IndexesEqually weighted index

RebalancingStockInitial PriceFinal PriceSharesI. V. StocksF.V. StocksABC253020500600XYZ10090110090TOTAL600690END OF CHAPTER