Chpt 10 intro business

© 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .

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Finance:Acquiring and Using Funds to Maximize Value

LO1 What is the role of financial markets in the U.S. economy? Who are the key players?

LO2 What are the key laws that govern the way financial markets operate and what is the impact of these laws?

LO3 What are the major types of securities that are traded in securities markets?

LO4 How are securities issued in the primary market and traded in secondary markets?

LO5 What strategies do investors use to invest securities?

LO6 How do you interpret the information provided in the stock quotes available on financial websites?


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The Role of Financial Markets

• Financial markets transfer funds from savers to borrowers

• Companies access financial resources to invest, meet payroll, and develop new products

• Individuals, organizations and YOU are all key players in financial markets


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Financial Institutions

• Depository Institutions Commercial banks Credit unions Savings and loan associations

• Nondepository Financial Institutions Institutional investors Securities brokers Securities dealers Investment Banks


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Congress Decides It’s Time to Trim the Hedges

• Hedge funds are mutual funds for millionaires

• The number of investors are limited

• Investors must meet wealth standards

• In the past there was no strict regulation

• There have been spectacular payoffs and extreme failures

• Unethical behavior grew from the lack of regulation

• The 2010 Dodd-Frank Act created much needed regulation

© Colin Anderson/Blend Images/Jupiterimages

Source: "Growth in Hedge Fund Fraud," Securities and Exchange Commission website: http://www.sec.gov/rules/final/ia-2333.htm#IB; "A Brief History of Hedge Fund Adviser Registration and Its Consequences for Private Equity and Venture Capital Advisers," by William J. Sjostrom, Harvard Business Law Review website: http://www.hblr.org/2011/02/a-brief-history-of-hedge-fund-adviser-registration-and-its-consequences-for-private-equity-and-venture-capital-advisers/; The Running of the Hedgehogs by Duff McDonald, New York Magazine website: http://nymag.com/news/features/2007/hedgefunds/30341/; “Galleon Wiretaps Rattle Hedge Funds as Insider Trading Targeted,” by Katherine Burton and David Glovin, Bloomberg website: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=as8seXJpbDUY; “Some Lessons from the Rescue of Long-Term Capital Management,” by Joseph G. Haubrich, Federal Reserve Bank of Cleveland website: http://www.clevelandfed.org/research/POLICYDIS/pdp19.pdf


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Regulating Financial Markets to Protect Investors and Improve Stability

• Savers and borrowers need confidence in financial institutions

• The crisis of 2008 is an example of the financial markets malfunctioning

• U.S. experienced bank failures in 1907, early 1930s, and 1908s


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Financial Regulation

• Early Efforts: Federal Reserve Act of 1913 – created the FED Banking Act of 1933/Glass-Steagall Act – established the

Federal Deposit Insurance Corporation Financial Services Modernization Act of 1999/Gramm-Billey-

Leach Act – reversed Glass-Steagall

• Recent Developments: Sarbanes-Oxley Act of 2002 – fair external audits Dodd-Frank Act of 2010 – extended authority over

nondepository institutionsSource: Public Company Accounting Oversight Board website: http://pcaobus.org/Pages/default.aspx,“Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” United States Senate Committee on Banking, Housing and Urban Affairs website: http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf


Investing in Financial Securities

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Three major types of securities that are traded in markets:

Common Stock

Preferred Stock

Bonds


Corporate Ownership

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Common Stock

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• Voting Rights• Right to Dividends• Capital Gains• Preemptive Rights• Right to Residual Claim on Assets

The basic form of ownership in a corporation


Preferred Stock: Getting Preferential Treatment

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Stock that gives its holder preference over common stockholders

Claim on Assets Payment of Dividends (stated amount) Cumulative Feature


Bonds: Earning Your Interest

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Long-term debt issued by a corporation or government• Maturity Date – the date the bond comes due

• Par Value – face value

• Premium – bond is above par

• Discount – bond is below par

• Coupon Rate – interest payment as percentage of par value

• Current Yield – interest payment as percentage of current market price

Bonds are a legal obligation. Companies issued century bonds in the 1990s.

Source: “Are Bond Buyers This Crazy?” by Dan Caplinger, Motley Fool website: http://www.fool.com/investing/dividends-income/2010/08/26/are-bond-buyers-this-crazy.aspx


Could Your Best Investment Be a Piece of Junk?

• Junk bonds are bonds issued by companies with poor credit ratings

• Junk bonds offer a higher rate of interest (and risk)

• In 2007, only 22 companies in the world defaulted in their bonds During the recession in 2008, the number soared to 126

• In late 2008, investing in junk bonds became a hot strategy

13Source: Defaults Stacking Up in the Junk Bond Market by Tom Petruno, Los Angeles Times website: http://latimesblogs.latimes.com/money_co/2009/01/junk-bonds-the.html January 26, 2009; There’s Plenty of Juice in Junk Bonds by Mina Kimes, Fortune magazine, March 2, 2009, p. 40; Junk Bond Yields Are Crazy High, But Tread Carefully by John Waggoner, USA Today, December 5, 2008, Money Section, p. 3b.


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Convertible Securities

• Convertible securities – bonds or preferred stock that investors exchange for common stock

• Conversion ratio is the number of shares exchanged for each convertible security

Conversion ratio of 20

Each security can be exchanged for 20 shares


Mutual Funds and ETFs: Diversification Made Easy

Mutual Funds Diversification Professional Management Variety Liquidity

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Exchange Traded Funds• Features of stocks and

mutual fund

• Ownership in a “market basket” of stocks

• You can buy and sell ETFs any time of the day, unlike Mutual Funds


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Does Green Investing Earn Green Returns?

• “Green” mutual funds select stocks based on environmental consideration

• Do these funds provide a return?

• The Winslow Green Growth Fund has an average annual return of 12.27%

• Portfolio 21 Fund performed much better than the S & P 500 over a 5-year period

• Over short periods, these funds did experience big fluctuations

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Source: Finding the Right Green Fund by Eugenia Levenson, Fortune magazine website November 6, 2008: http://money.cnn.com/2008/11/05/magazines/fortune/levenson_greenfunds.fortune/index.htm; Green Investments for Launderers by Will Ashworth, Investopedia website April 7, 2008: http://community.investopedia.com/news/IA/2008/Green_Investments_For_Launderers.aspx?partner=YahooSA; Winslow Green Growth Fund Performance, Winslow Management Company website: http://www.winslowgreen.com/fund/performance.aspx, accessed April 25, 2011; Portfolio 21 Performance, Portfolio 21 Investments website: http://www.portfolio21.com/in_depth_perf.php, accessed April 25, 2011; New Alternatives Fund Annual Report, December 31, 2010: http://www.newalternativesfund.com/returns/NAF-AR-2009.pdf, accessed April 25, 2011.

http://www.winslowgreen.com/


The Primary Securities Market: Where Securities Are Issued

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Public Offering:Securities are sold to

anyone in the investing public

Private Placement:Ownership by a small

number of people


Trading Securities: The Secondary Market

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Security Exchanges• New York Stock Exchange• NASDAQ• Currently the two largest exchanges

in the U.S.• A wave of mergers of exchanges are

taking place

Over the Counter Market

Electronic Communication Networks

©Songquan Deng / Shutterstock.com

http://www.nasdaq.com/


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Over-the-Counter Market

• Many corporations do not meet requirements to list on organized exchanges

Listing can be expensive

• OTC are traded through a system of market makers

• The market for OTC stocks is much less active than exchanges


Electronic Communications Networks

Computer-based securities market

ECNs automatically match buyers and sellers

Individuals open an account with a broker-dealer

Investors can trade “after hours”20

© iStockphoto.com/Skip Odonnell

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http://www.sharebuilder.com/


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Teaching Personal Finance

• Many states have adopted personal finance requirements in High School/College

• Four states require a course for graduation, other states integrate lessons into other classes

• Studies show courses help college students• Many students are learning from household woes• While three-quarters of students report money

management knowledge, only 52% have savings accounts

Source: http://www.usnews.com/education/blogs/high-school-notes/2011/08/26/states-push-to-teach-personal-finance-in-schools


Personal Investing

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What are your short-term and long-term goals?

Given your budget, how much are you able to invest?

How long can you leave your money invested?

How concerned are you about the tax implications of your investments?

How much tolerance do you have for risk?

DIVERSIFICATION

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http://www.fool.com/


Symbolic Logic: Do You LUV this HOG’s DNA?

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GOOG HOG

MMM DNA

JAVA LUV

Google Harley-Davidson

3M Genentech

Sun Microsystems Southwest Airlines© Rubberball/ Jupiterimages

Source: What Is a Stock Symbol and How Do I Find the Symbol for a Company?, BusinessKnowledgeSource.com website: http://businessknowledgesource.com/investing/what_is_a_stock_symbol_and_how_do_i_find_the_symbol_for_a_company_021903.html, accessed August 29, 2008; Stock Symbol Identifiers, StockMaven.com website, http://www.stockmaven.com/symbols.htm, accessed August 29, 2008; Stock Tickers and Ticker Symbols, Money-zine.com website, http://www.money-zine.com/Investing/Stocks/Stock-Tickers-and-Ticker-Symbols/, accessed August 9, 2009.

Every publicly traded corporation is identified by a unique combination of letters known as stock symbols.

Can you Guess These?


Choosing a Broker: Access to the Markets

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• Individuals must use a broker to trade stocks on the organized exchanges and OTC market

• Full Service BrokersProvide a range of services

• Discount BrokersBasic buy/sell capabilities

• The competition between brokers is intense and both attempt to offer more services

• Once you decide on a broker, you open an account

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© Tetra Images/ Jupiterimages

http://www.tradeking.com/


Buying Securities

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Market Orders – buy or sell a security

at the current market price

Limit Orders – Place limits on the price

at which orders are executed


Strategies for Investing in Securities

• Investing for Income• Market Timing• Value Investing• Investing for Growth• Buying and Holding

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Stock Indices: Tracking the Trends

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Stock Index:

Tracks how the prices of a specific set of stocks

have changed

Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by The Wall Street Journal editors.

Standard and Poor’s 500:

Tracks 500 stocks and weighs the total market

value of each stock


Major Stock Price Indices

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Tracking the Performance of Specific Securities

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Looking Back• What is the role of financial markets in the U.S. economy? Who are the key

players?

• What are the key laws that govern the way financial markets operate and what is the impact of these laws?

• What are the major types of securities that are traded in securities markets?

• How are securities issued in the primary market and traded in secondary markets?

• How do you interpret the information provided in the stock quotes available on financial websites?

Education

Chpt 10 intro business