Chapter 19 Using Securities Markets for Financing and Investing Opportunities 1 Function of Securities Markets a Two Functions i Assist businesses in finding long term funding to finance capital needs such as expanding operations developing new products or buying major goods and services ii Provides private investors a place to buy and sell securities investments such as stocks and bonds that can help them build their financial future iii Primary Markets Handle the sale of new securities 1 Corporations make money on the sale of their securities stock only once when they sell in the primary market 2 Initial Public Offering The first public offering of a corporation s stock iv Secondary Markets Handles the trading of stocks between investors with the proceeds of the sale going to the investor selling the stock not the corporation whose stock is sold b Investment Banker Specialists who assist in the issue and sale of new securities i Investment Bankers can underwrite new issues of stock firm buys the entire stock or bond issue at an agreed on discount and then sells the issue to private or institutional investors at full price c Institutional Investors Large organizations such as pension funds mutual funds and insurance companies that invest their own funds or the funds of others 2 Stock Exchanges a Stock Exchange An organization whose members can buy and sell exchange securities on behalf of companies and individual investors i NYSE Euronext is the world s largest securities exchange b Over the Counter OTC Market Provides companies and investors with a means to trade stocks not listed on the national securities exchanges i Network of several thousand brokers who maintain contact with one another and buy and sell securities through a nationwide electronic system Trading is conducted between two parties directly c NASDAQ A telecommunications network that links dealers across the nation so that they can buy and sell securities electronically rather than in person Largest US stock trading market i Microsoft Intel Google Starbucks Cisco Dell d Securities and Exchange Commission SEC The federal agency that has responsibility for regulating the various stock exchanges i Securities Act of 1993 helps protect investors by requiring full disclosure of financial information by firms selling bonds or stock ii Companies trading on national exchanges must register with the SEC and provide it with annual updates iii 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 iv Insider Trading Using knowledge or information that individuals gain through their position that allows them to benefit unfairly from fluctuations in securities prices 3 Raising Capital by Selling Stock a Stocks Shares of ownership in a company b Stock Certificate Represents stock ownership specifies the name of the company the number of shares owned and the type of stock it represents i Sometimes indicate stock s Par Value or the dollar amount assigned to each share of stock by the corporation s charter Today though companies issue no par stocks c Dividends Part of the firm s profits that the firm may but is not required to distribute to stockholders as either cash payments or additional shares of stock i Declared by board of directors and generally paid quarterly d Advantages i Stockholder s never have to be repaid their investment ii No legal obligation to pay dividends therefore firms can reinvest income retained earnings iii Improves the condition of a firm s balance sheet since issuing stock creates no debt i Stockholders have the right to vote for the company s board of directors altering control of the e Disadvantages firm ii Dividends when paid are paid from profit after taxes and are not tax deductible iii Need to keep stockholders happy can affect manager s decisions f Common Stock Most basic form of ownership in a firm i Holders of common stock can elect board members and vote on issues pertaining to the company and share in the firm s profits through dividends ii Have a preemptive right to purchase new shares of common stock before anyone else g Preferred Stock Owners are given preference in the payment of company dividends and must be paid dividends in full before any common stock dividends can be distributed i Have prior claim on company assets if the firm is forced out of business and its assets sold ii Do not get voting rights within the firm iii Issued with a par value that becomes the base for a fixed dividend the firm is willing to pay iv Callable Preferred stockholders could be required to sell their shares back to the corporation or have it turned into common stock v Cumulative If one or more dividends are not paid when promised they can accumulate and corporation must pay them before it can distribute common stock dividends 4 Raising Capital Through Bonds a Bond Corporate certificate indicating that an investor has lent money to a firm or government i Issuing bonds gives you a legal obligation to make regular interest payments to investors and to repay the entire bond principal amount at a particular time ii Usually issued in PRINCIPAL amounts of 1 000 iii Maturity Date Date that company is legally bound to repay bond in full to bondholder iv Interest The payment the bond issuer makes to the bondholders to compensate them for the use of their money 1 Sometimes called the coupon rate b Advantages i Bondholders are creditors not owners thus not voting on corporate matters ii Interest is tax deductible iii Temporary source of funding debt obligation is eventually eliminated iv Can be repaid before maturity date and be converted to common stock c Disadvantages i Increase debt long term liabilities and adversely affect market s perception of firm ii Paying interest is a legal obligation iii Face value must be repaid at maturity date could cause cash flow problems d Debenture Bonds Unsecured bonds that are not backed by collateral e Mortgage Bonds Secured bonds that are backed by collateral f Sinking Fund A reserve account in which the issuer of a bond sets aside some part of the principal prior to maturity so that enough funds will accumulate by the maturity date to pay off the bond i Provides for orderly retirement of bond issue ii Reduce risk that the bond will not be repaid iii Support market price of bond b c they reduce the risk the bond will not be repaid g Callable Bonds Permits
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