Charles P. Jones, Investments: Analysis and Management, - PowerPoint PPT Presentation

1 / 23
About This Presentation
Title:

Charles P. Jones, Investments: Analysis and Management,

Description:

Dow Jones Industrial Average. Composed of 30 'blue-chip' stocks. Price-weighted index: Essentially adds the prices of 30 stocks, divides by 30 ... – PowerPoint PPT presentation

Number of Views:3059
Avg rating:3.0/5.0
Slides: 24
Provided by: garyk155
Category:

less

Transcript and Presenter's Notes

Title: Charles P. Jones, Investments: Analysis and Management,


1
Securities Markets
  • Chapter 4
  • Charles P. Jones, Investments Analysis and
    Management,
  • Ninth Edition, John Wiley Sons
  • Prepared by
  • G.D. Koppenhaver, Iowa State University
  • Additional Information by Axel Grossmann

2
The Role of Financial Markets
  • Governments and Firms need vast amounts of
    capital
  • Help firms and governments raise cash by selling
    claims against themselves
  • Provide a place where investors can act on their
    beliefs
  • Help allocate cash to where it is most productive
    allocationally efficiency
  • Help lower the cost of exchange
  • Well functioning primary and secondary market
    import for economy

3
Markets in New Securities
  • New securities are issued in a primary market
  • Initial public offerings (IPOs) versus seasoned
    new issues
  • Transaction in the secondary market do not affect
    the initial issuer of a security
  • Performance of IPOs

4
Investment Banking
  • Issue facilitated by investment banker
  • Investment Banks
  • Merrill Lynch (investment banking and brokerage)
  • Salomon Smith Barney
  • JP Morgan
  • Goldman Sachs
  • Lehman Brothers
  • Banc of America
  • Deutsche Bank
  • Specialists in advice, design, and sales
  • Intermediaries between issuer and investor

5
Investment Banking
  • Investment Banks (IBs)
  • Client advice includes type and features of
    security, offer price, and timing of sale
  • Underwriting services
  • Investment bankers purchase an issue of
    securities from a firm and resell it to the
    public
  • Risk of selling to investors assumed from issuer
  • IBs are compensated by a spread
  • Coordinates marketing by helping issuer register
    securities, issue prospectus, and sell securities

6
Investment Banking
  • One originating investment banks forms a an
    underwriting syndicate group of investment
    bankers
  • Diversification of risk
  • The syndicate becomes part of a large group that
    sells the securities
  • Underwriting group plus brokerage houses

7
Investment Banking
  • Rule 415 (shelf rule) allows certain issuers to
    sell new securities over time after filing a
    single registration
  • Reduces issuance cost
  • A private placement means new securities are sold
    directly to investors, bypassing the open market
  • Registration not required

8
Secondary Markets
  • Markets where investors trade previously issued
    securities
  • Auction markets involve bidding in a specific
    physical location
  • Brokers represent investors (buyers and sellers)
    for a fee Commission Brokers
  • Others trade for their own account Independent
    Floor Brokers
  • Electronic net work of dealers (market makers)

9
Secondary Markets
  • Three major markets
  • NYSE
  • AMEX
  • Nasdaq
  • Regional Exchanges
  • Over-the-counter
  • Electronic Communication Networks (ECNs)
  • Most stocks are listed at the first three, but
    also traded at ECNs (e.g 45 of Nasdaq shares
    were traded through ECNs)

10
NYSE
  • Secondary auction market in equity shares
  • Has a physical location
  • Specialists assigned to each traded equity to
    make a market in that stock
  • Broker with no vested interest in whether a
    customer places a buy or a sell order
  • Not-for-profit organization of members
  • Member firms own seats
  • Only member firms are allowed to sell securities
    at the trading floor

11
NYSE
  • Listing requirements
  • Specified amounts of earning power and assets
  • At least 40,000,000 market value of publicly
    traded shares
  • 1,100,000 common shares publicly held
  • Listing fees

12
NYSE
  • Broker
  • An agent representing customers order to buy an
    sell
  • Commission Brokers
  • Employed by Member firms
  • Independent Floor Brokers
  • Work for themselves
  • Handle orders for brokerage houses that do not
    have a full time broker

Public Investor
Sales Personnel of Brokerage House
Commission Broker at Trading Floor
13
NYSE
  • Specialist
  • They manage the auction process
  • Assigned to trading posts and handle one or more
    stocks
  • Act as Agents
  • Executes orders for the floor brokers
  • As Catalyst
  • Match sellers and buyers
  • As Auctioneers
  • Establish fair market price
  • Quote bids and offers
  • Stabilize Prices
  • Ensure smooth trading and minimal fluctuations
  • Provide Capital
  • Minimizes sell and buy imbalance with own capital

14
AMEX and regional stock exchanges
  • Organization and procedures resemble NYSE
  • List smaller firms
  • Less volume than NYSE
  • Listing requirements are less stringent
  • Lower listing fees

15
NASDAQ
  • Network of competing dealers (market makers)
    trading listed securities
  • Dealers stand ready to buy and sell securities
  • They conduct transaction directly with each other
    or customers
  • They a vested interest in each transaction
  • Spread is their profit
  • Automated quotation system with no fixed number
    of participants
  • NASDAQ National Market
  • NASDAQ SmallCap Market
  • More firms listed than NYSE
  • Network connects to other trading systems
  • ECNs
  • Nasdaq InterMarket (trades stocks at NYSE and
    AMEX)

16
Secondary Markets
  • Over-the-counter
  • Companies not listed at one of the three markets
  • They may fail to qualify
  • They may not want to be listed
  • Securities are traded in two ways
  • OTC Bulletin Board (OTCBB)
  • Registration with SEC
  • Operated by Nasdaq but separated from Nasdaq
    market
  • Pink Sheet LLC
  • Not registered with SEC
  • Privately owned company

17
Over-the-Counter Markets
  • Network of dealers standing ready to either buy
    or sell securities at specified prices
  • Dealers profit from spread between buy and sell
    prices
  • Handle unlisted securities

18
Electronic Communications Networks (ECNs)
  • A computerized trading network
  • Compete with
  • Auction markets
  • Computerized Nasdaq market Network of dealers
    standing ready to either buy or sell securities
    at specified prices
  • It matches buy and sell orders from
  • Own subscribers
  • As well as customers orders routed from other
    brokerage firms.
  • No spreads, 0.01 per share traded
  • Examples
  • Instinet (operates around the clock, world wide)
  • Island

19
Foreign Markets
  • US equity markets account for a third of worlds
    stock market capitalization
  • Many different equity markets exist
  • Emerging market Stable political system, low
    regulation, low standardization in trading
    activity
  • Risks Illiquidity, lack of information,
    political uncertainty

20
Equity Market Indicators
  • Provide a composite report of market behavior on
    a given day
  • Dow Jones Industrial Average
  • Composed of 30 blue-chip stocks
  • Price-weighted index Essentially adds the prices
    of 30 stocks, divides by 30
  • Adjusted for stock splits, stock dividends
  • Oldest, most well-known measure

21
Equity Market Indicators
  • Standard Poors Composite Index
  • Composed of 500 large firm stocks
  • Expressed as index number relative to a base
    index value of 10 (1941-43)
  • Value-weighted index Prices and shares
    outstanding considered
  • Indicates how much the average equity value of
    the 500 firms in the index has increased relative
    to the base period

22
Equity Market Indicators
  • NYSE and NASDAQ Composite Indices
  • Value-weighted indices of broad markets
  • Wilshire Index
  • Broadest measure of the market (more than 6,500
    stocks
  • Nikkei 225 Average
  • Price-weighted index of 225 actively-traded
    stocks on the Tokyo Stock Exchange

23
Bond Markets
  • Secondary bond market is primarily an
    over-the-counter network of dealers
  • NYSE features an automated bond system to execute
    orders.
  • Mostly corporate bonds, thinly traded
  • Treasury and agency bonds actively trade in
    dealer markets
  • Municipal bonds less actively traded
Write a Comment
User Comments (0)
About PowerShow.com