Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-31
b. The stockbroker places an order with a stock
exchange member who goes to the place
where the bond or stock is traded and NE-
GOTIATES A PRICE.
c. The completed transaction is reported to the
broker and then to the investor.
d. Large brokerage firms have AUTOMATED
ORDER SYSTEMS that allow brokers to in-
stantly place and confirm orders.
2. The broker can also be a source of information
about stocks or bonds, but you can learn about
and follow stocks or bonds on your own.
B. INVESTING THROUGH ONLINE BROKERS
1. Investors can use ONLINE TRADING SER-
VICES to buy and sell stocks and bonds instead
of using traditional broker services.
a. Examples: TDAmeritrade, E*Trade
b. The FEES on these trading services are less
than those of regular stockbrokers.
c. To meet this competition, traditional broker-
ages have introduced their own online capa-
bilities.
2. These services are targeted primarily at inves-
tors willing to do their OWN RESEARCH and
make their OWN INVESTMENT DECISIONS.
a. The leading online services do provide key
market information about companies.
b. Some online brokers are exploring OTHER
FINANCIAL SERVICES ALTERNATIVES
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-32
MAKING
ethical
decisions
PPT 19-28
Money Going
Up in Smoke
MONEY GOING UP in SMOKE
19-28
• You recently received news that your Uncle Alex
passed away after a long battle with lung cancer
caused by smoking. He left you $25,000 in his
will, saying you were his favorite nephew.
• Your friend Jack recommends that you buy stock
in a well-known multinational firm that is primary
product is tobacco.
• Will you invest your inheritance in a company that
markets tobacco?
critical thinking
exercise 19-2
PLAYING THE STOCK MARKET
This exercise explores the effect of the stock market ups and
downs on an investor. (See the complete exercise on page 19.90
of this manual.)
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-33
such as banking services and credit cards.
3. Investing means committing (and risking) money
with the expectation of profit—a risky undertak-
ing.
4. The first step in any investment program is to
analyze such factors as desired income, cash
requirements, level of risk, and so on.
C. CHOOSING THE RIGHT INVESTMENT STRATE-
GY
1. INVESTMENT OBJECTIVES change over the
course of a person’s life.
a. A young person can afford more high-risk in-
vestment options than a person nearing re-
tirement.
b. An older person has different objectives, in-
cluding steady return and additional income.
2. You should consider FIVE CRITERIA FOR SE-
LECTING AN INVESTMENT VEHICLE:
a. INVESTMENT RISK, the chance that an in-
vestment and its entire yield will be worth
less at some future time
b. YIELD, the expected rate of return on an in-
vestment, such as interest or dividends
c. DURATION, or the length of time your mon-
ey is committed
d. LIQUIDITY, how quickly you can get back
your invested funds when desired
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-34
bonus case 19-1
INVESTING AN INHERITANCE
PPT 19-29
Five Investment Criteria
FIVE INVESTMENT CRITERIA
19-29
LO 19-5
1. Investment risk
2. Yield
3. Duration
4. Liquidity
5. Tax consequences
PPT 19-30
Investing 101
INVESTING 101
Things to Do Before Making Your First Investment
Source: Money, www.money.com, accessed November 2014. 19-30
LO 19-5
• Take an investing class.
• Attend a conference.
• Head to the library and
pick up investing books.
PPT 19-31
Average Annual Return of Asset
Classes (Since 1926)
AVERAGE ANNUAL RETURN of
ASSET CLASSES (Since 1926)
Source: Ibbotson Associates and Morningstar. 19-31
Investment Return
Small company stocks 12.2%
Large company stocks 9.5%
Corporate bonds 6.0%
Long-term government bonds 5.8%
Treasury bills 4.1%
LO 19-5
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-35
e. TAX CONSEQUENCES, how the invest-
ment will affect your tax situation
3. Investment Strategies
a. GROWTH (choosing stocks you believe will
increase in price)
b. INCOME (choosing stocks that pay con-
sistent dividends)
4. Investors need to consider the RISK/RETURN
TRADEOFF.
5. Investors can read and study the market and
make their own decisions or use the services of
an investment planner.
D. REDUCING RISK BY DIVERSIFYING INVEST-
MENTS
1. DIVERSIFICATION means buying several dif-
ferent investments alternatives to spread the risk
of investing.
2. By diversifying, investors decrease the chance
of losing everything they have invested.
3. This investment strategy is often called a
PORTFOLIO STRATEGY or ALLOCATION
MODEL.
learning objective 6
Analyze the opportunities stocks offer as investments.
VI. INVESTING IN STOCKS
A. STOCK INVESTMENTS let investors participate in
the success of emerging or expanding companies.
1. As owners, however, stockholders can also
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-36
PPT 19-32
Diversification
DIVERSIFICATION
19-32
LO 19-5
• Diversification — Buying several different types of
investments to spread the risk of investing.
• If diversifying, an investor may put:
– 25% of his/her money into U.S. growth stocks
– 25% in government bonds
– 25% in dividend-paying stocks
– 10% in an international mutual fund
– The rest in a savings account
CONNECTING
ACROSS
borders
PPT 19-33
Global Stocks:
Love Them or
Leave Them
GLOBAL STOCKS:
LOVE THEM or LEAVE THEM
19-33
• Suggestions for building your financial future:
– Invest in familiar global companies with a solid
reputation and performance records.
– Invest only in global stocks listed on U.S.
exchanges.
– Invest in global mutual funds that focus on specific
countries or regions.
– Use extreme caution if investing in unstable
countries!
PPT 19-34
Primary Investment Services Con-
sumers Need
PRIMARY INVESTMENT SERVICES
CONSUMERS NEED
Source: Investment Company Institute. 19-34
LO 19-5
• Savings and investing
advice
• Help with 401k plans
• Retirement planning
• Tax planning
• Estate planning
• Education expense planning
test
prep
PPT 19-35
Test Prep
TEST PREP
19-35
• What is the key advantage of investing through
online brokers? What is the key disadvantage?
• What is the primary purpose of diversifying
investments?
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-37
LOSE MONEY if a company does not do well or
if the market is declining, such as the recent
market freefall.
2. Stock investors are identified by their percep-
tions of the market.
a. BULLS are investors who believe that stock
prices are going to rise.
b. When overall stock prices are rising, the
market is called a BULL MARKET.
c. BEARS are investors who expect stock pric-
es to decline.
d. When the price of stocks declined, the mar-
ket is called a BEAR MARKET.
3. The market price (and growth potential) of com-
mon stock depends heavily on the overall per-
formance of the corporation.
a. CAPITAL GAINS are the positive difference
between purchase price of a stock and its
sale price.
b. Stocks can be subject to a high degree of
risk.
4. INVESTMENT OPPORTUNITIES IN STOCK
a. BLUE CHIP STOCKS are stocks of high-
quality companies that pay regular dividends
and generally experience consistent growth
in the company’s stock price.
b. GROWTH STOCKS are stocks of corpora-
tions whose earnings are expected to grow
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-38
PPT 19-36
Perceptions of the Market
PERCEPTIONS of the MARKET
19-36
LO 19-6
• Bulls: Investors who
believe stock prices
are going to rise.
• Bears: Investors who
expect stock prices to
decline.
PPT 19-37
Bear Market Declines in the S&P
500
BEAR MARKET DECLINES
in the S&P 500
Source: Stock Traders Almanac 2011. 19-37
Time Period % Drop in Prices
2007-2009 52.5%
2000-2002 51%
1973-1974 48.2%
1968-1970 36.1%
1987-1988 33.5%
LO 19-6
PPT 19-38
Selecting Stocks
SELECTING STOCKS
19-38
• Capital Gains — The positive difference between
the price at which you bought a stock and what you
sell it for.
• Investors can also choose stocks according to
their strategy:
– Blue-chip stocks
– Growth stocks
– Income stocks
– Penny stocks
LO 19-6
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-39
at a faster rate than those other stocks.
i. These are often technology-, biotechnol-
ogy-, or Internet-related firms.
ii. These stocks are often RISKY but offer
the potential for HIGH RETURNS.
c. INCOME STOCKS are stocks that offer a ra-
ther high dividend yield (e.g., public utilities).
d. PENNY STOCKS are stocks that sell for
less than $2, and are considered very risky
investments.
5. BUYING STOCK: MARKET AND LIMIT OR-
DERS
a. MARKET ORDERS are instructions to a
broker to buy stock immediately at the best
price available.
b. LIMIT ORDERS tell a broker to buy or sell a
stock at a specific price, if that price be-
comes available.
B. STOCK SPLITS
1. Companies and brokers prefer to sell stock in
ROUND LOTS, purchases of 100 shares at a
time, although investors can buy stock in ODD
LOTS (less than 100 shares at a time).
2. A STOCK SPLIT is an action by a company that
gives stockholders two or more shares of stock
for each one they own.
3. There is no change in the firm’s ownership struc-
ture and no change in the investment’s value af-
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-40
PPT 19-39
Stock Splits
STOCK SPLITS
19-39
LO 19-6
• Stock Splits — An action by a company that gives
stockholders two or more shares of additional stock
for every share that they own.
• Splits cause no change in the firm’s ownership
structure and no change in the investment’s
value.
• Firms can never be forced to spilt their stocks.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-41
ter the stock split.
4. The advantage for shareholders is that the lower
price increases demand for the stock.
5. A company cannot be forced to split its stock.
C. BUYING STOCK ON MARGIN
1. BUYING STOCK ON MARGIN is purchasing
stocks by borrowing some of the purchase cost
from the brokerage firm.
2. MARGIN is the amount of money (as a percent-
age) an investor must invest in the stock; the
Federal Reserve sets MARGIN RATES (dis-
cussed in detail in Chapter 20).
3. However, investors must repay the credit ex-
tended, plus interest.
4. If the value of investor’s account goes down, the
broker will issue a MARGIN CALL requiring the
investor to come up with more money to cover
any losses.
5. If the investor is unable to make the margin call,
the broker can legally sell the stock.
D. UNDERSTANDING STOCK QUOTATIONS
1. The Wall Street Journal lists stock quotations
from the OTC markets of New York Stock Ex-
change, the American Stock Exchange, and the
NASDAQ.
2. Figure 19.4 shows an example of an online
stock quotation.
3. STOCK QUOTES SHOW:
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-42
PPT 19-40
Buying Stock on Margin
• Buying Stock on Margin — Borrowing some of the
stock
’
s purchase cost from the brokerage firm.
BUYING STOCK on MARGIN
19-40
LO 19-6
• Margin is the portion of the
stock’s purchase price that
the investor must pay with
their own money.
• If a broker issues a margin
call, the investor has to
come up with money to
cover losses.
PPT 19-41
Understanding Stock Quotations
TEXT FIGURE 19.4
Understanding Stock Quotations
UNDERSTANDING STOCK
QUOTATIONS
19-41
LO 19-6
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-43
a. The HIGHEST and LOWEST PRICE the
stock has sold for over the past 52 weeks
b. The last DIVIDEND PER SHARE paid
c. The stock’s DIVIDEND YIELD (annual divi-
dend as a percentage of the price per share)
d. Important ratios such as the P/E RATIO
(price to earnings ratio)
e. THE NUMBER OF SHARES OUTSTAND-
ING
f. The total market capitalization of the firm
4. You can begin to follow stocks with a hypothet-
ical stock portfolio without investing any money.
learning objective 7
Analyze the opportunities bonds offer as investments.
VII. INVESTING IN BONDS
A. Bonds are a relatively SAFE INVESTMENT.
1. U.S. GOVERNMENT BONDS are backed by the
full faith and credit of the federal government.
2. MUNICIPAL BONDS offered by local govern-
ments often offer TAX-FREE INTEREST.
3. CORPORATE BONDS are riskier.
B. Bonds are bought and sold daily on major securities
exchanges.
1. You may sell your bond before maturity, but you
aren’t guaranteed to get the FACE VALUE of
the bond.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-44
PPT 19-42
Top Financial News and Research
Sites
TOP FINANICIAL NEWS and
RESEARCH SITES
19-42
LO 19-6
• Yahoo Finance
• DailyFinance
• MSN Money
• Forbes
• Dow Jones & Co.
PPT 19-43
Important Bond Questions
IMPORTANT BOND QUESTIONS
19-43
• Junk Bonds — Bonds that are high-risk and have
high default rates.
LO 19-7
• First-time bond investors generally ask two
questions:
– Do you have to hold a bond until the maturity date?
– How can I assess the investment risk of a particular
bond issue?
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-45
2. If your bond does not have attractive features,
you may be forced to sell your bond at a DIS-
COUNT, a price less than the face value.
3. If your bond is highly valued, you may be able to
sell it at a PREMIUM, a price above the face
value.
4. AS INTEREST RATES GO UP, BOND PRICES
FALL, AND VICE VERSA.
5. Standard & Poor’s, Moody’s Investors Service,
and Fitch Ratings rate the level of risk of many
corporate and government bonds.
C. INVESTING IN HIGH-RISK (JUNK) BONDS
1. JUNK BONDS are high-risk, high-interest
bonds.
2. Standard & Poor’s, Moody’s, and Fitch Ratings
consider junk bonds as non-investment-grade
bonds because of their HIGH RISK and HIGH
DEFAULT RATES.
3. If the company can’t pay off the bond, the inves-
tor is left with nothing more than paper—in other
words, junk.
D. UNDERSTANDING BOND QUOTATIONS
1. BOND PRICE is quoted as a percentage of
$1,000.
2. A 9% bond due in 2025 is referred to as “9s of
25.”
3. Figure 19.5 shows simple bond quotations.