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					Chapter 12

 Securities Markets
Security Markets
  The primary
  markets

  Secondary
  markets – stocks

  Secondary
  markets – bonds

                     2
The Primary Market –
Two Forms of Issues
  Initial public offerings (IPO)
    The very first shares ever issued by a
     company
  Seasoned new issues
    New shares being issued by a
     company that is already publicly
     traded
  Investment bankers serve as
  underwriters
                                          3
Secondary Markets
               Trade previously
               owned shares of
               stock

               Consist of
               organized
               exchanges and an
               over-the-counter
               market
                                  4
Secondary Markets: The
Organized Exchanges
  Are used to facilitate trading between
  investors
  New York Stock Exchange (NYSE)
  American Stock Exchange (AMEX)
  Regional stock exchanges



                                           5
Secondary Markets – Bonds
  No organized secondary bond market,
  as little demand among individual
  investors
  Individual investors must work through
  a broker, who buys or sells with a bond
  dealer
  Government bond trading is dominated
  by investment houses, commercial
  banks, and the Federal Reserve
                                        6
Regulation of the
Securities Markets
  Securities and Exchange Commission
  (SEC) regulation
  Securities Act of 1933 – requires
  disclosure of relevant information in a
  timely manner
  Securities Exchange Act of 1934 –
  established the SEC

                                            7
Self-Regulation
 “Circuit breakers”
   Triggers that momentarily stop trading
    to prevent disastrous market slides
 Insider trading and market abuses:
   Insider trading
      Use of non-public information for
       personal gain in the market
   Churning
      Excessive trading without benefit to
       the client used to increase
       commissions                          8
How Securities are Traded
  Specialists
  Buy and sell orders
  Brokers
  Brokerage services
  Cash and margin
  accounts
                            9
Role of the Specialist in an
Organized Exchange
 To maintain order in the market
 To reduce fluctuation, NYSE specialists
 represent almost 20% of the share
 volume traded
 To track and process buy and sell
 orders
 To maintain an inventory of assigned
 stock
 To maintain bid and ask prices of their
 assigned stock
                                           10
Order Characteristics: Sizes
  Round lots – orders of 100 shares
  Odd lots – orders of 1 to 99 shares


  Discretionary account: Broker
  authorized to make trades for you.
  Exercise caution, or avoid these types
  of arrangements.

                                           11
Order Characteristics:
Time Period Outstanding
  Day orders
    Good until the end of the trading day

  Open orders (GTC)
    Good until filled or canceled

  Fill or kill orders
    Must be filled or canceled

     immediately

                                        12
Order Characteristics: Types
Market order
  Order to sell or buy a specific number of
   shares at the best available price
Limit order
  Order to sell or buy a specific number of
   shares at a certain price or better
Stop (or stop-loss) order
  Order to sell a specific number of shares
   if the stock falls below a certain price or
   buy a specific number of shares if the
   stock rises above a certain price         13
Asset Management Account
             Brokerage firm
             comprehensive
             financial services
             package
             Checking account
             Credit card and loans
             Money market mutual
             fund
             Brokerage services
                                14
Types of Brokerage Firms
  Full service brokers
  Discount service brokers
    50% to 70% discount

  Deep discount brokers
    90% discount

  On-line discount and deep discount
  brokers
    Low cost, immediate trading

                                       15
Account Types
 Cash accounts
  Use your money to pay for the
   purchase in-full within 3 business
   days
 Margin accounts
  Use the brokerage firm’s money to
   purchase part of the stock; can
   amplify both gains and losses
    Maintenance margin
    Margin call
                                        16
Account Types (cont’d)
  Automated Clearing House (ACH)
  Network
   Electronic payment system among

    14,000 financial institutions that can
    be linked to your brokerage firm;
    cheap, convenient, fast payment



                                         17
Accounts Types (cont’d)
 Street name registration
   Shares of stock remain in the broker’s
    custody; may be charged a
    “maintenance fee” for dormant
    accounts
 Joint accounts – shares owned with a
 spouse or partner:
   Joint tenancy with the right of
    survivorship
   Tenancy-in-common
                                         18
Working With a Broker
  Remember Principle 12:
    The Agency Problem in Personal
     Finance
  Do your homework and take
  responsibility
  Keep transaction costs to a minimum
  Use a discount broker or consider
  mutual funds
  For bonds, go full service or buy direct
                                         19
Choosing a Broker
  Integrity, intelligence, and efficiency
  Experience in both up- and down-
  markets
  Someone who understands your
  investment philosophy
  Reputation for allowing customers to
  say no without undue pressure
  Upfront regarding costs and
  commissions
                                            20
The Cost of Trading
                 Commissions
                 Transaction fees
                 Inactive account
                 fees
                 Annual fees
                 Maintenance fees


                                21
On-line Trading
  Cheap, easy
  trading, but do
  your investment
  homework
  For fast moving
  stocks, use limit
  orders, not
  market orders
                      22
On-line Trading (cont’d)
  Make sure all cancellations were
  processed
  If your account falls below the
  maintenance margin requirement, your
  securities can be sold without a margin
  call
  No regulations govern the time for
  executing a trade

                                        23
Day Trading Cautions
  Be prepared for financial losses
  Don’t confuse day trading with investing
  – it’s speculating
  Don’t believe claims of easy profits
  Watch out for “hot tips” and “expert
  advice” for day traders


                                        24
Sources of Investment
Information
  Corporate sources of information
  Brokerage firm reports
  The press:
     The Wall Street Journal
    Magazines
    Investment publications

  Internet sources
  Investment clubs
                                     25

				
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posted:1/9/2011
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