Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-1
chapter
.
Using Securities Markets
for Financing and
Investing Opportunities
what’s new in this edition 19.3
brief chapter outline and learning objectives 19.5
lecture outline and lecture notes 19.7
PowerPoint slide notes 19.61
lecture enhancers 19.83
lecture enhancer 19–1: TWITTER’S IPO VICTORY 19.83
lecture enhancer 19-2: THE TOKYO EXCHANGE TYPING ERROR 19.84
lecture enhancer 19-3: RATINGS AGENCY DOWNGRADES FRANCE 19.84
lecture enhancer 19-4: THE DANGERS OF ETFS 19.85
lecture enhancer 19-5: LINEUP CHANGES ON THE DOW JONES 19.85
lecture enhancer 19-6: THE DAY THEY CALL “BLACK TUESDAY” 19.86
lecture enhancer 19-7: INVESTING IN COMMODITIES 19.86
19
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-2
critical thinking exercises 19.88
critical thinking exercise 19–1: FINANCING GROWTH 19.88
critical thinking exercise 19–2: PLAYING THE STOCK MARKET 19.90
critical thinking exercise 19–3: DOW JONES COMPONENTS 19.92
bonus cases 19.94
bonus case 19-1: INVESTING AN INHERITANCE 19.94
bonus case 19-2: THE NEXT GENERATION OF BUBBLES 19.96
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-3
what’s new in
this edition
additions to the 11th edition:
• Getting to Know Mellody Hobson of Ariel Investments
• Name That Company: McDonald’s
• Spotlight on Small Business: Giving Small Business a Jump on Funding
• Reaching Beyond Our Borders: Global Stocks: Love Them or Leave Them
• Figure 19.10: Cleaning Up the Street
• Video Case: Morningstar
revisions to the 11th edition:
• Making Ethical Decisions: Money Going Up in Smoke
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Maria Bartiromo
• Name That Company: Berkshire Hathaway
• Spotlight on Small Business
• Making Ethical Decisions
• Reaching Beyond Our Borders
• Legal Briefcase
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-4
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-5
brief chapter outline
and learning objectives
CHAPTER 19
USING SECURITIES MARKETS FOR FINANCING AND
INVESTING OPPORTUNITIES
Getting to Know MELLODY HOBSON of ARIEL INVESTMENTS
learning objective 1
Describe the role of securities markets and of investment bankers.
I. THE FUNCTION OF SECURITIES MARKETS
A. The Role of Investment Bankers
learning objective 2
Identify the stock exchanges where securities are traded.
II. STOCK EXCHANGES
A. Securities Regulations and the Securities and Exchange Commis-
sion
B. Foreign Stock Exchanges
learning objective 3
Compare the advantages and disadvantages of equity financing by is-
suing stock, and detail the differences between common and preferred
stock.
III. HOW BUSINESSES RAISE CAPITAL BY SELLING STOCK
A. Advantages and Disadvantages of Issuing Stock
B. Issuing Shares of Common Stock
C. Issuing Shares of Preferred Stock
learning objective 4
Compare the advantages and disadvantages of obtaining debt financ-
ing by issuing bonds, and identify the classes and features of bonds.
IV. HOW BUSINESSES RAISE CAPITAL BY ISSUING BONDS
A. Learning the Language of Bonds
B. Advantages and Disadvantages of Issuing Bonds
C. Different Classes of Bonds
D. Special Bond Features
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-6
learning objective 5
Explain how to invest in securities markets and set investment objec-
tives such as long-term growth, income, cash, and protection from infla-
tion.
V. HOW INVESTORS BUY SECURITIES
A. Investing through Online Brokers
B. Choosing the Right Investment Strategy
C. Reducing Risk by Diversifying Investments
learning objective 6
Analyze the opportunities stocks offer as investments.
VI. INVESTING IN STOCKS
A. Stock Splits
B. Buying Stock on Margin
C. Understanding Stock Quotations
learning objective 7
Analyze the opportunities bonds offer as investments.
VII. INVESTING IN BONDS
A. Investing in High-Risk (Junk) Bonds
B. Understanding Bond Quotations
learning objective 8
Explain the investment opportunities in mutual funds and exchange–
traded funds (ETFs).
VIII. INVESTING IN MUTUAL FUNDS AND EXCHANGE-TRADED
FUNDS
A. Understanding Mutual Fund Quotations
learning objective 9
Describe how indicators like the Dow Jones Industrial Average affect
the market.
IX. UNDERSTANDING STOCK MARKET INDICATORS
A. Riding the Market’s Roller Coaster
B. Investing Challenges in the 21st-Century Market
X. SUMMARY
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-7
Getting to Know MELLODY HOBSON of ARIEL INVEST-
MENTS
As president of Ariel Investments, she oversees over $9 billion in assets and is a fi-
nancial educator.
learning objective 1
Explain the role of security markets and of investment bankers.
I. THE FUNCTION OF SECURITIES MARKETS
A. Securities markets are FINANCIAL MARKETPLAC-
ES for stocks and bonds.
1. Securities markets serve two MAJOR FUNC-
TIONS:
a. To help businesses find LONG-TERM FUND-
ING
b. To provide a place for private investors to
BUY AND SELL SECURITIES (INVEST-
MENTS) such as stocks, bonds, and mutual
funds
2. Securities markets are divided into TWO MAR-
KETS:
a. PRIMARY MARKETS handle the sale of
NEW securities.
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.
(Students should read the chapter before guessing the company’s name: McDonalds.)
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-8
PPT 19-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Using Securities
Markets for
Financing &
Investing
Opportunities
CHAPTER 19
PPT 19-2
Learning Objectives
LEARNING OBJECTIVES
19-2
1. Describe the role of securities markets and of
investment bankers.
2. Identify the stock exchanges where securities are
traded.
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.
PPT 19-3
Learning Objectives
LEARNING OBJECTIVES
19-3
5. Explain how to invest in securities markets and set
investment objectives such as long-term 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 exchange-traded funds (ETFs).
9. Describe how indicators like the Dow Jones Industrial
Average affect the market.
PPT 19-4
Mellody Hobson
MELODY HOBSON
Ariel Investments
19-4
• Hobson started as an intern at
Ariel Investments after
graduating from Princeton in
1991.
• 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 term.
PPT 19-5
Name That Company
NAME that COMPANY
19-5
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!
(See complete PowerPoint slide notes on page 19.61.)
PPT 19-6
The Basics of Securities Markets
The BASICS of
SECURITIES MARKETS
19-6
• Securities markets are
financial marketplaces for
stocks and bonds and serve
two primary functions:
1. Assist businesses in finding
long-term funding to finance
capital needs.
2. Provide private investors a
place to buy and sell
securities such as stocks and
bonds.
LO 19-1
PPT 19-7
Types of Securities Markets
TYPES of
SECURITIES MARKETS
19-7
LO 19-1
• Securities markets are divided into primary and
secondary markets:
– 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
the seller.
• Initial Public Offering (IPO) — The first offering of
a corporation
’
s stock.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-9
i. Corporations make money on the sale of
their securities ONLY ONCE, when they
are first sold on the primary market.
ii. An INITIAL PUBLIC OFFERING (IPO) is
the first public offering of a corporation’s
stock.
b. SECONDARY MARKETS handle the trading
of securities between investors; the pro-
ceeds of the sale go to the investor selling
the stock, not to the corporation.
3. THE IMPORTANCE OF LONG–TERM FUND-
ING
a. Businesses prefer to meet LONG-TERM FI-
NANCIAL NEEDS by using RETAINED
EARNINGS or by BORROWING from a
lending institution.
b. If such forms are not available, the company
may be able to raise capital by ISSUING
CORPORATE BONDS (DEBT) or SELLING
STOCK (OWNERSHIP or EQUITY).
c. These forms of debt or equity financing are
not available to all companies.
d. Getting approval for bond or stock issues re-
quires extensive financial disclosures and
scrutiny by the SEC.
B. THE ROLE OF INVESTMENT BANKERS
1. INVESTMENT BANKERS are specialists who
assist in the issue and sale of new securities.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-10
lecture enhancer 19-1
TWITTER’S IPO VICTORY
critical thinking
exercise 19-1
FINANCING GROWTH
PPT 19-8
Investment Bankers and
Institutional Investors
• Investment Bankers — Specialists who assist in
the issue and sale of new securities.
INVESTMENT BANKERS
and INSTITUTIONAL INVESTORS
19-8
LO 19-1
• Institutional Investors —
Large organizations such as
pension funds or mutual funds
that invest their own funds or
the funds of others.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-11
2. Investment bankers also UNDERWRITE NEW
ISSUES of bonds or stocks, buying the entire is-
sue at a discount and then selling the issue to
investors.
3. INSTITUTIONAL INVESTORS are large inves-
tors—such as pension funds, mutual funds, and
insurance companies—that invest their own
funds or the funds of others.
4. Institutional investors are a powerful force in se-
curities markets.
learning objective 2
Identify the stock exchanges where securities are traded.
II. STOCK EXCHANGES
A. A STOCK EXCHANGE is an organization whose
members can buy and sell (exchange) securities for
companies and individual investors.
B. U.S. EXCHANGES
1. The NEW YORK STOCK EXCHANGE, founded
in 1792.
a. The NYSE used to be a FLOOR-BASED
EXCHANGE but now most trading is done
electronically.
b. In 2005 the NYSE merged with Archipelago.
c. In 2007 it merged with Europe’s Euronext
exchange.
d. In 2013 it was purchased by Intercontinental
Exchange (ICE) for $8.2 billion.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-12
PPT 19-9
Stock Exchanges
STOCK EXCHANGES
19-9
LO 19-1
• Stock Exchange — An organization whose
members can buy and sell (exchange) securities on
behalf of companies and individual investors.
• Over-the-Counter (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
securities electronically.
PPT 19-10
Top Stock Exchanges
TOP STOCK EXCHANGES
19-10
LO 19-1
• NYSE Euronext
• NASDAQ
• London Stock
Exchange
• Tokyo Stock Exchange
• Deutsche Borse
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-13
2. THE OVER-THE-COUNTER (OTC) MARKET
a. The OVER-THE-COUNTER (OTC) MAR-
KET is an exchange that provides a means
to trade stocks not listed on the national ex-
changes.
b. The NASDAQ is a nationwide electronic sys-
tem that links dealers across the nation so
that they can buy and sell securities (origi-
nally known as the NATIONAL ASSOCIA-
TION OF SECURITIES DEALERS AUTO-
MATED QUOTATION SYSTEM).
c. It is the largest U.S. electronic stock trading
market.
d. Originally, the over-the-counter market dealt
with small firms, but today, firms such as In-
tel and Microsoft are traded on the OTC
market.
e. The NASDAQ market also handles COR-
PORATE AND GOVERNMENT BONDS.
f. The NASDAQ lists about 3,300 companies.
3. Stocks can be DELISTED from an exchange if a
company fails to hold up the exchange’s mini-
mum requirements.
C. SECURITIES REGULATIONS AND THE SECURI-
TIES AND EXCHANGE COMMISSION
1. The SECURITIES ACT OF 1933 protects inves-
tors by requiring full disclosure of financial in-
formation by firms selling new stocks or bonds.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-14
SPOTLIGHT ON
small
business
PPT 19-11
Giving Small
Business a
Jump on Fund-
ing
GIVING SMALL BUSINESS
a JUMP on FUNDING
19-11
• 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.
lecture enhancer 19–2
THE TOKYO EXCHANGE TYPING
ERROR
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-15
2. The SECURITIES AND EXCHANGE COMMIS-
SION (SEC) is the federal agency that has re-
sponsibility for regulating the various exchanges.
a. Companies trading on the national exchang-
es must register with the SEC and provide
annual updates.
b. When issuing bonds or stock, companies
must follow established specific guidelines
such as filing a PROSPECTUS.
3. A PROSPECTUS is a condensed version of
economic and financial information that a com-
pany must file with the SEC before issuing
stock; the prospectus must be sent to prospec-
tive investors.
4. INSIDER TRADING involves the use of
knowledge or information that individuals gain
through their position that allows them to benefit
unfairly from fluctuations in security prices.
a. The key words are BENEFIT UNFAIRLY.
b. The term INSIDER has been broadened to
include anyone with information about a se-
curity not available to the general public.
c. Penalties for insider trading can include fines
or imprisonment.
D. FOREIGN STOCK EXCHANGES
1. Stock exchanges operate globally.
2. Investors can now buy securities from compa-
nies almost anywhere in the world.