Chapter 19: Using Securities markets for Financing and Investing Opportunities

Advantages of Issuing Bonds

- Bondholders are creditors, not owners of the firm and can't vote on corporate matters - Bonds 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

Special Features in Bond Issues

- Callable bonds permit bond issuers to pay off the principal before the maturity date - Convertible bonds allow bondholders to convert their bonds into shares of common stock

Top Stock Exchanges

- NYSE Euronext - NASQAQ - London Stock Exchange - Tokyo Stock Exchange - Deutsche Borse

Advantages of Issuing Stock

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

Disadvantages of Issuing Stock

- Stockholders have the right to vote for a company's board of directors - Issuing new shares of stock can alter the control of the firm - Dividends are paid from after-tax profits and are not tax deductible - The need to keep stockholders happy can affect management's decisions

Top Financial News and Research Sites

- Yahoo Finance - DailyFinance - MSN Money - Forbes - Dow Jones & Co.

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

Bond

A corporate certificate indicating that an investor has lent money to a firm (or a government) the principal is the face value of the bond

Stockbroker

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

NASDAQ

A telecommunications networks that links dealers across the nation so they can exchange securities electronically

Main Street

Americans lived beyond their means; lenders gave favorable loans to homebuilders; greedy homeowners took out equity loans; and teaser mortgage rates let people live large

Mutual Fund

An organization that buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors' money and buys stock according to the fund's purpose

Stock Exchange

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

Secured Bonds

Backed by collateral (land or equipment)

October 29, 1929

Black Tuesday; the market ost 13% of its value

Junk Bonds

Bonds that are high-risk and have high default rates

Exchange-Traded Fund (ETF)

Collections of stocks and bonds that are traded on securities exchanges, but are traded more like individual stocks than mutual funds

Key Stock Market Indicators

Critics say the 30-company Dow is too small a sample and suggest following the S&P 500

Stock Certificate

Evidence of stock ownership

October 27, 1997

Fears of an economic crisis in Asia cause widespread panic and losses

Washington

Gramm-Leach-Billey Act allowed commercial and investment banks to partner; housing interest rates were kept low; and Community Reinvestment Act forced lending to people with bad credit

Primary Markets

Handle the sales of new securities.

Secondary Markets

Handle the trading of securities between investors with the proceeds of the sales going to the investor selling the stock.

Bulls

Investors who believe stock prices are going to rise

Bears

Investors who expect stock prices to decline

Wall Street

Issued exotic securities; paid excessive compensation based on bonuses; and investment banks got the SEC to relax capital requirements

Institutional Investors

Large organizations such as a pension funds or mutual funds that invest their own funds or the funds of others.

Unsecured Bonds

Not backed by specific collateral (debenture bonds)

Buying Securities

Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds

Preferred Stock

Owners are given preference in the payment of company dividends before common stock dividends are distributed Preferred stock can also be: - Callable - Convertible - Cumulative

Dividends

Part of a firm's profits that the firm may distribute to stockholders as either cash or additional shares

Over-the-Counter Market (OTC)

Provides companies and investors with a means to trade stocks not listed on the national securities exchanges

Sinking Fund

Reserve account set up to ensure that enough money will be available to repay bondholders on the maturity date

Types of Securities Markets

Securities markets are divided into primary and secondary markets.

The Basics of Securities Markets

Securities markets are financial marketplaces for stocks and bonds and serve two primary functions. 1. Assist businesses in finding long-term funding to finance capital needs. 2. Provide private investors a place to buy and sell securities such as stocks and bonds.

Stocks

Shares of ownership in a company

Investment Bankers

Specialists who assist in the issue and sale of new securities.

Dow Jones Industrial Average

The average cost of 30 selected industrial stocks

Turmoil in the 2008

The collapse of the real estate market sent financial markets into panic, the United States government made significant investments in private banks and offered a large stimulus package to re-eneragize the economy

Securities and Exchange Commission (SEC)

The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act

Initial Public Offering (IPO)

The first offering of a corporation's stock.

Turmoil in the 2000s

The market collapsed into a deep decline in 2000-2002 when the dot-com bubble burst, Investors lost $7 trillion in market value

October 19, 1987

The market suffered its worst one-day drop when it lost 22% of its value

Common Stock

The most basic form; holders have the right to vote for the board of directors and share in the profit if dividends are approved

Interest

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

S&P 500

Tracks the performance of 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks