1 New stock issue process the primary market is the market that new issues of securities are sold to investors 154 initial public offering the first public sale of a company s stock 154 the process starts with 1 obtaining the approval of its current shareholders to go public 155 2 Next auditors and lawyers have to verify all financial disclosure documents are legitimate 155 3 The offering is given to an investment bank to underwrite 155 Underwriting the role of the investment banker in bearing the risk of reselling the securities purchased from an issuing corporation at an agreed on price G 6 4 Registration statement is presented to SEC 155 5 After approval for SEC and until a month after the IPO there is a quiet period where no information is discussed about the company 155 1b Documents used and impact on shareholders The registration statement that is filed with the SEC 155 A key portion of the registration statement is called the prospectus 155 prospectus Describes the key aspects of the securities to be issued the issuer s management and the issuer s financial position 155 Red Herring A preliminary prospectus received while waiting for SEC approval of official prospectus called so because there is a notice printed in red on the cover identifying the tentative nature of the offer 155 2 Types of exchanges stock and listings Broker Markets consists of national and regional securities exchanges 159 The New York Stock Exchange Most securities exchanges are modeled after the NYSE 160 The NYSE Amex Modeled like the NYSE with less stringent requirements so smaller and younger firms can list here 161 Regional Stock Exchanges also modeled after the NYSE however much more lenient on membership requirements Trading costs are also lower 162 Options Exchanges Options allow their holders to sell or to buy another security at a specific price over a given period Biggest option market is the Chicago Board Options Exchange 162 Futures Exchanges Futures are contracts that guarantee the delivery of a specified commodity or financial instrument at a specified future date at and agreed on price Biggest Futures exchange is the Chicago Board of Trade 162 Dealer Market is made up of the Nasdaq market and the OTC over the counter market 159 Biggest feature here is that there are no centralized trading floors everything is done through networks 162 3 Bull Bear Market 164 Bull market is a market normally associated with rising prices investor optimism economic recovery and government stimulus Bear market is a markets normally associated with falling prices investor pessimism economic slowdown and government restraint 4 Identify an appreciated depreciated currency 168 If the exchange rate of currency A to currency B was 50 cents at one point in time and when checked again a few months later the new exchange rate of currency A to B is 60 cents this means that currency A has appreciated when compared to Currency B and that currency B has depreciated when compared to Currency A 5 Major focus impact of SOX 171 SOX or Sarbanes Oxley Act of 2002 focused on eliminating corporate fraud related to accounting and other information releases This act heightened the public s awareness of ethics Ethics standards of conduct or moral judgment 6 Types of brokerage accounts 192 Single or Joint account A joint account is common between a husband and wife or a parent and child Custodial account is the account of a minor Cash account is one in which customers can make only cash transactions Margin account is an account in which the brokerage firm extends borrowing privileges to a creditworthy customer Wrap account or a managed account gives great convenience to a customer in the form of a flat fee in return for help selecting a money manager paying the manager fees and covers all commission on trades 7 Long Short positions Long position or long purchase is a transaction in which investors buy securities in the hope that they will increase in value and can be sold at a later date for profit Buy low and sell high 171 Short position or short selling is generally defined as the practice of selling borrowed securities Starts when an investor borrows securities from a broker and sells them in the marketplace When the price has fallen the lender buys them back and returns them to the lender 178 8 Major published reports analysis 9 Types of averages indexes The Wall Street Journal Barron s Stockcharts com reuters com finance Averages reflect the arithmetic average price behavior of a representative group of stocks at a given point in time 182 Indexes measure the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time 182 The Dow Jones Industrial Average made up of 30 stocks selected for total market value and broad public ownership 182 DJ U S Total stock market index a market weighted index 185 Standard and Poor s indexes publish six major common stock indexes 186 The S P 500 Index The S P 100 Index The Industrial Index The S P 400 MidCap Index The S P 600 SmallCap Index The 1500 SuperComp Index NYSE Amex and Nasdaq Indexes these measure the daily results of the NYSE NYSE Amex and Nasdaq 186 Value Line composite index 187 10 Types of markets Money Markets are the markets where short term debt securities are bought and sold 154 Capital Markets are the markets where long term securities such as stocks and bonds are sold 154 Primary markets the market in which new issues of securities are sold 154 Secondary market the aftermarket the market where securities are traded after the initial offer 158 See above for Broker and Dealer Markets 11 Major characteristics of bonds Bond Yields are the returns an investor would receive on a bond if it were purchased and held to maturity 187 12 Capital gain loss parameters and calculation Capital gains when the proceeds from the sale of an investment exceeds its original purchase price 200 Capital loss when an investment sells for less than its original purchase price 200 paid 1000 and sold for 1100 capital gain of 100 201 paid 1000 and sold for 960 capital loss of 40 13 Total return parameters and calculations Total return is calculated by combining capital gain loss with income Table 10 1 total income Table 10 2 Total return 14 Impact of inflation on securities assets Inflation tends to have a positive impact on investments such as real estate and a negative impact on stocks and fixed income securities 203 15 Internal external impacts
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