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Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
PPT 19-57
Cleaning Up the Street
PPT 19-58
Progress Assessment
1. The Dow Jones Industrial Average is the average
price of 30 specific industrial stocks. It is important
because it allows followers of the market to track
the general direction of the stock market.
2. The Dow will delete and add new companies to the
Dow Jones Industrial Average to reflect increased
economic importance of a particular company or
industry. Recently, Cisco and Travelers replaced
Citi and GM.
3. Program trading occurs when investors give in-
structions to their computers to execute a sell order
if the stock price dips to a certain point. Many at-
tribute the stock market crash of 1987 to program
trading as computer sell orders caused many stocks
to fall to incredible levels.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-80
lecture
links
lecture link 19-1
THE IPO FROM HELL
With its 2004 IPO, Google’s reaped $17.5 billion. On the first day of trading, the new shares were
quickly bid up from the offering price of $85 to $100. This profitable conclusion, however, came after a
very stormy IPO process.
The missteps began almost immediately. When Google announced its plans to go public, it reject-
ed the traditional IPO format in favor of a riskier, but more democratic, auction approach. In the tradition-
al IPO process, the first shares are offered by an investment bank. The shares are hard to get and often
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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When the stock finally opened for trading in August 2004, Brin and Page’s approach was vindi-
cated. By the end of the day, the two founders were worth almost $4 billion apiece. Google’s $27 billion
market value exceeded that of General Motors and almost twice that of Amazon.com.
a whopping 75% share of all IPOs while Asia languished at 12%. Times are different now, though, and
not just because of the credit crunch. After all, American outsourcing contributed directly to the burgeon-
ing Asian markets that are expanding with capital today. At the top of the heap is America’s economic
rival China, which attracted $76 billion in investment in 2010. Six Chinese companies’ offerings hit the
billion-dollar mark, with one IPO for the Agricultural Bank of China selling a world record of $22.1 bil-
You’ve probably seen the photos of the New York Stock Exchange floor jammed with traders in
colored jackets, waving arms and shouting orders. What seems like mayhem to us is the natural way of
doing business on the NYSE. Or at least it has been up until now. The NYSE has lost considerable market
share to electronic platforms that allow faster trading at lower costs.
In an effort to compete with their electronic rivals, in February 2011 the NYSE announced a mer-
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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and head of global information technology. All told, the new exchange, which has not released a name
yet, will save an estimated $400 million in operating costs annually. These potential savings have made
mergers look attractive in other markets, such as one proposed tie-up of the Singapore and Australian ex-
company, for 610,000 yen ($5,041). The trader instead entered a trade of 610,000 shares at 1 yen (less
than a penny).
The enormity of the error should have raised red flags through the exchange. The number of
shares in the order was 41 times greater than the number of J-Com’s shares actually outstanding, but the
Tokyo Stock Exchange processed the order anyway. Mizuho says another trader tried to cancel the order
sent, has 275 faith-based institutional investors with combined holdings of about $90 billion.
Sister Patricia Daly, executive director of the organization representing the Dominican Order, has
introduced shareholder resolutions aimed at the “filthy five,” five U.S. utilities viewed as the biggest
emitters of carbon dioxide in their business. The resolutions asked investors to agree that the board of di-
rectors report to shareholders on “the greenhouse-gas emissions from our company’s operations including
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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while others used annual shareholder meetings to submit resolutions that called on these companies to
stop what they saw as immoral business practices. The Interfaith Center on Corporate Responsibility was
founded during this era.
vice groups. They have also instructed the managers of their multimillion-dollar stock portfolio not to buy
shares in tobacco companies. If no women candidates are candidates for the board of directors, the Do-
minicans refuse to cast a vote.
It is rare that a shareholder resolution they offer passes when voted on by other stockholders. But
their concerns generate publicity, which along with dialogue and negotiation have become their most ef-
A few months after filing resolutions with the “filthy five” utilities, Sister Daly also filed resolu-
tions with two of the Big Three: General Motors and Ford. They are asking the carmakers to commit to
reducing greenhouse gas emissions. According to Sister Daly, “this is not only about what is good for the
environment, it is about what is good for GM and Ford Shareholders,” by nudging the car giants to focus
on their hybrid (gas/electric vehicle) strategy to regain their competitive edge in the United States.v
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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at an alarming rate, with 140 shutting down since 2008. In the 15 years before then, only 10 had closed.
An ETF needs at least $50 million to generate a profit and many disappear due to a lack of investor inter-
est. Although investors don’t lose their money once a fund closes, those looking for ETFs as a solid di-
THE DAY THEY CALL “BLACK TUESDAY”
October 29, 1929, “Black Tuesday,” was the day the boom of the 1920s ended. The market slides
of 1987 and 1997 are often compared with this historical watershed.
Few suspected that the go-go era would end so abruptly. Between the spring of 1926 and the
spring of 1929, the Dow Jones Industrial Average had more than doubled. During the summer of 1929, it
dropped out. The Dow dropped 31 more points, on a volume of 16.4 million shares. In two days, the mar-
ket lost almost 25% of its value. Tuesday’s volume record stood for nearly four decades. In five trading
days, the gains of the previous 16 months were wiped out.
By July, 1932, the DJIA had bottomed out at 41, a reduction of nearly 90% from its peak three
years previously. Investors lost more than $74 billion in the collapse. It was not until 1954 that the stock
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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Trading in commodities, however, can also be used as a means of protecting businesspeople,
farmers, and others from wide fluctuations in commodity prices and thus for them can be a very conserva-
tive investment strategy. A commodity exchange specializes in the buying and selling of precious metals
es.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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critical
thinking exercises
1. What are your financing alternatives?
2. Would you consider selling bonds if you had to pay 12% interest?
3. What are the major advantages of using issuing bonds?
4. What are the major disadvantages of using issuing bonds?
19-87
1. What are your financing alternatives?
2. Would you consider selling bonds if you had to pay 12% interest?
3. What are the major advantages of using issuing bonds?
4. What are the major disadvantages of using issuing bonds?
1. Why would a good stock drop $3 in one day?
2. What do you tell your client if the market drops again tomorrow and his stock drops with it?
3. Are some people emotionally unsuited to handle the stresses of the ups and downs of the stock
market? Should such people stay out of the stock market? If so, what are their investment alterna-
tives?
19-88
1. Why would a good stock fall $3 in one day?
2. What do you tell your client if the market drops again tomorrow and his stock drops with it?
3. Are some people emotionally unsuited to handle the stresses of the ups and downs of the stock
market? Should such people stay out of the stock market? If so, what are their investment alterna-
tives?
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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Name: ___________________________
1. What is the Dow Jones Industrial Average Index value at the end of yesterday’s trading?
2. What is the percentage change in the index in the year to date?
3. The website contains information about the composition of the DJIA index. Use this information
to answer the following questions:
a. In what year was the DJIA index expanded to twelve stocks?
b. In what year was General Motors added to the index?
c. In what year was Microsoft added to the index?
4. Choose one of the stocks included in the DJIA today and trace its history.
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5. The website includes a chart showing what happened to the Dow Jones Industrial Average after
major world events.
a. After the Oklahoma City bombing in 1995, what was the one-day effect on the Dow
Jones Industrial Average? What was the effect one year later?
b. After the September 11, 2001, terrorist attacks, what was the one-day effect on the Dow
Jones Industrial Average? What was the effect one year later?
c. After Hurricane Katrina hit the Gulf Coast in August 2005, what was the one-day effect
on the Dow Jones Industrial Average? What was the effect one year later?
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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bonus
cases
bonus case 19-1
IS IT TIME FOR AN NYSE CODE OF ETHICS?
1. Many in the investment company were implicated in the accounting/underwriting scandals in-
volving Enron, WorldCom, and Arthur Andersen. Would a code of ethics have discouraged or
prevented these unethical situations?
3. Does a broker have a duty to make as much money for his or her clients as possible? Does the
19-92
1. Many in the investment company were implicated in the accounting/underwriting scandals in-
volving Enron, WorldCom, and Arthur Andersen. Would a code of ethics have discouraged or
prevented these unethical situations?
2. Suppose you were a stockbroker and recognized a profitable, but questionably ethical investment
opportunity. The investment would significantly benefit the major corporate directors and gener-
ate commission income for you and your brokerage. What is your obligation to other stockhold-
ers, regulators, and society in general?
It depends entirely on what is meant by “questionably ethical.” Does that mean questionably legal
as well? In that case, there is no debate. It is wrong to do. Period. If it means that people might have some
3. Does a broker have a duty to make as much money for his or her clients as possible? Does the
wide separation in wealth between rich and poor create a situation where brokers should stop
making as much money as possible for rich people?
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
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bonus case 19-2
INVESTING AN INHERITANCE
Jason Heimberg’s grandmother died and left him $30,000. Jason needed $5,000 of the inheritance
1. What are the criteria Jason should use in evaluating investment alternatives?
2. Look up no-load mutual funds in a newspaper or magazine that lists them. Do you understand
what is available? What are the advantages and disadvantages of buying a mutual fund through a
broker?
3. What questions does this case raise that you need to have answered before you can invest your
funds more intelligently? Where could you find answers to such questions?
19-94
1. What are the criteria Jason should use in evaluating investment alternatives?
2. Look up no-load mutual funds in a newspaper or magazine that lists them. Do you understand
what is available? What are the advantages and disadvantages of buying a mutual fund through a
broker?
3. What questions does this case raise that you need to have answered before you can invest your
funds more intelligently? Where could you find answers to such questions?
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-95
bonus case 19-3
THE NEXT GENERATION OF BUBBLES
For more than a decade the rapid inflation and subsequent bursting of several bubbles have de-
1. What key economic principles can we learn from “bubbles”?
2. Is it time for the Federal Reserve to increase interest rates?
19-96
1. What key economic principles can we learn from “bubbles”?
2. Is it time for the Federal Reserve to increase interest rates?
endnotes
i Sources: Steven Levy, “Surviving the IPO from Hell,” Newsweek, August 20, 2004; “Google Stock Bargain or
Bubble?” The Clarion-Ledger, Associated Press, December 4, 2004.
2005.
v Sources: Marilyn Berlin Snell, “Sister Action: The Almighty Dollar Meets Its Match in a Dominican Nun,” Sierra,
May 1, 2003; Tom Murphy, “Lilly Faction Seeks Split of Exec Roles,” Indianapolis Business Journal, March 21,
2005; Sarah A. Webster, “Stockholders Support Ford Leadership: Few at Annual Meeting Criticize Chairman’s
Work,” Detroit Free Press, May 12, 2006
