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