Understanding

UnderstandingSecurities
Securities
and
andSecurities
SecuritiesMarkets
Markets
Chapter
21

THE
THEFUTURE
FUTUREOF
OFBUSINESS
BUSINESS
Gitman
Gitman&&McDaniel
McDaniel
55ththEdition
Edition

Prepared
Preparedby
by
Chapter 21

Deborah Baker
Deborah Baker
Texas
Texas ChristianUniversity
Christian University
 Learning Goals

1 How do common stock and preferred stock differ as

investments?
2 What are bonds, and what investment advantages and
disadvantages do they offer?
3 What other types of securities are available to investors?
4 What is the function of the securities markets?
5 Where can investors buy and sell securities, and how are
these securities markets regulated?
Chapter 21

Copyright 2005 by South-Western, a division of 2

 Learning Goals

6 Which sources of investment information are the most

helpful to investors?
7 What can investors learn from stock, bond, and mutual
fund quotations?
8 What are the current trends in securities markets?
Chapter 21

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 1 Learning Goal 1

How do common stock and

preferred stock differ
as investments?
Chapter 21

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 1 Stocks and Bonds

Investment
Investmentcertificates
certificatesthat
that
Securities
Securities represent
representeither
eitherequity
equityorordebt.
debt.

Stocks
Stocks Bonds
Bonds

Common Corporate Bonds

Preferred Government
Securities
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 1 Stocks

Ownership
Ownership that
that allows
allows voting
voting rights.
rights.
Common
Common Can
Stock Can be
be bought
bought and
and sold
sold (liquidity).
(liquidity).
Stock May
May pay
pay dividends
dividends

Dividends
Dividends set
set at
at issuance,
issuance,
and
and are
are paid
paid before
before common
common stock
stock
Preferred
Preferred dividends
Stock dividends
Stock Ownership
Ownership does
does not
not allow
allow
voting
voting rights.
rights.
Chapter 21

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 2 Learning Goal 2

What are bonds, and what

investment advantages and
disadvantages do they offer?
Chapter 21

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 2 Types of Corporate Bonds
Collateral
Collateral trust
trust bonds
bonds

Convertible
Convertible bonds
bonds

Debenture
Debenture

Equipment
Equipment trust
trust certificates
certificates

Floating-rate
Floating-rate bonds
bonds

High-yield
High-yield (junk)
(junk) bonds
bonds

Mortgage
Mortgage bonds
bonds
Chapter 21

Zero-coupon
Zero-coupon bonds
bonds

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 2 Government Securities

Treasury
Treasury Bills
Bills

U.S.
U.S. Treasury
Treasury Treasury
Treasury Notes
Notes

Treasury
Treasury Bonds
Bonds

General
General Obligation
Obligation
Bonds
Bonds
Municipal
Municipal Bonds
Bonds
Revenue
Revenue Bonds
Bonds
Chapter 21

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 2
Moodys and Standard & Poors Bond Ratings
Chapter 21

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 3 Learning Goal 3

What other types of securities

are available to investors?
Chapter 21

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 3 Other Types of Securities

Financial-services
Financial-servicescompany
company
Mutual
MutualFund
Fund that
thatpools
poolsinvestors
investorsfunds
funds
to
tobuy
buyaaselection
selectionof
ofsecurities
securities

Legally
Legallybinding
bindingobligations
obligationstotobuy
buy
Futures
FuturesContracts
Contracts or
orsell
sellcommodities
commoditiesor or
financial
financialinstruments
instrumentsat
atlater
laterdate
date

Contracts
Contractsto tobuy
buyor
orsell
sellquantities
quantities
Options
Options of
ofcommon
commonstocks
stocksororfinancial
financial
instruments
instrumentsatatlater
laterdate
date
Chapter 21

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 3 Appeal of Mutual Funds

Good way to hold a diversified,

less risky, portfolio

Professional management

May offer higher returns

Chapter 21

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 4 Learning Goal 4

What is the function

of the securities market?
Chapter 21

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 4 Securities Market

Help
Helpcompanies
companiesraise
raise
Investment
Investment long-term
long-termfinancing,
financing,
Bankers
Bankers aaprocess
processcalled
called
underwriting
underwriting

AAperson
personlicensed
licensedtotobuy
buy
Stockbroker
Stockbroker and
andsell
sellsecurities
securitiesonon
behalf
behalfofofclients
clients
Chapter 21

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 4 Types of Markets

Primary
Primary New
Newsecurities
securitiesare
are
Market
Market sold
soldtotothe
thepublic
public

Old
Old(already
(alreadyissued)
issued)securities
securities
Secondary
Secondary are
arebought
boughtand
andsold,
sold,or
ortraded,
traded,
Market
Market among
amonginvestors
investors
Chapter 21

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 5 Learning Goal 5

Where
Where can
can investors
investors buy
buy and
and
sell
sell securities,
securities, and
and how
how are
are these
these
security
security markets
markets regulated?
regulated?
Chapter 21

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 5 Buying and Selling at
Securities Exchanges

Organized
Organized Stock
Stock Exchanges
Exchanges
Types
Typesofof
Securities
Securities
Markets
Markets
Over-the-Counter
Over-the-Counter Market
Market
Chapter 21

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 5 U.S. Stock Exchanges

New
New York
York Stock
Stock Exchanges
Exchanges
(NYSE)
(NYSE)

American
American Stock
Stock Exchange
Exchange
(AMEX)
(AMEX)
Chapter 21

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 5 Anatomy of a Stock Trade
Chapter 21

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 5 Global Trading and Foreign Exchanges
London
London

NYSE
NYSE
NASDAQ Tokyo
Tokyo
NASDAQ

Toronto
Toronto Buenos
BuenosAires
Aires

Frankfurt
Frankfurt Hong
HongKong
Kong

Montreal
Montreal Zurich
Zurich

Paris
Paris Sydney
Sydney
Chapter 21

Taiwan
Taiwan

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 5 The Over-the-Counter Market
AAtelecommunications
telecommunications
Over-the-Counter
Over-the-Counter network
networkthat
thatlinks
linksdealers
dealers
(OTC)
(OTC) throughout
throughoutthe
theU.S.
U.S.and
and
Market
Market enables
enablesthem
themto totrade
trade
securities
securities

The
Thefirst
firstelectronic-based
electronic-based
NASDAQ
NASDAQ stock
stockmarket
marketand
andthe
the
fastest
fastestgrowing
growingpart
partof
ofthe
the
stock
stockmarket.
market.
Chapter 21

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 5 Bull or Bear Market?

Bull
Bull Prices
Pricesrise.
rise.
Market
Market Better
Betterreturns.
returns.

Bear
Bear Prices
Pricesgo
godown.
down.
Market
Market Low,
Low,orornegative,
negative,returns.
returns.
Chapter 21

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 5 Regulation of Securities Markets

Securities The
Themain
mainfederal
federalgovernment
government
Securities and
and agency
Exchange agencyresponsible
responsiblefor
for
Exchange regulating
regulatingthe
theU.S.
U.S.securities
securities
Commission
Commission industry.
industry.

The
Theuse
useofofinformation
informationthat
thatis
is
not
notavailable
availabletotothe
thegeneral
general
Insider
Insider Trading
Trading public
publicto
tomake
makeprofits
profitson
on
securities
securitiestransactions.
transactions.
Chapter 21

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 5 Securities Industry Violations

Insider trading
Misrepresenting or omitting information
Stealing customer funds or securities
Violating responsibilities to treat customers fairly
Selling securities without proper SEC registration
Chapter 21

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 5 Circuit Breakers

Measures
Measuresthat thatstop
stoptrading
trading
in
inthe
thesecurities
securitiesmarkets
markets
Circuit
Circuit Breakers
Breakers for
foraashort
shortperiod
periodto
to
limit
limitthe
theamount
amountthe
themarket
market
can
candrop
dropin
inone
oneday.
day.

http://www.sec.gov/answers/circuit.htm
Chapter 21

Copyright 2005 by South-Western, a division of 26

 6 Learning Goal 6

Which
Which sources
sources of of investment
investment
information
information areare the
the most
most
helpful
helpful to
to investors?
investors?
Chapter 21

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 6 Popular Sources of Investment Information

Company
Company financial
financial statements
statements

Economic
Economic and
and financial
financial publications
publications

Online
Online information
information resources
resources

Security
Security price
price quotations
quotations

Market
Market averages
averages and
and indexes
indexes
Chapter 21

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 6 Economic and Financial Publications
Wall Street Journal
Barrons
Business Week
Kiplingers Personal Finance
Forbes
Fortune
Smart Money
Worth
Money
Chapter 21

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 6 Online Information Sources

CBS Marketwatch http://www.marketwatch.com

CNN Money http://money.cnn.com
EXCITE http://money.excite.com
Yahoo! Finance http://finance.yahoo.com
Morningstar http://www.morningstar.com
Chapter 21

See Exhibit 21.5

for more sources
Copyright 2005 by South-Western, a division of 30
 7 Learning Goal 7

What
What can
can investors
investors learn
learn
from
from stock,
stock, bond,
bond, and
and
mutual
mutual fund
fund quotations?
quotations?
Chapter 21

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 7 Stock Quotations
Chapter 21

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 7 Bond Quotations
Chapter 21

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 7 Market Averages and Indexes
Summarizes
Summarizesprice
pricebehavior
behaviorbased
based
Market
Market on
onaverage
averageprice
priceof
ofgroups
groupsof of
Averages
Averages securities
securitiesat
ataagiven
givenpoint
pointin
intime.
time.

Measures
Measuresof ofthe
thecurrent
currentprice
price
Market
Market behavior
behaviorof
ofsecurities
securitiesrelative
relativetotoaa
Indexes
Indexes base
basevalue
valueset
setatatan
anearlier
earlierpoint.
point.

Measures
Measuresthe
thestock
stockprices
pricesof
of30
30large
large
Dow
DowJones
Jones well-known
well-knowncorporations
corporationsthat
thattrade
tradeon
on
Industrial
IndustrialAverage
Average the
theNYSE
NYSEand
andNASDAQ
NASDAQ

Market
Marketindex
indexthat
thatincludes
includes400
400
Standard
Standard&&Poors
Poors industrials,
industrials,20
20transportation,
transportation,40
40
500
500stock
stockindex
Chapter 21

index public
publicutility,
utility,and
and4040financial
financialstocks.
stocks.
Copyright 2005 by South-Western, a division of 34
 8 Learning Goal 8

What
What are
are the
the current
current trends
trends in
in
securities
securities markets?
markets?
Chapter 21

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 8 Trends in Securities and Securities Markets

Rebuilding
Rebuilding
Investor
Investor
Trust
Trust

Stronger
Stronger Role
Role Sarbanes-Oxley
for the Sarbanes-Oxley
for the Act
SEC Act of
of 2002
2002
SEC
Chapter 21

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