Bài giảng Understanding Business - Chapter 19 Using Securities Markets for Financing and Investing Opportunities

Using Securities Markets for Financing and Investing OpportunitiesChapter 19 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinDescribe the role of securities markets and of investment bankers.Identify the stock exchanges where securities are traded.Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.LEARNING GOALSChapter Nineteen19-2Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.Analyze the opportunities stocks offer as investments.Analyze the opportunities bonds offer as investments.Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).Describe how indicators like the Dow Jones Industrial Average affect the market.LEARNING GOALSChapter Nineteen19-3Emmy Award-winning journalist, Bartiromo’s analysis of day-to-day Wall Street has made her the face of investing.Started as an overnight producer for CNN before moving to CNBC.She’s lead anchor at two of CNBC’s biggest shows, has written several books and numerous columns.MARIA BARTIROMOCNBCProfile19-4Securities markets are financial marketplaces for stocks and bonds and serve two primary functions:Assist businesses in finding long-term funding to finance capital needs.Provide private investors a place to buy and sell securities such as stocks and bonds.The BASICS of SECURITIES MARKETSThe Function of Securities MarketsLG119-5Securities markets are divided into primary and secondary markets:Primary markets handle the sale of new securities. Secondary markets handle the trading of securities between investors with the proceeds of the sale going to the seller.Initial Public Offering (IPO) -- The first offering of a corporation’s stock.TYPES of SECURITIES MARKETSLG1The Function of Securities Markets19-6Investment Bankers -- Specialists who assist in the issue and sale of new securities.INVESTMENT BANKERS and INSTITUTIONAL INVESTORS The Role of Investment BankersLG1Institutional Investors -- Large organizations such as pension funds or mutual funds that invest their own funds or the funds of others.19-7Stock Exchange -- An organization whose members can buy and sell (exchange) securities on behalf of companies and individual investors.Over-the-Counter (OTC) Market -- Provides companies and investors with a means to trade stocks not listed on the national securities exchanges.NASDAQ -- A telecommunications network that links dealers across the nation so they can exchange securities electronically. STOCK EXCHANGESStock ExchangesLG219-8NYSE EuronextNASDAQLondon Stock ExchangeTokyo Stock ExchangeDeutsche BorseTOP STOCK EXCHANGESLG2Stock Exchanges19-9Securities and Exchange Commission (SEC) -- The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act.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.The SECURITIES and EXCHANGE COMMISSIONSecurities Regulations and the SECLG219-10Stocks -- Shares of ownership in a company.Stock Certificate -- Evidence of stock ownership.Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares.LEARNING the LANGUAGE of STOCKSHow Businesses Raise Capital by Selling StockLG319-11Stockholders 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.ADVANTAGES of ISSUING STOCKAdvantages & Disadvantages of Issuing StockLG319-12Stockholders 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.DISADVANTAGES of ISSUING STOCKLG3Advantages & Disadvantages of Issuing Stock19-13Common Stock -- The most basic form; holders have the right to vote for the board of directors and share in the profits if dividends are approved.Preferred Stock -- Owners are given preference in the payment of company dividends before common stock dividends are distributed. Preferred stock can also be:CallableConvertibleCumulativeTWO CLASSES of STOCKIssuing Shares of Common and Preferred StockLG319-14Bond -- A corporate certificate indicating that an investor has lent money to a firm (or a government).LEARNING the LANGUAGE of BONDSLearning the Language of BondsThe principal is the face value of the bond.Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money.LG419-15Bondholders 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.ADVANTAGES of ISSUING BONDSAdvantages & Disadvantages of Issuing BondsLG419-16Bonds 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.DISADVANTAGES of ISSUING BONDSLG4Advantages & Disadvantages of Issuing Bonds19-17BOND RATINGSRatingMoody’sS & PFitchDescriptionAaaAAAAAAHighest QualityAaAAAAHigh QualityAAAUpper-Medium GradeBaaBBBBBBMedium GradeBaBBBBLower-Medium GradeBBBSpeculativeCaaCCC, CCCCCPoorCaCDDDHighly SpeculativeCDDLowest Grade LG4Advantages & Disadvantages of Issuing Bonds19-18Corporations can issue two classes of bonds:DIFFERENT CLASSES of CORPORATE BONDSDifferent Classes of BondsUnsecured bonds (debenture bonds): not backed by specific collateral.Secured bonds: backed by collateral (land or equipment).LG419-19Sinking Fund -- Reserve account set up to ensure that enough money will be available to repay bondholders on the maturity date.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.SPECIAL FEATURES in BOND ISSUESSpecial Bond FeaturesLG419-20Stockbroker -- A registered representative who works as a market intermediary to buy and sell securities for clients.Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds.BUYING SECURITIESHow Investors Buy SecuritiesLG519-21Investment riskYieldDurationLiquidityTax consequencesFIVE INVESTMENT CRITERIAChoosing the Right Investment Strategy LG519-22INVESTING 101Things to Do Before Making Your First InvestmentSource: Money, November 2010.LG5Choosing the Right Investment Strategy Take an investing class.Attend a conference.Head to the library and pick up these books:The Big ShortThe Intelligent InvestorThe Myth of the Rational Market19-23Diversification -- Buying several different types of investments to spread the risk of investing.If diversifying, an investor may put: 25% of his/her money into U.S. growth stocks25% in government bonds25% in dividend-paying stocks10% in an international mutual fundThe rest in a savings accountDIVERSIFICATIONReducing Risk by Diversifying InvestmentsLG519-24PRIMARY INVESTMENT SERVICES CONSUMERS NEEDSavings and investing adviceHelp with 401k plansRetirement planningTax planningEstate planningEducation expense planningSource: Investment Company Institute. LG5Reducing Risk by Diversifying Investments19-25Bulls: Investors who believe stock prices are going to rise.PERCEPTIONS of the MARKETInvesting in StocksBears: Investors who expect stock prices to decline.LG619-26Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for.Investors can also choose stocks according to their strategy:Blue-chip stocksGrowth stocksIncome stocksPenny stocksSELECTING STOCKSLG6Investing in Stocks19-27Stock Splits -- An action by a company that gives stockholders two or more shares of additional stock for every share that they own.Splits cause no change in the firm’s ownership structure and no change in the investment’s value.Firms can never be forced to spilt their stocks.STOCK SPLITSStock SplitsLG619-28Buying Stock on Margin -- Borrowing some of the stock’s purchase cost from the brokerage firm.BUYING STOCK on MARGINBuying Stock on MarginMargin is the portion of the stock’s purchase price that the investor must pay with their own money.If a broker issues a margin call, the investor has to come up with money to cover losses.LG619-29TOP FINANICIAL NEWS and RESEARCH SITESYahoo FinanceDailyFinanceMSN MoneyForbesDow Jones & Co.LG6Understanding Stock Quotations 19-30First-time bond investors generally ask two questions:Do you have to hold a bond until the maturity date?How can I assess the investment risk of a particular bond issue?Junk Bonds -- Bonds that are high-risk and have high default rates.IMPORTANT BOND QUESTIONSInvesting in BondsLG719-31Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors’ money and buys stocks according to the fund’s purpose.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.INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDSInvesting in Mutual Funds & Exchange-Traded FundsLG819-32WHAT MUTUAL FUNDS CAN LEARN FROM KaChingSource: Fast Company, March 2010.LG8Investing in Mutual Funds & Exchange-Traded FundsReform the ratings systemGive information for freeCut out useless feesBe transparentShare insights19-33COMPARING INVESTMENTSLG8Understanding Mutual Fund Quotations 19-34Dow Jones Industrial Average -- The average cost of 30 selected industrial stocks.Critics say the 30-company Dow is too small a sample and suggest following the S&P 500.S&P 500 tracks the performance of 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks.KEY STOCK MARKET INDICATORSUnderstanding Stock Market Indicators LG919-35The stock market has its shares of ups and downs:MARKET TURMOILOctober 29, 1929 - Black Tuesday; the market lost 13% of its value.October 19, 1987 - The market suffered its worst one-day drop when it lost 22% of its value.October 27, 1997 - Fears of an economic crisis in Asia cause widespread panic and losses.LG9Riding the Market’s Roller Coaster19-36The market collapsed into a deep decline in 2000-2002 when the dot-com bubble burst. Investors lost $7 trillion in market value.Starting in 2008, the collapse of the real estate market sent financial markets into panic.The U.S. government made significant investments in private banks and offered a large stimulus package to re-energize the economy.TURMOIL in the 2000sLG9Riding the Market’s Roller Coaster19-37Program Trading -- Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses.Analysts believe program trading caused the turmoil in 1987.The exchanges created mechanisms to restrict program trading.The UPS and DOWNS of the MARKETRiding the Market’s Roller CoasterLG919-38Wall Street - Issued exotic securities; paid excessive compensation based on bonuses; and investment banks got the SEC to relax capital requirements.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.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.WHO’S at FAULT for the ECONOMIC CRISIS?Source: Fortune Magazine, www.fortune.com, accessed July 2011. LG9Riding the Market’s Roller Coaster19-39Congress passed the Dodd-Frank Financial Reform and Consumer Protection Act into law on July 21, 2010. Gives the government power to seize and shutter large financial institutions on the verge of collapse in an effort to prevent further bailouts. Formed an independent consumer protection agency housed within the Federal Reserve, protecting borrowers against a host of financial abuses ranging from payday loans to mortgages and credit cards. CLEANING UP the STREET(Legal Briefcase)19-40