BUS 100 - Chptr 19 - Using Securities Markets for Financing & Investment Opportunities

over-the-counter (OTC) market

Provides companies and investors with a means to trade stocks not listed on the large securities exchanges. -- A network of several thousand brokers who maintain contact with one another and buy and sell securities through a nationwide electronic system. Trading is conducted through 2 parties directly instead of though an exchange like the NYSE.

stockbroker

Registered representative who works for a brokerage firm as a market intermediary to buy and sell securities for clients. - place an order & negotiate a price - transaction completed, trade is reported to broker, who notifies you

SEC (JOBS Act of 2012)

Requires companies looking for crowdinvestors to publicly disclose their financials and work through one of two types of intermediarites: - Broker-dealers (Venture.co, FlashFunders, North Capital) do a lot of the legwork by offering document drafting and investment management services - Funding portal (StartEngine, SeedInvest, NextSeed) facilitators that allow start-ups and investors to find each other. The do NOT search for investors or provide investment advice. -- SeedInvest only listed 1 percent of companies that applied.

SEC

Responsible for regulating various stock exchanges.

equity financing

Selling stock in the corporation

mutual funds

Sources to evaluate these: Morningstar Investor newsletter, Bloomberg Businessweek, The Wall Street Journal, Money, Forbes, Investor's Business Daily

investment bankers

Specialists who assist in the issue and sale of new securities. -- Can underwrite new issues of stocks and bonds by the investment firm buying the entire stock or bond at an agreed on discount, and selling the issue to private or institutional investors at full price.

Bond rating organizations

Standard & Poor's, Moody's Investors Service & Fitch Ratings rate bonds according to their degree of risk. - Bonds can range from the highest quality to junk bonds

Investment program

Step 1 - analyze your level of risk tolerance - other factors: desired income, cash requirements, need to hedge against inflation and investment's growth prospects

growth stocks

Stocks of corporations in emerging fields such as technology, biotechnology, or Internet-related firms, whose earnings are expected to grow at a faster rate than other stocks. - riskier, offer potential for higher returns

Securities & Exchange Act of 1934

Created the SEC

risk/return trade-off

Important in any investment strategy. - growth (choosing stocks you believe will increase in price) - income (choosing bonds that pay consistent interest or stocks that pay high dividends)

Troubled Asset Relief Program (TARP)

$700 billion financial package allowed the Treasury Dept to purchase or insure "troubled assets" to bolster the banks and bail out the automotive industry and insurer American International Group (AIG)

Black Tuesday

** October 29, 1929 - stock market lost almost 13% of its value in a single day - great depression followed ** October 19, 1987 - largest one day drop in history, over 22% of its value ** October 27, 1987

New stocks added to Dow

- 1991 Disney - service sector - 1999 Home Depot & SBC Communications - 1st NASDAQ stocks (Intel & Microsoft) - 2013 Visa, Goldman Sachs, Nike (replaced Alcoa, Bank of America, Hewlett-Packard - 2015 Apple replaced AT&T

Intercontinental Exchange (ICE)

- 2005 NYSE merged with Archipelago (securities company specializing in electronic trades) - 2007 Merged with Europe's Euronext exchange and became NYSE Euronext - 2013 this organization located in Atlanta purchased the NYSE Euronext for $8.2 billion.

advantages of issuing stock

- As owners of the business, stockholders never have to be repaid their investment. - There is no legal obligation to pay dividends to stockholders; therefore, the firm can reinvest income (retained earnings) to finance future needs. - Selling stock can improve the condition of a firm's balance sheet since issuing stock creates no debt. (A corporation may also buy back its stock to improve its balance sheet and make the company appear stronger financially.)

disadvantages of issuing stock

- As owners, stockholders have the right to vote for the company's board of directors (one vote per share of stock). Issuing new shares can alter the control of the firm. - Dividends are paid from profit after taxes and are not tax-deductible. - The need to keep stockholders happy can affect managers' decisions.

Dow Jones Industrial Average (the Dow)

- Average cost of 30 selected industrial stocks - The financial industry uses it to give an indication of the direction (up or down) of the stock market over time. - Charles Dow began the practice in 1884 using the prices of 12 key stocks (1982 - 30 stocks) - American Cotton Oil, American Sugar Refining Co., American Tobacco, Chicago Gas, Distilling & Cattle Feeding Co, General Electric Co., National Lead, North American Co., Tennessee Coal, Iron & Railroad Co, U.S. Leather, U.S. Rubbor Co)

new exchanges

- Bats Global Markets - IEX exchanges

Securities markets

- Financial marketplaces for stocks, bonds and other investments that serve 2 major functions: 1 - Assist businesses in finding long-term funding to finance capital needs (expanding operations, developing new products, buying major goods and services) 2 - Provide investors a place to buy and sell securities (investments like stocks and bonds) that can help them build their financial future.

JOBS Act of 2012

- Now gives small businesses access to public securities markets. - Goals -- Make crowdinvesting more accessible to smalls businesses (before they could only raise money from accredited investors only w/net work over $1 million) -- Allows businesses to accept investment from unaccredited investors

junk bonds

- Risky high-yield bonds. High risk and high default rates. - Pay investors interest as long as the value of the company's assets remain high and its cash flow stays strong.

stock splits

- high per-share prices an induce companies to delcare these in which they issue tow or more shares for every one that's outstanding - cause no change in the firm's ownership structure and no immediate change in the investment's value - company cannot be forced to do this

online trading services

- TD Ameritrade, E*Trade, Charles Schwab, Fidelity - willing to do their own research & make investment decisions without the direct assistance of a broker - charge lower trading fees - provide company financial data, price histories of a stock and analyst's reports - level of information services you receive depends on the size of your account and level of trading

publications with information about stocks & other investments

- The Wall Street Journal, Barron's, Investor's Business Daily - MSN Money, Yahoo! Finance, CNBC (carry up to the minute information)

capital gains

- The positive difference between the price at which you bought a stock and what you sell it for. - A company that achieves its objectives offer great potential for this.

IPOs

- Visa $18 billion in 2008 was largest, until Alibaba's $21 billion in 2014

National Association of Securities Dealers Automated Quotations (NASDAQ)

- World's first electronic stock market. - Evolved from the OTC market but is no longer part of it. - Electronic-based network that links dealers so they can buy and sell securities electronically rather than in person. - Largest U.S. electronic stock trading market and has more trading volume than any electronic exchange in the world. - Originally dealt with smaller firms, but today well known companies trade their stock on this (Facebook, Microsoft, Intel, Google, Starbucks)

advantages of issuing bonds

- bondholders are creditors of the firm, not owners, seldom vote on corporate matters - bond interest is a business expense & tax-deductible to the firm - bonds are a temporary source of funding, eventually repaid and debt obligation is eliminated - bonds can be repaid before maturity date if they are callable, can also be converted to common stock

2000-2002

- bursting of the dot-com bubble was the primary reason for the stock market decline at this time bubble - (caused when too many investors drive price of something unrealistically high) - accompanies by disclosures of financial fraud at WorldCom, Enron & Tyco

index fund

- constructed to match or track the components of a market index such as Standard & Poor's 500 (includes leading companies and is considered the best market gauge of large-cap stocks) - low cost, easy to obtain, can be held by investors for a long period of time - matched or beat higher priced funds performance - recommended for all levels of investors - may focus on large companies, small companies, emerging countries, or real estate (REITs)

disadvantages of issuing bonds

- increase debt (long-term liabilities) and may adversely affect the market's perception of the firm - paying interest on bonds is a legal obligation. If not paid, bondholders can take legal action to force payment. - face value of the bond must be repaid on the maturity date, may cause cash flow problems when repayment comes due

convertible bonds

- investors can convert these into shares of common stock in the issuing company - can be an incentive for an investor because common stock tends to grow faster than a bond

program trading

- investors give their computers instruction to sell automatically to avoid potential losses, if the price of their stock dips to a certain point - caused market turmoil of 1987, 1997, 200-2002, 2008

bonds

- issued with an interest rate - unsecured or secured by some type of collateral - must be repaid by their maturity date

mutual funds

- offer small investors a way to spread the risk of owning stocks, bonds, and other securities & have their investments managed by a financial specialist for a fee

Municipal bonds

- offered by local governments and often have advantages such as tax-free interest - some may be insured

penny stocks

- ownership in companies that compete in high-risk industries like oil exploration - sell for less than $2 a share - very risky investments

callable bond

- permits the bond issuer to pay off the bond's principal before its maturity date - gives companies some discretion in their long-term forecasting - if a company calls a bond before maturity, it often pays investors a price above the bond's face value

advantages of sinking finds

- provide for an orderly retirement (repayment) of a bond issue - reduce the risk the bond will not be repaid - support the market price of the bond because they reduce the risk the bond will not be repaid

stock certificate

- represents stock ownership - specifies the name of the company, number of shares owned and type of stock it represents - companies today are not required to issue paper ones

exchange traded funds (ETFs) (mutual fund)

- resemble both stocks and mutual funds - collections of stocks, bonds and other investments that are traded on securities exchanges, but are traded more like individual stocks than like mutual funds - can be purchased or sold at any time during the trading day like individual stocks

curbs and circuit breakers

- restrict program trading whenever the market moves up or down by a large number of points in a trading day - key computer is turned off and program trading is halted - circuit breakers (more drastic) triggered when Dow falls 10, 20 or 30 percent in a day (happened 10/27/97) -- halt trading for half an hour to two hours so traders have time to assess the situation

human financial managers, especially certified financial planners (CFPs)

- well schooled in estate planning, mortgage refinancing and trust investments, as well as any personal issues like planning for a child's education

prospectus

A condensed version of the detailed registration statement with the SEC that includes extensive economic and financial information. - required by the 1934 Securities & Exchange Act

brokerage firm

After you decide what stock or fund you want to buy, you find a __________________ _________________ authorized to trade securities to execute your order.

stock exchange

An organization whose members can buy and sell (exchange) securities on behalf of companies and individual investors.

insider

Anyone with securities information not available to the general public.

margin rates

Board of governors of the Federal Reserve System sets these in the U.S. market.

two

Bond interest is quoted for an entire year, but it is paid in ______________ installment(s).

inversely

Bond prices generally fluctuate _______________________ with current market interest rates. - as interest rates go up, bond prices fall and vice versa - bonds do have a degree of risk

NYSE

Bulk of their revenue comes from selling complex financial contracts (such as derivatives) and market data services to companies like Yahoo! and Google that offer stock quotes as a service on their websites.

long-term

Businesses prefer to meet their ________ ________________ financial needs by using retained earnings or borrowing funds from a lending institution (bank, pension fund, insurance company) or corporate bond issue. If they cannot, they may be able to raise capital by issuing corporate stock.

mutual fund

Buys stocks, bonds and other investments and then sells shares in those securities to the public. - like an investment company that pools investors' money and then buys stocks or bonds in many companies in accordance with the fund's specific purpose - very conservative (gov't securities) - greater risk (specialize in emerging biotech firms, internet companies, foreign companies, precious metals, other investments)

SEC

Companies that trade on the national exchanges must register with the ____________ and provide it with annual updates. - 1934 Act established guidelines -- companies must follow when issuing financial securities, such as stocks or bonds -- to prevent insiders within the company from taking advantage of privileged information they may have

NYSE

Computers for this transact thousands of stock trades within seconds.

Motley Fools

David & Tom Gardner

securities markets

Divided into primary and secondary markets: - Primary Market - handle sale of new securities -- Corporations make money on the sale of their securities (stock) only once, when they sell it on the primary market. -- Initial Public Offering (IPO) is the first public offering of a corporation' stock. - Secondary Market - Handles the trading of the securities between investors, with the sale going to the investor selling the stock, NOT the corporation whose stock is sold.

2010

Dodd-Frank Wall Street Reform and Consumer Protection Act passed - brought significant financial market regulation to the securities industry

20,000

Dow Jones Industrial Average closed above this for the first time in 2017.

SEC

Federal agency responsible for regulating various stock exchanges.

investment options

Five key criteria when selecting ___________ _____________: 1 - Investment risk (chance an investment will be worth less at some future time than it's worth now) 2 - Yield (expected ROI, such as interest or dividends, over a period of one year) 3 - Duration (length of time your money is committed to an investment) 4 - Liquidity (how quickly you can get back your invested funds in cash if you want or need them) 5 - Tax consequences (how the investment will affect your tax situation)

New York Stock Exchange (NYSE)

Founded in 1792 as a primarily floor-based exchange where trades physically took place on the floor

preferred stock

Given preference in the payment of company dividends and must be paid their dividends in full before any common stock dividends can be distributed. - Have a prior claim on company assets if the firm is forced out of business and its assets sold. - stockholders DO NOT get voting rights in the firm - may be issued with a par value that becomes the base for a fixed dividend the firm is willing to pay - it can be callable - stockholders could be required to sell their shares back to the corporation - can be converted to shares of common stock (but not the other way around) and it can be cumulative (if one or more dividends are not paid when promised, they accumulate and the corporation must pay them in full at a later date BEFORE it can distribute any common dividends

Securities Act of 1933

Helps protect investors by requiring full disclosure of financial information by firms selling bonds or tock. - Congress passed this legislation to deal with the free-for-all atmosphere that existed in the securities markets during the '20s & '30s that halped cause the Great Depression.

stock quote

Includes: - highest and lowest price stock traded for that day - stock's high and low over past 52 weeks - dividend paid (if any) - stock's dividend yield (annual dividend as a percentage of the stock's price per share) - ratios like price/earnings (P/E) ratio (price of the stock divided by the firm's per share earnings) - earnings per share - number of shares traded (volume) - total market capitalization fo the firm - stock's beta (measures degree of the stock's risk) - stock's intraday trading (trading throughout the current day)

U.S. government bonds

Investors turn to these for guaranteed income and limited risk. - Have financial backing and full faith and credit of the federal government.

Dodd-Frank Wall Street Reform Act

Key provisions of this act: - gave government power to seize and shutter large financial institutions on the verge of collapse - put derivatives and complicated financial deals (including those that packaged subprime mortgages) under strict governmental oversight - required hedge funds to register with the SEC and provide information about trades and portfolio holdings - created the Consumer Financial Protection Bureau to watch over the interests of American consumers by reviewing and enforcing federal financial laws

institutional investors

Large organizations - pension funds, mutual funds and insurance companies - that invest their own funds or the funds of others

only at the close of the trading day

Mutual funds permit investors to buy and sell shares

2017

NYSE changed rules allowing trading of all stocks

index funds

One way to diversify your investments is by investing in a variety of ________ __________________

principal (bond)

face dollar (dollar value) of a this - issuing company is legally bound to repay in full to the bondholder on the bond's maturity date

common stock

The most basic form of ownership in a firm. If a company issues only one type of stock, by law it must be common stock. - Holders have the right to: 1 - elect members of the company's board of directors and vote on important issues affecting the company 2 - share in the firm's profits through dividends, if approved by the firm's board of directors - Stockholders have a preemptive right to purchase new shares before anyone else, allowing them to maintain their proportional share of ownership in the company.

mutual fund

Things to check before buying: - long-term performance of fund's managers (more consistent the better) - fees and charges that can differ significantly

stock, bond

To get approval for ______________ or ________________ issues you must make extensive financial disclosures and undergo detailed scrutiny by the U.S. Securities and Exchange Commission (SEC).

unsecured (debenture) bonds secured bonds

Two different classes of corporate bonds that can be issued.

market behavior

You may want to follow the _____________ ____________ of specific stocks that catch your interest, even if you lack the money to invest in them.

OTC market

exchange that provides a means to trade stocks not listed on the national exchanges

First time

______________ __________________ corporate bond investors ask two questions. 1 - If I purchase a corporate bond, do I have to hold it until maturity date? (no, but you may not get the face value) -- may have to sell at a discount (price less than bond's face value) -- may be able to sell at a premium (price above face value) 2 - How can I evaluate the investment risk of a particular bond issue? -- Standard & Poor's, Moody's Investors Service & Fitch Ratings rate risk of many corporate and government bonds -- higher risk of a bond, higher interest rate (risk/return trade-off)

mutual fund managers

_______________ _____________ _______________ pick what they consider to be the best stocks and bonds available and help investors: - change investments more easily - diversity their investments

government securities

_________________________ ______________________ that compete with corporate bonds - U.S. government bond (issued by the federal gov't, considered the safest type of bond investment) - Treasury bill / T-bill (matures in less than a year, issues with a minimum denomination of $1,000) - Treasure note (matures in 10 years or less, sold in denominations of $1,000 up to $1,000,000) - Treasury bond (matures in 25 years or more; sold in denominations of $1,000 up to $1,000,000) - Municipal bond (issued by states, cities, counties, and other state & local government agencies; usually exempt from federal taxes) - Yankee bond (issued by a foreign government, payable in US dollars)

open-end funds (mutual fund)

accept investments of any interested investors

unsecured bonds (debenture bonds)

are not back by any specific collateral (land or equipment) - firms with excellent reputations and credit ratings

stock investors

are often called this according to their perception of the market - bulls (believe stock prices are going to rise and buy stock in anticipation of increase) BULL MARKET - overall prices are rising - bears (expect stock prices to decline and sell their stocks in anticipation of failing prices) BEAR MARKET - stock prices are declining

corporate bonds

are usually issued in units of $1,000 - government bonds can be issued in much larger amounts

robo-advisor

automated online tools that use advanced algorithms that - make investment suggestions - manage money - rebalance a client's portfolio - and shift investments to save taxes -- originally target customers were Millenials --- distrusted Wall Street, wanted to save money, grew up on technology, often overlooked because they lacked the minimum investment of $50K ADVANTAGES: fees are lower, don't require minimum amounts -- Invest in conservative exchange traded funds (ETFs) and high-rated bond issues, will rebalance your account when appropriate

secured bonds (sometimes called mortgage bonds)

backed by collateral such as land or buildings pledged to bondholders if interest or principal is not paid as promised

see photo on phone

bond rating agencies A - highest quality, high quality, upper medium grade B - medium grade, lower medium grade, speculative C - poor (high default risk), highly speculative, lowest grade

corporate bonds

bonds that are more risky and challenging

buying stock on margin

borrowing some of the stocks' purchase cost from the brokerage firm - the margin is the portion of the stocks' purchase price that investors must pay with their own money - investors must repay credit plus interest - if account goes down in value, broker may issue a margin call requiring investor to come up with funds to cover the losses (if the investor does not have the funds, the broker can legally sell off share to reduce their chance of loss - risky way to invest in stocks

stockbrokers & certified financial planners (CFPs)

both trained to give advice about the investment portfolio that will best fit each client's financial objectives

market order

buy or sell stock immediately at the BEST (not highest) price available

diversification

buying several different types of investments to spread the risk of investing - using a portfolio strategy or allocation model decreases the chance of losing everything you have invested

load fund (mutual fund)

charges investors a commission to buy or sell its shares

no load fund (mutual fund)

charges no commission

common & preferred

companies can issue two classes of stock

debt financing

companies prefer to raise capital by - i.e. issuing corporate bonds

bond

corporate certificate indicating an investor has lent money to a firm (or a government) - organization that issues these has a legal obligation to make regular interest payments and repay the entire principal amount at a prescribed time

stock's par value

dollar amount assigned to each share of stock by the corporation's charter -- Today, since these values do not reflect the market value of the stock (what it is actually worth), most companies issue stock with a very low or no _________________

mutual fund advantage

generally buy directly from the fund and avoid broker fees or commissions

blue-chip stocks

generally pay regular dividends and experience consistent price appreciation (Coca-Cola, Johnson & Johnson, IBM)

Berkshire Hathaway (Warren Buffett's firm)

has never split its class A stock

common stock

high risk - variable income - good growth (capital gain)

2006-2011

housing values plummeted - financial institutions reduced their lending requirements - homebuilders overbuilt - buyers overspent - government required more mortgages to be given to low to moderate income buyers with weak credit scores or no verification of income or assets (subprime loans) pooled and repackaged as mortgage back securities sold to investors

debt financing

issuing corporate bonds

closed-end funds (mutual fund)

limit the number of shares, once the fund reaches its target number, no investors can buy into the fund

bonds

low risk - secure income - little growth (capital gain)

depend heavily on how well the corporation is meeting its business objectives

market price and potential growth of most stock

crowdinvesting

may not work for companies that need a couple hundred thousand dollars or less given - the equity you sell - paperwork - fees to intermediaries - legal and accounting costs

preferred stock

medium risk - steady income - little growth (capital gain)

mutual funds

medium risk - variable income - good growth (capital gain)

ETFs

medium risk - variable income - good possible growth (capital gain)

robots

new type of money manager

income stocks

offer investors a high dividend yield that generally keeps pace with inflation

dividends

part of a firm's profits the company may (but is not required to) distribute to stockholders as either cash payments or additional shares of stock - declared by a corporation's board of directors and are generally paid quarterly

interest (bond)

payment the bond issuer makes to the bondholders to compensate them for the use of their money -- sometimes called the coupon rate (dating back to when they were bearer bonds)

fines or imprisonment

penalties for insider trading

pf

preferred stock is identified by these letter following the company symbol

2000-2006

prices of existing homes rose 50%

financial advisors

put mutual funds and ETFs high on the list of recommended investments, particularly for first-time investors

bonds

registered to specific owners and changes in ownership are recorded electronically

sinking fund bonds

reserve fund to ensure enough money will be available to repay bondholders on the bond's maturity date - firms issuing these periodically retire (set aside) some part of the principal they owe prior to maturity so enough funds will accumulate by the maturity date to pay off the bond

stocks

shares of ownership in a company

mutual fund managers

specialists who pick what they consider to be the best stocks and bonds available and help investors diversify their investments

limit order

tells a broker to buy or sell a stock at a specific price, if that price becomes available

market order

tells a broker to buy or sell a stock immediately at the best price available

insider trading

using knowledge or information that individuals gain through their position that allows them to benefit unfairly from fluctuations in security prices -- keywords benefit unfairly

bond interest rates

vary based on - state of the economy - reputation of issuing company - interest rates for bonds of similar companies