Intro to business chapter 16 Investment Opportunities in the Securities Market

Bonds are issued

1. company contacts an investment bank for advice. 2. Investment bankers prepare documents with the SEC, set the price of the bond issue and take the lead in forming the group of banks that initially buy the bonds. 3. Financial advisers and bankers generate interest and locate potential buyers for the bonds before issuance. 4. Investment banks initially purchase all of the bonds at a discount and then quickly sell them in the primary market.

Stocks are issued in this manner:

1. the first stock is an initial public offering (IPO) 2. A financial adviser firms establish the best timing for the public sale and determine the initial selling price. 3. Financial advisory firms establish the best timing for the public sale and determine the initial selling price. 4. Banks form a syndicate to underwrite the IPO. The syndicate then purchases the stock and sells it to the public.

NASDAQ 100

100 of the largest domestic and international non financial companies listed on NASDAQ. It does not include financial institutions in the group and includes companies incorporated outside the US.

Debenture Bo0nds

unsecured bonds backed only by a corporations promise to pay.

Defensive stocks

usually maintain their value regardless of the state of the economy. companies that produce staples such as food, drugs and insurance products. Usually maintain value regardless of the economy.

Municipal Bonds

Issued by municipalities such as states, city and local governments. sold to cover deficits or to fund specific projects. Investment income exempt from federal taxes.

the state of the US economy is reflected in these

S&P 500 & the DJIA

SIPC

Securities investor protection corporation

common stock

a class of ownership in which the stockholders have the right to elect a board of directors and vote on corporate policy.

option

a contract that gives a buyer the right but not the obligation to buy or sell a particular security at a specific price on or before a certain date.

dividend

a distribution of a portion of the company's earning as determined by its board of directors.

prospectus

a formal legal document that provides details about an investment.

coupon (interest rate)

a percentage of the face value.

par (face) value

amount of money the bondholder will get back once a bond matures.

DJIA

an index of the 30 largest capitalized public companies in the US.

S&P 500

an index of the 500 largest companies, most of which are American

stock exchange

an organization that facilitates the exchange of stock and other securities between brokers and traders.

Corporate bonds

are debt securities issued by corporations.

Income stock

are issued by companies that pay large dividends such as utility companies Duke energy, Exxon Mobile

Cyclical stocks

are issued by companies that produce goods or services that are affected by economic trends. goes down in a recession, goes up in when economy is healthy. Airlines, automobiles, home building and travel.

Value stocks

are priced less than what one would expect based on the company's earnings. A good stock at a great price. have the potential to increase when the market adjusts for their incorrect valuation.

Money market funds

are the least risky because they invest in short term debt obligations such as T-bills and certificates of deposit.

Secured bonds

backed by collateral, an asset of the corporation that will past to the bondholders if the corporation does not repay the amount borrowed.

just like stocks bonds can be

bought and sold on the secondary market.

Two main stocks are

common and preferred.

Treasuries

deemed the safest bonds

NASDAQ

first electronic stock exchange and the worlds second largest stock exchange.

Convertible bonds

give the bondholder the right, but not obligation to convert the bond into a predetermined number of shares of a company's stock.

bear market

indicated decreasing investor confidence as the market continues to decline in value.

bull market

indicates increasing investor confidence as the market continues to increase in value.

Bond prices move in the opposite direction of

interest rates.

Preferred stock

is a class of ownership in which the preferred stockholders have a claim to assets before common stockholders if a firm goes out of business.

Mutual fund

is a means by which a group of investors pool money together to invest in a diversified set of investments.

Feature contract

is an agreement between a buyer and a seller to receive or deliver an asset sometime in the future at a specific price agreed on today. Usually the asset is a commodity such as sugar, coffee or wheat.

Diversification

is having a variety of investments in your portfolio, such as different types of companies in different industries.

Growth Stocks

issued by companies that are experiencing rapid growth and expansion, they pay no dividends. Firms that issue them retain their earnings ad reinvest them in new projects that fuel growth.

Blue Chip Stock

issued by companies that have along history of consistent growth and stability. General Electric, IBM, Walt Disney

Corporate Bonds

issued by companies. ranges in degree of riskiness, though generally safer than owning corporate stock.

Treasury bonds

issued for 30 year terms. Pay interest semi-annually.

Characteristics of a bond

maturity date, par (face) value, and coupon (interest rate)

money market funds offer

nearly double interest bearing checking or savings account earns. can be very liquid, offer quick access to your money. The FDIC does not insure the money in money market funds.

primary market

part of the capital market that deals with new bond and stock issues.

Asset allocation

refers to how you structure your portfolio with different types of assets (stocks, bonds, mutual funds, real estate).

secondary market

refers to the market in which investors purchase securities from other investors rather than directly from an issuing company.

SEC

securities and exchange commission US federal agency created to protect investor and maintain fair and orderly securities markets.

Treasury bills

sold for terms less than one year. sold at a discount redeemed for par value at maturity.

Treasury Inflation-Protected Securities

sold in 5,10,30 year terms. Payment with change with inflation.

Treasury notes

sold in 5,10,30 year terms. US mortgage rates often based off the 10 year treasury note.

Buying on margin

stock that is bought with borrowed funds from a broker.

Securities are

stocks, bonds or mutual funds.

Stock prices change in reaction to

supply and demand. Other factors that can affect stock prices include economic forecasts, industry or sector concerns or global events.

Insider trading

the buying and selling of securities based on information that has not been disclosed to the public.

maturity rate

the date the bond matures and the investor is repaid.

Compound interest

the interest you earn on your initial savings periodically gets adding to the total amount you have saved and begins earning interest as well.

A financial advisor coordinates

the preparation of a prospectus and files it with the securities and exchange commission.

Stock performance is typically measured by the fluctuation in price. When stock price increases

the stock shows good performance. Conversely a decrease in price indicates a poor performance.

NYSE Euronext

the worlds largest stock exchange

IPO

Initial public offering, the first sale of stock to the public.