1 The Function of Securities Market place to buy and sell securities investments securities markets financial marketplaces for stocks bonds other investments assist businesses in finding long term funding and provide private investors a Primary markets handle the sale of new securities corporation s make money on the sale only once initial public offering the first public offering of a corporation s stock Secondary market handles trading b t investors selling stock in the corporation is a form of equity financing issuing corporate bonds is a form of debt financing a The Role of Investment Bankers investment bankers specialists who assist in the issue and sale of new securities can also underwrite new issues of stocks bonds buys entire stock or bond issue at an agreed on discount sells the issue to private or institutional investors at institutional investors large organizations such as pension funds mutual funds and insurance companies that invest their own funds or the funds of others full price 2 Stock Exchanges stock exchange an organization whose members can buy and sell exchange securities for companies and individual investors over the counter OTC market exchange that provides a means to trade stocks not listed on the national exchanges trading is conducted b w two parties directly instead of through an exchange NASDAQ a nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically a Securities Regulations and the Securities and Exchange Commission Securities and Exchange Commission SEC the federal agency that has responsibility for regulating the various stock exchanges Securities Act of 1933 helps protect investors by requiring full disclosure of financial information by firms selling bonds stock Securities Act of 1934 created the prospectus a condensed version of economic financial information that a company must file with the SEC before issuing stock must be sent to prospective insider trading is using knowledge or info that individuals gain through their position that allows them to benefit unfairly from fluctuations in security prices SEC investors b Foreign Stock Exchanges 3 How Businesses Raise Capital By Selling Stock 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 a dollar amount assigned to each share of stock by the corporation s charter Since they do not reflect market value most companies issue no par stock dividends part of a firm s profits that the firm may distribute to stockholders as either cash payments or additional shares of stock a Advantages and Disadvantages of Issuing Stock Advantages stockholders never have to be repaid their investment no legal obligation to pay dividends to stockholders firm can reinvest income retained earnings can improve condition of balance sheet creates no debt Disadvantages Stockholders usually only common stockholders have right to vote for the company s board of directors Issuing new shares of stock can alter control of the firm Dividends are paid from profit after taxes are not tax deductible Need to keep stockholders happy can affect mangers 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 b Issuing Shares of Common Stock firm s board of directors holders also have preemptive right to purchase new shares of common stock before anyone else c Issuing Shares of Preferred Stock forced out of business and its assets sold Normally do not get voting rights in the firm distribute any common stock dividends 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 Can be callable preferred stockholders could be required to sell their shares back to the corporation Can be cumulative if one or more dividends are not paid when promised they accumulate and the corp must pay them in full at a later date before it can 4 How Businesses Raise Capital By Issuing Bonds bond a corporate certificate indicating that a person has lent money to a firm or a gov t a Learning the Language of Bonds principal face value of a bond which the issuing company is legally bound to repay in full maturity date the 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 bondholders for use of the borrowed money coupon rate bond interest when they were referred to as bearer bonds b Advantages and Disadvantages of Issuing Bonds Advantages Bondholders are creditors not owners Seldom vote management maintains control Bond interest is a business expense it tax deductible Bonds are a temp source of funding Debt obligation is eliminated when repaid Can be repaid before maturity date if they contain a call provision Can also be converted to common stock Disadvantages Increase debt Paying interest is a legal obligation Face value must be repaid on maturity date Can cause cash flow problems c Different Classes of Bonds debenture bonds unsecured bonds bonds that are not baked by any collateral such as land or equipment secured bonds or mortgage bonds are backed by collateral sinking fund a 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 d Special Bond Features accumulated by the maturity date to pay off the bond they provide for an orderly retirement repayment Reduce risk bond will not be repaid Support market price of the bond b c they reduce the risk the bond will not be repaid callable bond permits the bond issuer to pay off the principal before its maturity date 5 How Investors Buy Securities stockbroker a registered representative who works as a market intermediary to buy and sell securities for clients a Investing Through Online Brokers b Choosing the Right Investment Strategy 5 key criteria when selecting investment options 1 Investment risk the chance an investment will be worth less in the future than now 2 Yield expected return on an investment usually over a period of one year 3 Duration length of time your money is committed to an investment 4 Liquidity how quickly you can get back your invested funds in cash 5 Tax