Chapter 19

Convertible bonds

Bonds that can be converted into common stock at the bondholder's option

What're the 2 names that stock investors are often called?

Bulls and Bears

Diversification

Buying several different investment alternatives to spread the risk of investing.

What are the 2 classes of stock that companies can issue?

Common and preferred

$1k

Corporate bonds are usually issued in units of ______?

Bond

a corporate certificate indicating that a person has lent money to a firm (or a government)

Par value

a dollar amount assigned to each share of stock by the corporation's charter. preferred stock may be issued with a ___________ that besoms the base for a fixed dividend the firm is willing to pay

no-load fund

a mutual fund that has no commission fee

stock splits

an action by a company that gives stockholders two or more shares of stock for each one they own

National Association of Securities Dealers Automated Quotations (NASDAQ)

an electronic-based network that links dealers so they can buy and sell securities electronically rather than in person. It is the largest U.S. electronic stock trading market and has more trading volume than any electronic exchange in the world.THE WORLDS FIRST ELECTRONIC STOCK MARKET. Now deals with Facebook, Microsoft, Google, Intel and Starbucks.

market order

an order telling a broker to buy or sell a specific security at the best currently available price

limit order

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

mutual fund

an organization that buys stocks and bonds and then sells shares in those securities to the public

Stock exchange

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

Unsecured bonds

are NOT back by any specific collateral (such as land or equipment). Also known as debenture bonds

Dividends

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

Investment bankers

are specialists who assist in the issue and sale of new securities. Also underwrite new issues of stocks or bonds

Bulls

believe that stock prices are going to rise; they buy stock in anticipation of the increase

Load fund

charges investors a commission to buy or sell its shares

Exchange Traded Fund (ETF)

collections of stocks, bonds, and other investments that are traded on securities exchanges, but are traded more like individual stocks than like mutual funds.

over-the-counter (OTC) market

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

Bears

expect stock prices to decline and sell their stocks in anticipation of falling prices

Securities and Exchange Commission (SEC)

federal agency responsible for regulating the various stock exchanges.

Callable bond

permits the bond issuer to pay off the bond's principal before its maturity date. This gives companies some discretion in their long-term forecasting.

Callable

preferred stockholders could be required to sell their shares back to the corporation

buying stock on margin

purchasing stocks by borrowing some of the purchase cost from the brokerage firm

Penny stocks

represent ownership in companies that compete in high-risk industries like oil exploration; sells for less than $2 (some analysts say less than $5) and are considered risky investment.

stock certificate

represents stock ownership. It specifies the name of the company, the number of shares owned, and the type of stock it represents

stocks

shares of ownership in a company

Blue-chip stocks

stocks of large, well-established corporations with a solid record of profitability

income stocks

stocks of public utilities; usually offer investors a high dividend yield that generally keeps pace with inflation

Growth stocks

stocks whose earnings grow faster than the market and offer long term growth potential

maturity date

the exact date the issuer of a bond must pay the principal to the bondholder

Principal

the face value (dollar value) of a bond,

interest

the payment the bond issuer makes to the bondholders to compensate them for the use of their money

U.S gov't bonds

these are considered safe investments, so they can pay lower interest.

insider trading

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

open-end funds

will accept the investments of any interested investors

Advantages of Issuing Bonds

- Bondholders are creditors, not owners of the firm and can't vote on corporate matters. - Bond interest is tax deductible. - Bonds are a temporary source of funding and are eventually repaid. - Bonds can be repaid before the maturity date if they contain a call provision.

Disadvantages of Issuing Bonds

- Bonds increase debt and can affect the market's perception of the firm. - Paying interest on bonds is a legal obligation. If interest isn't paid, bondholders can take legal action. - The face value of the bond must be repaid on the maturity date.

Reasons why sinking funds are attractive to issuing firms & investors

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

Disadvantages of issuing stock

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

Advantages of issuing stock

-Stockholders are owners of a firm and never have to be repaid their investment. -There is no legal obligation to pay dividends. -Issuing stock can improve a firm's balance sheet since stock creates no debt.

5 key criteria when selecting investment options

1. Investment risk 2. Yield 3. Duration 4. Liquidity 5. Tax consequences

The two major functions of securities markets

1. they assist businesses in finding long-term funding to finance capital needs, such as expanding operations, developing new products, or buying major goods and services 2. they provide private investors a place to buy and sell securities (investments), such as stocks and bonds, that can help them build their financial future

prospectus

A condensed version of economic and financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors.

Stockbroker

A registered representative who works as a market intermediary to buy and sell securities for clients.

Sinking fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Secured bonds

ARE backed by collateral such as land or buildings that is pledged to bondholders if interest or principal isn't paid when promised. Also known as mortgage bonds

Coupon rate

Another name for bond interest. A term that dates back to when bonds were issued as bearer bonds.

Do preferred stockholders get voting rights in a firm?

No

What two markets are securities markets divided into?

Primary and Secondary markets

preferred stock

Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold

preemptive right

Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued.

Dow Jones Industrial Average (the Dow)

The average cost of 30 selected industrial stocks, used to give an indication of the direction (up or down) of the stock market over time.

Initial Public Offering (IPO)

The first public offering of a corporation's stock.

Electronically

Today, companies are not required to issue paper stock certificates to owners since stock is generally held ________________.

What're the different classes of bonds

Unsecured and secured bonds

The New York Stock Exchange (NYSE)

founded in 1792, and was then primarily a floor-based exchange, which means trades physically took place on the floor of the stock exchange. Things changed in 2005 when the NYSE merged with Archipelago, a securities trading company that specialized in electronic trades. Two years later, it merged with Europe's Euronext exchange, and became the NYSE Euronext. In 2013, the Intercontinental Exchange (ICE) located in Atlanta purchased the NYSE Euronext for $8.2 billion.

primary market

handles the sales of new securities

secondary markets

handles the trading of these securities between investors, with the proceeds of the sale going to the investor selling the stock, not to the corporation whose stock is sold

The Securities Act of 1933

helps protect investors by requiring full disclosure of financial information by firms selling bonds or stock. The U.S. Congress passed this legislation to deal with the free-for-all atmosphere that existed in the securities markets during the 1920s and the early 1930s that helped cause the Great Depression. The Securities and Exchange Act of 1934 created the SEC. Also established specific guidelines that companies must follow when issuing financial securities, such as stocks or bonds.

Cumulative

if 1 or more dividends aren't paid when promised, they add up and the corporation must pay them in full at a later date

program trading

investors give their computers instructions to sell automatically to avoid potential losses if the price of their stock dips to a certain point

Common stock

is the most basic form of ownership in a firm. In fact, if a company issues only one type of stock, by law it must be common stock. Holders of common stock have the right to (1) elect members of the company's board of directors and vote on important issues affecting the company and (2) share in the firm's profits through dividends, if approved by the firm's board of directors.

institutional investors

large organizations—such as pension funds, mutual funds, and insurance companies—that invest their own funds or the funds of others. Because of their vast buying power, institutional investors are a powerful force in securities markets.

closed-end funds

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