USINESS 7e CHAPTER 19
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BUSINESS 7e Chapter Outline
Buying and Selling Securities
Securities Market Regulation
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USINESS 7e What Are Securities?
Stocks and bonds
representing secured, or
asset-based, claims by
investors against issuers
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What is the Primary Securities
USINESS 7e Market?
Market in which new
stocks and bonds are
bought and sold
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What is the Security and
USINESS 7e Exchange Commission (SEC)?
Federal agency that
securities laws to
protect the investing
public and maintain
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USINESS 7e What is an Investment Bank?
engaged in issuing
and reselling new
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What is the Secondary
USINESS 7e Securities Market?
Market in which
stocks and bonds are
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BUSINESS 7e Common Stock
Stock values are expressed in three
Par value is the face value of a share of stock
at the time it is originally issued
Market value is the current price of a share in
the stock market
Book value is the value of a common stock
expressed as total shareholders’ equity divided
by the number of shares of stock
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Investment Traits of
Common stocks are among the riskiest of all
Common stocks offer high growth potential.
Blue-chip stock is issued by a well-
established company with a sound financial
history and a stable pattern of dividend
The “Old” Economy versus the “New”:
What’s a “Blue Chip” Now?
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Market Value Growth: Wal-Mart
BUSINESS 7e versus Yahoo!
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Preferred stock is usually issued with a
stated par value.
Dividends are typically expressed as a
percentage of par value.
Some preferred stock is callable.
Call price is the amount of payment specified in
the purchase agreement between the firm and
its preferred stockholders
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Investment Traits of
BUSINESS 7e Preferred Stock
Preferred stock has first rights to dividends.
Preferred stock is less risky than income
from the same firm’s common stock.
Cumulative preferred stock is preferred stock
on which any missed dividend payments must
be paid as soon as the firm is able to do so
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USINESS 7e What is a Stock Exchange?
individuals formed to
provide an institutional
setting in which stock
can be traded
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The Trading Floor
Trading is allowed only at an actual physical
location called the trading floor.
Brokers are individuals or organizations
who receive and execute buy-and-sell
orders on behalf of other people in return
for commissions. Types include:
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The Major Exchanges and the
The New York Stock Exchange (NYSE)
The American Stock Exchange (AMEX)
Regional Stock Exchanges
Foreign Stock Exchanges
Over-the-Counter (OTC) Market
National Association of Securities
Dealers Automated Quotation (Nasdaq)
system and National Association of
Securities Dealers Inc. (NASD)
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BUSINESS 7e Growth of Online Trading
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USINESS 7e What is a Bond?
Security through which
an issuer promises to
pay the buyer a certain
amount of money by a
specified future date
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BUSINESS 7e Bond Rating Systems
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Types of Bonds
Government bond is issued by the federal
Municipal bond is issued by a state or
Corporate bond is issued by a company
as a source of long-term funding.
Registered and Bearer (or Coupon) Bonds
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The Retirement of Bonds
Callable bonds may be called in and paid for by
the issuer before its maturity data
Sinking Fund provisions
Serial bonds are retired when the issuer redeems
portions of the issue at different preset dates
Convertible bonds can be retired by converting it
to common stock
Secondary Markets for Bonds
Nearly all secondary trading in bonds occurs in the
OTC market rather than on organized exchanges.
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Mutual funds are companies that pool
investments from individuals and
organizations to purchase a portfolio of
stocks, bonds and other securities
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Commodities market is a market in
which futures contracts are traded
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Making Choices for Diversification,
BUSINESS 7e Asset Allocation and Risk Reduction
Investors select a mixture, or portfolio,
of investments to reduce risk. They do
this in two ways:
2. Asset Allocation
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Mutual Funds Quotations
The Dow Jones Industrial Average (DJIA) (or
The S&P 500
The Nasdaq Composite
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BUSINESS 7e Reading a Stock Quotation
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BUSINESS 7e Reading a Bond Quotation
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Reading a Mutual Fund
BUSINESS 7e Quotation
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BUSINESS 7e Bull and Bear Markets
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The Stock Markets: Comparative
BUSINESS 7e Dollar Volume of Trades
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Market order requests that a broker buy or sell a
certain security at the prevailing market price at the
time of the order
Limit order authorizes the purchase of a stock
only if its price is equal to or less than a specified
Stop order instructs the broker to sell if a stock
price falls to a certain level
Round lot is the purchase or sale of stock in 100
Odd lot is the purchase or sale of stock in fractions
of round lots
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BUSINESS 7e Financing Purchases
Stocks can be bought on margin.
Controlled by the Feds, the margin
requirement has remained fixed at 50 percent
Short sale is a stock sale in which an
investor borrows securities from a broker
to be sold and then replaced at a
specified future date
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USINESS 7e What is Program Trading?
Large purchase or sale of
a group of stocks, often
triggered by computerized
trading programs that can
be launched without
human supervision or
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BUSINESS 7e The SEC
Prospectus is a registration statement filed
with the SEC before the issuance of a new
Insider trading is the illegal practice of
using special knowledge about a firm for
profit or gain
Blue-sky laws are laws requiring securities
dealers to be licensed and registered with
the states in which they do business
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