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Chapter 12 – Securities Markets Where financial assets are traded

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Chapter 12 – Securities Markets Where financial assets are traded

  1. 1. Chapter 12 – Securities Markets <ul><li>Where financial assets are traded </li></ul><ul><li>Primary market – First time a security sold </li></ul><ul><ul><li>Initial Public Offering (IPO's) </li></ul></ul><ul><li>Secondary market – existing securities </li></ul><ul><li>Investment bankers – financial advice to companies </li></ul><ul><ul><li>Underwrite – purchase entire new issue </li></ul></ul><ul><ul><li>Merrill Lynch, Goldman Sachs, Citibank </li></ul></ul>
  2. 2. Terminology to Understand <ul><li>Securities and Exchange Commission </li></ul><ul><li>Registration (prospectus) required by SEC </li></ul><ul><ul><li>Fair, truthful, accurate info about new issues </li></ul></ul><ul><ul><li>Does not prohibit sale of risky assets </li></ul></ul><ul><li>Organized exchanges such as NYSE </li></ul><ul><ul><li>Has physical location; trades listed securities; generally of larger companies </li></ul></ul><ul><ul><li>Nine exchanges in the US </li></ul></ul>
  3. 3. Stock Markets NYSE, NASDAQ, ECN’s <ul><li>New York Stock Exchange </li></ul><ul><ul><li>2,800 listed stocks </li></ul></ul><ul><ul><li>Most liquid market </li></ul></ul><ul><ul><li>Humans (specialists) match bids and offers </li></ul></ul><ul><ul><li>Physical floor on Wall Street </li></ul></ul><ul><ul><li>Owned by 1,366 seat holders </li></ul></ul>
  4. 4. NASDAQ or Over-the-Counter <ul><li>National Association of Securities Dealers Automated Quotation System </li></ul><ul><ul><li>Trades 3,400 stocks </li></ul></ul><ul><ul><li>No formal listings </li></ul></ul><ul><ul><li>But traded companies must register with SEC </li></ul></ul><ul><ul><li>Traders at hundreds of locations </li></ul></ul><ul><ul><li>Loose federation of electronic traders </li></ul></ul>
  5. 5. Electronic Communications Networks (ECN’s) <ul><li>Trade exchange-listed and NASDAQ stocks </li></ul><ul><li>Collect and post bids and offers </li></ul><ul><li>Match orders electronically </li></ul><ul><li>Execution is immediate </li></ul><ul><li>Have 7% of the trading volume in NYSE stocks and 83% of OTC stocks </li></ul><ul><li>Biggest: Instanet, Island and ArcaEx </li></ul>
  6. 6. Regulation <ul><li>SEC plus self-regulation </li></ul><ul><li>Securities Act of 1933 associated with new securities </li></ul><ul><li>Securities Exchange Act – 1934 regulates secondary market and financial reporting </li></ul><ul><li>Investment Advisors Act of 1940 – covers all types of advisors and mutual funds </li></ul>
  7. 7. Stock Trading <ul><li>Exchange assigns stock to a &quot;specialist&quot; who buys and sells the issue to &quot;maintain a fair and orderly market&quot;. </li></ul><ul><li>Orders can take various forms </li></ul><ul><li>Short selling – borrow a stock, sell it in expectation of buying back at lower price </li></ul><ul><li>Market order – immediate at best possible price </li></ul>
  8. 8. Brokers <ul><li>Licensed by SEC </li></ul><ul><ul><li>Can sanction rule-breakers; names in newspapers </li></ul></ul><ul><li>Types – full service versus discount brokers </li></ul><ul><ul><li>500 shares @ $20 = $10,000 investment </li></ul></ul><ul><ul><li>Commissions: FS = $253; Discount $7 to 30 </li></ul></ul><ul><li>Registration – you can hold paper certificates or broker can hold electronically </li></ul>
  9. 9. Stock Brokers <ul><li>A person who buys and sells stock on behalf of clients. </li></ul><ul><li>Operates as an agent </li></ul><ul><ul><li>Doesn’t own the securities but matches buy and sell orders </li></ul></ul><ul><li>Securities Investor Protection Corp (SPIC) insures customer accounts against financial failure of brokers </li></ul>
  10. 10. SIPC <ul><li>Securities Investor Protection Corp. </li></ul><ul><li>Federal agency but not like FIDC </li></ul><ul><li>Does not protect against loss of value </li></ul><ul><li>Replaces securities stolen by a broker or loss through failure of brokerage holding your securities </li></ul><ul><ul><li>Up to $500,000; 99% recovery rate </li></ul></ul>
  11. 11. Brokerage Fees <ul><li>Have been increasing </li></ul><ul><li>What can you do to hold down? </li></ul><ul><ul><li>Do you even need a broker? </li></ul></ul><ul><ul><li>Trade online </li></ul></ul><ul><ul><li>Watch asset level- big balances help a lot </li></ul></ul><ul><ul><li>Consolidate household accounts </li></ul></ul><ul><ul><li>Opt for e-mail confirms </li></ul></ul>
  12. 12. Sources of Information <ul><li>Annual reports to shareholders </li></ul><ul><li>(Full service) broker reports </li></ul><ul><li>Rating agencies </li></ul><ul><li>Press – WSJ, Barons, Fortune Value Line </li></ul><ul><li>SEC's online EDGAR </li></ul><ul><li>Watch out for &quot;free advice&quot; </li></ul>
  13. 13. Registration <ul><li>Book entry – completely electronic </li></ul><ul><ul><li>No paper certificates </li></ul></ul><ul><ul><li>More convenient, less costly </li></ul></ul><ul><li>Joint tenancy with Right of Survivorship </li></ul><ul><ul><li>Surviving owner receives full ownership </li></ul></ul><ul><li>Tenancy-in-Common - goes to heirs </li></ul>
  14. 14. Key Topics <ul><li>IPO </li></ul><ul><li>Investment banker </li></ul><ul><li>Exchanges vs OTC </li></ul><ul><li>International Market </li></ul><ul><li>Intent of regulation </li></ul><ul><li>Market orders only </li></ul><ul><li>Sources of info </li></ul>

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