Chapter 19 Securities markets are financial markets are financial marketplaces for stocks and bonds and serve 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 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 IPO initial public offering of a company s stock Investment bankers specialists who assist in the issue and sale of new securities Institutional investors large organizations such as pension funds or mutual funds that invest their own funds o the funds of others Stock exchange organization whose members can buy and sell securities on behalf of companies and individual investors the national securities exchanges exchange securities OTC market provides companies and investors with a means to trade stocks not listed on NASDAQ telecommunications network that links dealers across the nation so they SEC the federal agency responsible for regulating the various stock exchanges created in 1934 through the securities and exchange act Prospectus detailed registration statement that includes extensive economic an financial info that must be sent to prospective investors Stocks 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 Advantages of issuing stocks Stockholders are owners of a firm and never have to be repaid their investment No legal obligation to pay dividends Issuing stock can improve a firm s balance sheet sine stock creates no debt Disadvantages Issuing new shares of stock can alter the control of the firm Stockholders have the right to vote for a company s board of directors Dividends are aid from after tax profits and are not tax deductible The need to keep stockholders happy can affect management s decisions Common stock 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 callable convertible cumulative Bond corporate certificate indicating that an investor has lent money to a firm Interest payment the bond issuer makes to the bondholders to compensate them for the use of their money Advantages Disadvantages Bondholders are creditors not owners and can t vote on corporate matters Bond interest is tax deductable Bonds are temporarily a source of funding and are eventually repaid Bonds can be repaid before the maturity date if they contain a call provision Bonds increase debt and can affect market view of the firm Paying interest on bonds is a legal obligation Face value of the bond must be paid at maturity date If interest isn t paid bondholders can take legal action Unsecured bonds not backed by collateral debenture Secured bonds backed by collateral Sinking 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 Stockbroker registered representative who works as a market intermediary to buy and stock sell securities for clients 5 investment criteria Investment risk 1 2 Yield 3 Duration 4 Liquidity 5 Tax consequences Capital gains positive difference between the price at which you bought a stock and what you sell it for Stock splits action by a company that gives stockholders 2 or more shares of additional stock for every share that s outstanding Buying stock on margin borrowing some of the stock s purchase cost from the brokerage firm Junk bonds bonds that have high risk and high default rates Mutual funds organization that 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 ETF collections of stocks and bonds that are traded on securities exchanged but themselves are traded more like stocks that mutual funds
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