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1. Describe the role of securities markets and of
2. Identify the stock exchanges where securities are
3. Compare the advantages and disadvantages of equity
financing by issuing stock, and detail the differences
between common and preferred stock.
4. Compare the advantages and disadvantages of
obtaining debt financing by issuing bonds, and identify
the classes and features of bonds.
5. Explain how to invest in securities markets and set
investment objectives such as longterm growth,
income, cash, and protection from inflation.
6. Analyze the opportunities stocks offer as investments.
7. Analyze the opportunities bonds offer as investments.
8. Explain the investment opportunities in mutual funds
and exchangetraded funds (ETFs).
9. Describe how indicators like the Dow Jones Industrial
Average affect the market.
• Hobson started as an intern at
Ariel Investments after
graduating from Princeton in
• Now, as president of the
company, she oversees more
than $9 billion in assets.
• Preaches patience in investing.
• Ariel Investments focuses on
stocks and equity funds that
should perform in the long
NAME that COMPANY
If someone had bought 100 shares in this company
when it was first available to the public in 1965,
it would have cost $2,250. If they held on to the
stock, the number of shares they’d have today
would be 74,360 (after 12 stock splits) with a
value of approximately $7.4 million.
Name that company!
The BASICS of
• Securities markets are
financial marketplaces for
stocks and bonds and serve
two primary functions:
1. Assist businesses in finding
longterm funding to finance
2. Provide private investors a
place to buy and sell
securities such as stocks and
• Securities markets are divided into primary and
- 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
• Initial Public Offering (IPO) The first offering
of a corporation’s stock.
and INSTITUTIONAL INVESTORS
• 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 or
the funds of others.
• Stock Exchange An organization whose
members can buy and sell (exchange) securities on
behalf of companies and individual investors.
• OvertheCounter (OTC) Market Provides
companies and investors with a means to trade stocks
not listed on the national securities exchanges.
• NASDAQ A telecommunications network that links
dealers across the nation so they can exchange
TOP STOCK EXCHANGES
• NYSE Euronext
• London Stock
• Tokyo Stock Exchange
• Deutsche Borse
GIVING SMALL BUSINESS
a JUMP on FUNDING
• The goal of the JOBS Act is to ease small
business financing problems.
• The SEC adopted new rules, including:
- Raised from 500 to 2,000 the number of shareholders
a company could have before it must register its stock
with the SEC.
- Allows equity crowdfunding through brokers or portals.
- Expanded the abilities of private companies to raise
capital through limited stock offerings.
The SECURITIES and
• Securities and Exchange Commission (SEC)
The federal agency responsible for regulating the
various stock exchanges; created in 1934 through the
Securities and Exchange Act.
• 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.
• What is the primary purpose of a securities
• What does NASDAQ stand for? How does this
LANGUAGE of STOCKS
• 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
• Stockholders are owners
of a firm and never have to
be repaid their investment.
• There is no legal obligation
to pay dividends.
• Issuing stock can improve
a firm’s balance sheet
since stock creates no
• Stockholders have the right to vote for a
company’s board of directors.
• Issuing new shares of stock can alter the control
of the firm.
• Dividends are paid from aftertax profits and are
not tax deductible.
• The need to keep stockholders happy can affect
TWO CLASSES of STOCK
• Common Stock The 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. Preferred stock can
• Name at least two advantages and disadvantages
of a company’s issuing stock as a form of equity
• What are the major differences between common
stock and preferred stock?
LANGUAGE of BONDS
• Bond A corporate certificate indicating that an
investor has lent money to a firm (or a government).
• The principal is the face
value of the bond.
• Interest The payment the
bond issuer makes to the
bondholders to compensate
them for the use of their
TYPES of BONDS
• Bondholders are creditors, not owners of the firm
and cannot vote on corporate matters.
• Bond interest is tax deductible.
• Bonds are a temporary source of funding and are
• Bonds can be repaid before the maturity date if
they are callable.
• Bonds increase debt and can affect the market’s
perception of the firm.
• Paying interest on bonds is a legal obligation.
• If interest is not paid, bondholders can take legal
• The face value of the bond must be repaid on the
DIFFERENT CLASSES of
• Corporations can issue two classes of bonds:
1. Unsecured bonds
backed by specific
2. Secured bonds:
collateral (land or
SPECIAL FEATURES in
• 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 stock.