11 14 13 Chapter 19 Notes Using Securities Markets for Financing and Investing Opportunities The Function of Securities Markets Financial marketplaces for stocks bonds and other investments o Assist businesses in finding long term funding to finance capital needs o Provide private investors a place to buy and sell securities investments Primary markets handle the sale of new securities o Initial public offering first public offering of a corporations stock Secondary market handles the trading of these securities between investors with the proceeds of the sale going to investors selling the stock not to the corporation whose stock is sold Investment Bankers Investment bankers specialists who assist in the issue and sale of new securities Institutional investors large organization such as pension funds mutual funds and insurance companies that invest their own funds or the funds of others Stock exchange organization whose members can buy and sell securities for companies and individual investors NYSE bulk of their revenue comes from selling complex financial contracts and Over the counter market exchange that provides a means to trade stocks not listen market information to companies on the national exchanges NASDAQ nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically Securities and Exchange commission the federal agency that has responsibility for regulating the various stock exchanges o Companies trading on the national stock exchange must register with the SEC and provide it with annual updates o 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 o Insider trading using knowledge or information that individuals gain through their position that allows them to benefit unfairly from fluctuations in security prices Raising Capital Stocks shares of ownership in a company Stock certificate evidence of stock ownership that specifies the name of the company the number of shares it represents and the type of stock being issued sometimes indicate a stock s par value dollar amount assigned to each share of stock by the corporation s charter Dividends part of a firm s profits that the firm may distribute to stockholders as either cash payment or as additional shares of stock declared by corporations board and generally paid quarterly Advantages of issuing stock o As owners of the business stockholders never have to be repaid their investment o There s no legal obligation to pay dividends to stockholders therefore the firm can reinvest income to finance future needs o Selling stock can improve the condition of a firm s balance sheet since issuing stock creates no debt Disadvantages o As owners stockholders have the right to vote for the company s board of directors Issuing new shares of stock can thus alter the control of the firm o Dividends are paid from profit after taxes and are not tax deductible o The need to keep stockholders happy can affect managers decisions Common stock most basic form of ownership in a firm it confers voting rights and the right to share in the firm s profits through dividends if approved by the firm s board of directors o Common stock owners have a preemptive right to purchase new shares of common stock before anyone else allows common stockholders to maintain their proportional share of ownership in the company Preferred stock stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets are sold o Don t get voting rights in the firm o May be issued with par value that becomes the base for a fixed dividend the firm o Callable preferred stockholders could be required to sell their shares back to the o Preferred stock can also be converted to shares of common stock and it can be is willing to pay corporation cumulative Bonds Bond corporate certificate indicating that a person has lent money to a firm or a government Corporate bonds usually sold in units of 1 000 Principle face value of a bond which the issuing company is legally bound to repay in full to the bond holder in the maturity date exact date the issuer of a bond must pay the principal to the bondholder Interest the payment the issuer of the bond makes to the bondholder for use of the borrowed money sometimes called a coupon rate Advantages of issuing bonds o Bondholders are creditors of the firm not owners They seldom vote on corporate matters thus management maintains control over the firm s operations o Bond interest is a business expense and tax deductible to the firm o Bonds are temporary sources of funding They re eventually repaid and the debt obligation is eliminated o Bonds can be repaid before the maturity date if they contain a call provision They can also be converted to common stock Disadvantages o Bonds increase debt and may adversely affect the markets perception of the firm o Paying interest on bonds is a legal obligation If interest is not paid bondholders can take legal action to force payment o The face value of the bond must be repaid on the maturity date Without careful planning this obligation can cause cash flow problems when the repayment date comes Debenture bonds bonds that are unsecured Mortgage bonds secured bonds backed by collateral Sinking fund reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond o Primary purpose ensure that enough money will be available to repay bondholders on the bond s maturity date Callable bond permits the bond issuer to pay off the principal before its maturity date Investors can convert convertible bonds into shares of common stock in the issuing company How to buy securities Decide what stock you want Find a brokerage firm authorize to trade securities and authorize your order Stockbroker registered representative who works for a brokerage firm as a market intermediary to buy and sell securities for clients o Place an order and negotiate a price Trade is then reported to your broker who notifies you Online Brokers o Online investors are willing to do their research on their own and make investment decisions without the direct assistance of a broker o Allows them to charge more When
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