INVESTMENT MANAGEMENT IMELDA T.

ANGELES

Identify the basic types of securities markets and describe their

characteristics;

Explain the initial public offering (IPO) process; Describe broker markets and dealer markets, and discuss how they differ from alternative trading systems;

Review the key aspects of the globalization of securities markets,

and discuss the importance of international markets;

Discuss trading hours and the regulation of securities markets; Explain long purchases, margin transactions and short sales.

are forums that allow suppliers and demanders of securities to make financial transactions.

Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)

ISSUING FIRM

LEAD UNDERWRITER

INVESTME NT BANKER A

INVESTME NT BANKER B

INVESTME NT BANKER C

INVESTME NT BANKER C

PRIVATE INVESTORS

Every IPO release by the exchange are mostly likely observed by hundred of buyer around the market, since all of us is looking forward as an inception of a new or better trading prospect.

The best way to hit profit from an IPO is to buy the stocks as early as possible and hope that the crowd will follow, and as per history, yes they will do. Before this new publicly listed company will be crowded by another new buyers and speculators, established immediately your target price and be realistic that your target is really achievable. Remember, your buying only this share for trading and not for your longterm investment as of now. When everything are all set, sell all your purchased stocks, run and enjoy your profit! Just back back again when the price will return to its fundamental value.

Good example from our local publicly listed companies in the Philippines is the Century Peak Metal Holdings, Inc. (CPM). From the opening on October 6, 2009, the stock price first posted is only Php1.50 per share, continuously surge until December 16, 2009 where it peaked at 7.10 per share. Based on that, lets say that you managed only to buy 3.0 per share and sold it at 6.0 per share, and then you profited 100% in just two months of holding a share. But after that blast, the company stock price is downed back to 3.50 per share until today.,

Underwriting the offering: promoting the stock and facilitating the sale of companys shares Prospectus: registration statement describing the issue and the issuer

Red Herring: preliminary prospectus available during the waiting period

Quiet Period: time period after prospectus is filed when company must restrict what is said about the company Road Show: series of presentations to potential investors 2-8

assist companies to issue new securities advise firms with regard to major financial transactions UNDERWRITING - process that involves purchasing the securities from the issuing firm at an agreed-on price and bearing the risk of reselling them to the public.

Investment & Capital Corporation of the Philippines (ICCP) is a leading Philippine investment house

UNDERWRITING SYNDICATE SELLING GROUP GROSS SPREAD lead underwriters management fee, syndicate underwriters discounts, selling groups selling concession. Ex: P24 to P24.25, P24.25 to P25.25, P26 to P25.25

Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)

ISSUING FIRM

LEAD UNDERWRITER

INVESTMENT BANKER A

INVESTMENT BANKER B

INVESTMENT BANKER C

INVESTMENT BANKER C

PRIVATE INVESTORS

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BUYER AND SELLER ARE BROUGHT TOGETHER

SECONDARY MARKET

OFFER TO BUY OR SELL A CERTAIN AMOUNT OF SECURITIES AT STATED PRICES.

BROKER MARKET

DEALER MARKET

NATIONAL EXCHANGES

REGIONAL EXCHANGES

NASDAQ

OVER THE COUNTER

Secondary Market: the market in which securities are traded after they have been issued Role of Secondary Markets
Provides liquidity to security purchasers Provides continuous pricing mechanism

Organized Securities Exchanges: centralized institutions in which transactions are made in already outstanding securities Over-the-counter (OTC) Market: widely scattered telecommunications network in which transactions are made in both initial public offerings and already outstanding securities
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The New York Stock Exchange (NYSE)

Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges Specialists make transactions in key stocks Strictest listing policies

The American Exchange (AMEX)

Second largest stock exchangeabout 800 companies

and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot meet stricter listing requirements for NYSE
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Regional Stock Exchanges

Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,

and Cincinnati

Options Exchanges
Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)

Futures Exchanges
Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)

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Nasdaq
Electronic network that connects OTC dealers with buyers

and sellers About 7,000 stocks trade on the Nasdaq Both IPOs and secondary distributions are sold on OTC

Bid Price: the highest price offered by market maker to purchase a given security
Ask Price: the lowest price at which a market maker is willing to sell a given security

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It is the largest electronic screenbased equity securities trading market in the United States and secondlargest by market capitalization in the world

How firms issue securities? Primary Markets Secondary Markets Primary Markets: IPOs, Private Placement and Rights Offering

Underwriting the offering: promoting the stock and facilitating the sale of companys shares Prospectus: registration statement describing the issue and the issuer

Red Herring: preliminary prospectus available during the waiting period

Quiet Period: time period after prospectus is filed when company must restrict what is said about the company Road Show: series of presentations to potential investors 2-22

How firms issue securities? Primary Markets Secondary Markets Primary Markets: IPOs, Private Placement and Rights Offering Secondary Markets: Organized Exchanges, Over-the-counter market, Direct trading between two parties

Organized Securities Exchanges: centralized institutions in which transactions are made in already outstanding securities

Over-the-counter (OTC) Market: widely scattered telecommunications network in which transactions are made in both initial public offerings and already outstanding securities.
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The New York Stock Exchange (NYSE)

Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges Specialists make transactions in key stocks Strictest listing policies

The American Exchange (AMEX)

Second largest stock exchangeabout 800 companies

and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot meet stricter listing requirements for NYSE
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Regional Stock Exchanges

Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,

and Cincinnati

Options Exchanges
Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)

Futures Exchanges
Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)

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Third Market
Large institutional investors go through market makers on the

OTC market Institutional investors (mutual funds, life insurance companies, pension funds) receive reduced trading costs due to large size of transactions

Fourth Market
Large institutional investors deal directly with each other to bypass

OTC market makers Electronic Communications Networks (ECNs) allow direct trading ECNs account for about a third of all Nasdaq transactions

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How firms issue securities? Primary Markets Secondary Markets Primary Markets: IPOs, Private Placement and Rights Offering Secondary Markets: Organized Exchanges, Over-the-counter market, Direct trading between two parties Investment Banking

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Bull Market

Favorable markets Rising prices Investor/consumer optimism Economic growth and recovery Government stimulus
Unfavorable markets Falling prices Investor/consumer pessimism Economic slowdown Government restraint

Bear Market

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GLOBALIZATION OF SECURITIES

THE INTEGRATION OF FINANCIAL INSTITUTIONS IN THE EUROPEAN SECURITIES MARKETS TO CREATE SECURITIES MARKET IN THE THE TOP FOURCROSS-BORDER MARKETS WORLD ARE: TO COMPETE MORE EFFECTIVELY IN THE PANNYSE New York Stock Exchange EUROPEAN-EQUITY TRADING MARKETS NASDAQ National Association TO CREATE A WORLDWIDE STOCK EXCHANGE of Securities Dealers AutomatedQuotations ISE- London International Stock Exchange TSE Tokyo Stock Exchange

PARIS, AMSTERDAM, BRUSSELS, LISBON EXCHANGES

SCANDINAVIAN MARKETS-

EURONEXT INTERNATIONAL INVESTMENT PERFORMANCE

TOKYO AND AUSTRALIA STOCK EXCHANGES

NOREX

NASDAQ+JAPAN, HONGKONG, CANADA, AUSTRALIA

Diversification: the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risks. Use of international securities improves diversification
More industries and securities available Securities denominated in different currencies Opportunities in rapidly expanding economies

International Investment Performance

Opportunities for high returns Foreign securities markets do not necessarily move with the

U.S. securities market Foreign securities markets tend to be more risky than U.S. markets 2-35

Financial Market

Brokers and Agents Capital market Investment Bankers

Money market

Primary Mkt Inst

Commercial banks

Credit unions

Primary market Firms raise capital

Secondary market Organized exchanges Over-the counter market

Short term instruments debt

equity

Public

Private placement

Direct Ways to Invest in Foreign Securities

Purchase securities on foreign stock exchanges Buy securities of foreign companies that trade on U.S.

stock exchanges Buy American Depositary Receipts (ADRs): dollar denominated receipts for stocks of foreign companies held in vaults of banks

Indirect Ways to Invest in Foreign Securities

Buy mutual funds that invest in foreign securities

Usual investment risks still apply

Government policies risks

Unstable foreign governments Different laws in trade, labor or taxation Different economic and political conditions Less stringent regulation of foreign securities markets

Currency exchange rate risks

Value of foreign currency fluctuates compared to

U.S. dollar Value of foreign investments can go up and down with exchange rate fluctuations

Regular trading session for U.S. Exchanges and Nasdaq

9:30 A.M. to 4:00 P.M. Eastern time

Extended-hours electronic-trading sessions

Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time Orders only filled if matched with identical

opposing orders 24-hour market probably in near future

After-hours trades
Brokerage firms allow after-hours trading to individuals

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Securities Act of 1933

Required full disclosure of information by companies

Securities Act of 1934

Established SEC as government regulatory body

Maloney Act of 1938

Allowed self-regulation of securities industry through

trade associations such as the National Association of Securities Dealers (NASD)

Investment Company Act of 1940

Created & regulated mutual funds

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Investment Advisors Act of 1940

Required investment advisers to make full disclosure about their

backgrounds and their investments, as well as register with the SEC

Securities Acts Amendments of 1975

Abolished fixed-commissions and established an electronic

communications network to make stock pricing more competitive

Insider Trading and Fraud Act of 1988

Prohibited insider trading on nonpublic information

Sarbanes-Oxley Act of 2002

Tightened accounting and audit guidelines to reduce

corporate fraud
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Long Purchase
Investor buys and holds securities Buy low and sell high

Make money when prices go up

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Margin Trading
Uses borrowed funds to purchase securities
Currently owned securities used as collateral for margin

loan from broker

Margin requirements set by Federal Reserve Board
Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement, investor puts up $2,222.50 and broker will lend remaining $2,222.50

Can be used for common stocks, preferred stocks, bonds,

mutual funds, options, warrants and futures

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INITIAL MARGIN MAINTENANCE MARGIN MARGIN CALL

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Advantages
Allows use of financial leverage Magnifies profits

Disadvantages
Magnifies losses Interest expense on margin loan Margin calls

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buys a 100 shares of stock at P50Valueshare, putting up balance per of securities Debit a 60% Margin margin. of securities Value V D a. Compute for the debit balance. b. how much equity capital must the investor V provide to make this transaction? Example of Using price rises to P60 per share, c. If the stock Margin what is the investors new margin position? d. If the price of the stock goes down to P40 per share, what is the investors new margin Copyright 2005 Pearson position? Addison-Wesley. All rights
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Assume thatFormula Basic Margin an investor

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Assume you want Total buy 100 shares of stockMarket to at Total Market current interest value of value of P50 per share because you feel it will risetosecurities income paid on securities Return on received margin loan at sale at purchase invested capital P75 within six months. The stock pays P2 per Amount of equity at purchase sharefrom a margin stock annual dividend. Stocks are bought transaction with a 50% margin and will pay 10% interest on the margin loan. Example of Return on Invested Capital How much is the return on invested capital from a margin transaction?
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Return on Invested Capital

Short Selling
Investor sells securities they dont own Investor borrows securities from broker Broker lends securities owned by other investors

that are held in street name

Sell high and buy low

Investors make money when stock prices

go down
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Advantages
Chance to profit when stock price declines

Disadvantages
Limited return opportunities: stock price cannot go

below $0.00 Unlimited risks: stock price can go up an unlimited amount If stock price goes up, short seller still needs to buy shares to pay back the borrowed shares to the broker Short sellers may not earn dividends
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Elmo Inc.s stock is currently selling at P60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney realizes if she makes a P100-share transaction.
She sells short and repurchases the borrowed shares at P70 per share. She takes a long position and sells the stock at P75 per share. She sells short and repurchases all borrowed shares at 45 per share. She takes a long position and sells the stock at P60 per share.

Learning Goals
1. Identify the basic types of securities markets and

describe the IPO process.

2. Explain the characteristics of organized securities

exchanges.
3. Understand the over-the-counter markets and

alternative trading systems, and the general conditions of securities markets.

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Learning Goals (contd)

4. Review the importance of global securities markets, their

performance, procedures and and associated risks.

5. Discuss trading hours and regulation of

securities markets.
6. Explain the motives, procedures and calculations in long

purchases, margin transactions and short sales.

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Jesse Livermore was a famous american stock market investor and influential stock trader of the 20th century. I know from experience that nobody can give me a tip or series of tips that will make money for me than my own judgment.

Ben Graham is a famous American stock market investor that influenced the investing style of Warren Buffett.

If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.

The worlds richest man, Warren Buffett, is also the most famous stock investor.

I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

Peter Lynch is a Wall Street stock investor. Lynch's achieved dollar successes in a range of stocks including Fannie Mae, Ford, Philip Morris, MCI, Volvo, General Electric, General Public Utilities, Student Loan Marketing, Kemper, and Lowes.

Although it's easy to forget sometimes, a share is not a lottery ticket... it's partownership of a business.

WHAT IS GLOBALIZATION?
Is an integration of world economy. products and services information barriers technology for global trading round-the-globe, roundthe-clock automated system

Globalization of equity securities trading is a term that covers a variety of related growth trends. cross-listing of securities in several countries, cross-national portfolio diversification and hedging, holding membership (generally through affiliates) in another countrys exchanges, legal or contractual ties between exchanges, electronic systems for 24- hour trading, passing the book, the development of cross-national stock index derivative products, and related phenomena such as multinational primary offerings of stock and international mutual funds.

DIVERSIFICATION OF SECURITIES enable investors to seek out opportunities to profit from rapidly expanding economies throughout the world.
A wider range of securities and industries; Securities traded in a larger number of markets Securities denominated in different currencies