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					USINESS 7e       CHAPTER 19




                 Understanding Securities
                 and Investments




             1                 Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e                  Chapter Outline

                     Securities Markets
                     Stocks
                     Bonds
                     Other Investments
                     Buying and Selling Securities
                     Securities Market Regulation


              2                              Copyright 2004 Prentice Hall, Inc.
USINESS 7e       What Are Securities?


                    Stocks and bonds
                 representing secured, or
                  asset-based, claims by
                 investors against issuers



             3                  Copyright 2004 Prentice Hall, Inc.
                 What is the Primary Securities
USINESS 7e       Market?




                 Market in which new
                 stocks and bonds are
                 bought and sold


             4                    Copyright 2004 Prentice Hall, Inc.
                 What is the Security and
USINESS 7e       Exchange Commission (SEC)?


                 Federal agency that
                 administers U.S.
                 securities laws to
                 protect the investing
                 public and maintain
                 smoothly functioning
                 markets

             5                 Copyright 2004 Prentice Hall, Inc.
USINESS 7e       What is an Investment Bank?



                 Financial institution
                 engaged in issuing
                 and reselling new
                 securities


             6                  Copyright 2004 Prentice Hall, Inc.
                 What is the Secondary
USINESS 7e       Securities Market?


                 Market in which
                 stocks and bonds are
                 traded




             7                  Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Common Stock

                   Stock values are expressed in three
                    different ways:
                     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



              8                                    Copyright 2004 Prentice Hall, Inc.
                   Investment Traits of
                   Common Stock

                   Common stocks are among the riskiest of all
BUSINESS 7e
                    securities.
                   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
                       payouts
                         The “Old” Economy versus the “New”:
                          What’s a “Blue Chip” Now?




              9                                  Copyright 2004 Prentice Hall, Inc.
                   Market Value Growth: Wal-Mart
BUSINESS 7e        versus Yahoo!




              10                     Copyright 2004 Prentice Hall, Inc.
                    Preferred Stock

                    Preferred stock is usually issued with a
BUSINESS 7e

                     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




              11                                    Copyright 2004 Prentice Hall, Inc.
                     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




              12                                   Copyright 2004 Prentice Hall, Inc.
USINESS 7e        What is a Stock Exchange?

                  Organization of
                  individuals formed to
                  provide an institutional
                  setting in which stock
                  can be traded



             13                  Copyright 2004 Prentice Hall, Inc.
                    Stock Exchanges

                    The Trading Floor
BUSINESS 7e
                      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:
                      Discount Brokers
                      Online Trading
                      Full-Service Brokers


              14                                    Copyright 2004 Prentice Hall, Inc.
                       The Major Exchanges and the
                       OTC Market

                      The New York Stock Exchange (NYSE)
BUSINESS 7e

                      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)

              15                              Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Growth of Online Trading




              16                   Copyright 2004 Prentice Hall, Inc.
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


             17                 Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Bond Rating Systems




              18                 Copyright 2004 Prentice Hall, Inc.
                    Types of Bonds
                    Government bond is issued by the federal
BUSINESS 7e
                     government
                    Municipal bond is issued by a state or
                     local government
                    Corporate bond is issued by a company
                     as a source of long-term funding.
                      Registered and Bearer (or Coupon) Bonds
                      Secured Bonds
                      Debentures


              19                               Copyright 2004 Prentice Hall, Inc.
                     The Retirement of Bonds

                    Callable bonds may be called in and paid for by
BUSINESS 7e
                     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.


              20                                       Copyright 2004 Prentice Hall, Inc.
                   Other Investments
                    Mutual funds are companies that pool
                     investments from individuals and
BUSINESS 7e
                     organizations to purchase a portfolio of
                     stocks, bonds and other securities
                       No-Load Funds
                       Load Funds




              21                              Copyright 2004 Prentice Hall, Inc.
                   Other Investments
                    Commodities market is a market in
BUSINESS 7e
                     which futures contracts are traded
                      Futures Contracts
                      Margins




              22                            Copyright 2004 Prentice Hall, Inc.
                    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:
                   1.   Diversification
                   2.   Asset Allocation



              23                              Copyright 2004 Prentice Hall, Inc.
                       Financial Information
                       Services

                      Stock Quotations
BUSINESS 7e
                      Bond Quotations
                      Mutual Funds Quotations
                      Market Indexes
                        Bull Markets
                        Bear Markets
                        The Dow Jones Industrial Average (DJIA) (or
                         “the Dow”)
                        The S&P 500
                        The Nasdaq Composite


              24                                    Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Reading a Stock Quotation




              25                   Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Reading a Bond Quotation




              26                   Copyright 2004 Prentice Hall, Inc.
                   Reading a Mutual Fund
BUSINESS 7e        Quotation




              27                    Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e        Bull and Bear Markets




              28                   Copyright 2004 Prentice Hall, Inc.
                   The Stock Markets: Comparative
BUSINESS 7e        Dollar Volume of Trades




              29                      Copyright 2004 Prentice Hall, Inc.
                   Placing Orders
                Market order requests that a broker buy or sell a
BUSINESS 7e
                 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
                 amount
                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
                 shares
                Odd lot is the purchase or sale of stock in fractions
                 of round lots
              30                                   Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e         Financing Purchases

                    Margin Trading
                      Stocks can be bought on margin.
                      Controlled by the Feds, the margin
                       requirement has remained fixed at 50 percent
                       since 1974.
                    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


              31                                 Copyright 2004 Prentice Hall, Inc.
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
                  control


             32                   Copyright 2004 Prentice Hall, Inc.
BUSINESS 7e         The SEC

                    Prospectus is a registration statement filed
                     with the SEC before the issuance of a new
                     security
                    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


              33                                Copyright 2004 Prentice Hall, Inc.

				
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