Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-46
lecture enhancer 19-3
RATINGS AGENCY DOWNGRADES
FRANCE
Recently France was taken down a notch by Standard and
Poor’s (S&P). (See the complete lecture enhancer on page
19.84 of this manual.)
PPT 19-44
Understanding Bond Quotations
TEXT FIGURE 19.5
Understanding Bond Quotations
UNDERSTANDING BOND
QUOTATIONS
19-44
LO 19-7
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-47
learning objective 8
Explain the investment opportunities in mutual funds and exchange-traded
funds (ETFs).
VIII. INVESTING IN MUTUAL FUNDS AND EX-
CHANGE-TRADED FUNDS
A. A MUTUAL FUND is an organization that buys stocks
and bonds and then sells shares in those securities to
the public.
1. A mutual fund POOLS INVESTORS’ MONEY
and then buys stocks or bonds in many compa-
nies.
2. TYPES OF MUTUAL FUNDS
a. VERY CONSERVATIVE FUNDS invest only
in government securities or secure corporate
bonds.
b. Others specialize in investments with
GREATER RISK, such as high-tech firms, In-
ternet companies, foreign companies, and
precious metals.
3. Beginners can start with a few index funds and
diversify.
a. An INDEX FUND may invest in a range of
stocks.
b. Index funds let the investor DIVERSIFY, in-
vesting in a variety of funds.
c. A stockbroker, certified financial planner, or
banker can help you choose mutual fund in-
vestments.
d. With mutual funds it is easy to change in-
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-48
PPT 19-45
Investing in Mutual Funds and Ex-
change-Traded Funds
INVESTING in MUTUAL FUNDS
and EXCHANGE-TRADED FUNDS
19-45
LO 19-8
• Mutual Fund — An organization the buys stocks and
bonds and then sells shares in those securities to the
public. The fund pools investors
’
money and buys
stocks according to the fund
’
s purpose.
• Exchange-Traded Fund (ETF) — Collections of
stocks and bonds that are traded on securities
exchanges, but are traded more like individual stocks
than mutual funds.
PPT 19-46
What Mutual Funds Can Learn
from KaChing
WHAT MUTUAL FUNDS CAN
LEARN FROM KaChing
Source: Fast Company, www.fastcompany.com, accessed November 2014. 19-46
LO 19-8
1. Reform the ratings
system
2. Give information for
free
3. Cut out useless fees
4. Be transparent
5. Share insights
PPT 19-47
Percentage of Households Owning
Mutual Funds
PERCENTAGE of HOUSEHOLDS
OWNING MUTUAL FUNDS
Source: Investment Company Institute Factbook. 19-47
Year % of Households
1980 5%
1990 24%
2000 43%
2005 42%
2010 48%
LO 19-8
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-49
vestment objectives when your financial ob-
jectives change.
4. You can BUY MOST FUNDS DIRECTLY and
save any fees.
a. A LOAD FUND would charge a commission
to investors to buy shares in the fund or
commissions when the shares are sold.
b. A NO-LOAD FUND is one that charges no
commission to buy or sell its shares.
c. OPEN-END FUNDS will accept the invest-
ments of any interested investors.
d. CLOSED-END FUNDS offer a specific num-
ber of shares; once issued, no further inves-
tors can buy into the fund.
5. EXCHANGE-TRADED FUNDS (ETFS) are col-
lections of stocks that are traded on exchanges
but are traded more like individual stocks than like
mutual funds.
6. Both mutual funds and ETFs let the small investor
SPREAD THE RISK of stock ownership.
B. UNDERSTANDING MUTUAL FUND QUOTATIONS
1. Figure 19.7 shows an online listing of mutual
funds.
a. There are many types of funds available to
meet investor objectives.
b. Many companies offer a VARIETY OF FUND
TYPES within the fund family.
2. The quotation shows:
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-50
TEXT FIGURE 19.6
Mutual Fund Objectives
This text figure shows the wide range of investment categories
available for mutual fund investments.
lecture enhancer 19–4
THE DANGERS OF ETFS
ETFs have been a hot item recently. However, as their populari-
ty grows an increasing number of risky ETFs are misleading
investors. (See the complete lecture enhancer on page 19.85 of
this manual.)
PPT 19-48
Varieties of ETFs
VARIETIES of ETFs
Source: Schwab and E*Trade. 19-48
ETF Description
Traditional
Most common; include large U.S.
stocks, small U.S. stocks,
international stocks, or investment-
grade bonds.
Niche
Focus on an individual sector like
healthcare, high-yield bonds, or a
single country.
Exotic
Invest in unusual, more volatile
sectors such as commodities like
gold and concepts like clean
technology.
LO 19-8
PPT 19-49
Understanding Mutual Fund
Quotations
TEXT FIGURE 19.7
Understanding Mutual Fund
Quotations
UNDERSTANDING
MUTUAL FUND QUOTATIONS
19-49
LO 19-8
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-51
a. The fund’s NAME
b. The fund’s NET ASSET VALUE (NAV), the
price per share
c. The NET CHANGE IN THE NAV from the
previous day’s trading
d. The fund’s YTD RETURN
e. The FUND’S NET ASSETS
learning objective 9
Describe how indicators like the Dow Jones Industrial Average affect the market.
IX. UNDERSTANDING STOCK MARKET INDICA-
TORS
A. Investors today can find an enormous wealth of in-
vestment information in newspapers, magazines, on
television, and on websites.
1. The DOW JONES INDUSTRIAL AVERAGE
(THE DOW) is the average cost of 30 selected
industrial stocks, used to give an indication of
the direction (up or down) of the stock market
over time.
a. Charles Dow began measuring stock aver-
ages in 1884 using the prices of 12 im-
portant stocks.
b. NEW STOCKS were substituted on the Dow
when deemed appropriate, and the index
was enlarged to include 30 stocks.
c. The Dow has been broadened several times
to include the service sector, NASDAQ
stocks, and corporate mergers.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-52
PPT 19-50
Comparing Investments
TEXT FIGURE 19.8
Comparing Investments
COMPARING INVESTMENTS
19-50
LO 19-8
test
prep
PPT 19-51
Test Prep
TEST PREP
19-51
• What is a stock split? Why do companies
sometimes split their stock?
• What does buying stock on margin mean?
• What are mutual funds and ETFs?
• What is the key benefit to investors in investing in
a mutual fund or ETF?
PPT 19-52
The DOW
TEXT FIGURE 19.9
The Original Dow and the Current
Dow
The DOW
19-52
LO 19-9
PPT 19-53
Key Stock Market Indicators
KEY STOCK MARKET
INDICATORS
19-53
LO 19-9
• Dow Jones Industrial Average — The average
cost of 30 selected industrial stocks.
• Critics say the 30-company Dow is too small a
sample and suggest following the S&P 500.
• S&P 500 tracks the performance of 400
industrial, 40 financial, 40 public utility, and 20
transportation stocks.
lecture enhancer 19-5
LINEUP CHANGES ON THE DOW
JONES
Who is in? Who is out? Check out the new Dow lineup. (See the
complete lecture enhancer on page 19.85 of this manual.)
critical thinking
exercise 19-3
DOW JONES COMPONENTS
This exercise asks students to visit the website for the Dow
Jones Indexes and research the historical components of the in-
dex and its performance over time. (See the complete exercise
on page 19.92 of this manual.)
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-53
2. Today Dow Jones substitutes new stocks in the
Dow when it’s appropriate.
a. In 1991 Disney was added.
b. In 1999 the Dow added Home Depot and the
first NASDAQ stocks, Intel and Microsoft.
c. In 2013 Visa, Goldman Sachs, and Nike re-
placed Alcoa, Bank of America and HP.
3. Critics argue that the SAMPLE IS TOO SMALL
to get a good statistical representation.
4. Stock indexes like the STANDARD & POOR’S
500 and the NASDAQ AVERAGE track a
broader mix of stocks.
5. It is important to stay abreast of the market to
evaluate investment opportunities.
B. RIDING THE MARKET’S ROLLER COASTER
1. The first major crash occurred on “BLACK
TUESDAY,” October 28, 1929, when the stock
market lost almost 13% of its value.
2. The stock market dropped 508 points on Octo-
ber 19, 1987, losing 22% of its value, the
LARGEST ONE-DAY DROP in history.
3. On October 27, 1997, the Dow fell 554 points
due to fears of economic problems in Asian
markets.
4. On September 29, 2008, the Dow fell 778
points, the record point drop to that date.
5. From 2000 to 2002, both the S&P and NASDAQ
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-54
PPT 19-54
Market Turmoil
• The stock market has its shares of ups and
downs:
MARKET TURMOIL
19-54
LO 19-9
– October 29, 1929 – Black
Tuesday; the market lost 13% of
its value.
– October 19, 1987 – The market
suffered its worst one-day drop
when it lost 22% of its value.
– October 27, 1997 – Fears of an
economic crisis in Asia cause
widespread panic and losses.
lecture enhancer 19–6
THE DAY THEY CALL “BLACK
TUESDAY”
The heady expansion of the 1920s came crashing to a halt on
October 29, 1929. (See the complete lecture enhancer on page
19.86 of this manual.)
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-55
declined significantly in value.
6. Many analysts believe the 1987 crash was due
to PROGRAM TRADING, the process of giving
instructions to computers to automatically sell if
the price of a stock dips to a certain point to
avoid potential losses.
7. As a result, U.S. exchanges created mecha-
nisms to RESTRICT PROGRAM TRADING
whenever the market rises or drops by a large
number of points.
a. PROGRAM TRADING CURBS are put in ef-
fect when the Dow moves up or down more
than a certain number of points.
b. A key computer is turned off and trading is
halted.
c. CIRCUIT BREAKERS, complete halts in
trading, are triggered when the Dow falls 10,
20, or 30% in a day.
d. Circuit breakers were triggered for the first
and only time on October 27, 1997, when
the Dow fell 550 points.
e. The market again collapsed into a deep de-
cline in 2000–2002, largely due to the dot-
com bubble bursting.
8. Investor confidence eroded in the early 2000s.
a. Before 2000, investors believed that the real
value of companies was fairly reflected in
their financial statements.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-56
PPT 19-55
Turmoil in the 2000s
TURMOIL in the 2000s
19-55
LO 19-9
• The market collapsed into a deep decline in
2000-2002 when the dot-com bubble burst.
– Investors lost $7 trillion in market value.
• Starting in 2008, the collapse of the real estate
market sent financial markets into panic.
– The U.S. government made significant investments in
private banks and offered a large stimulus package to re–
energize the economy.
PPT 19-56
The Wall Street of Now
The WALL STREET of NOW
Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014. 19-56
Then Now
Town Car Transportation Uber
21 Club Restaurant Subway
The Penthouse Club After Hours Dave & Buster’s
Johnny Walker Blue
($200) Drink Bud Light
($5)
American Express
Black Card Metrocard
Bottle Service Pastime Trivia Night
LO 19-9
PPT 19-57
The Ups and Downs of the Market
The UPS and DOWNS
of the MARKET
19-57
LO 19-9
• Program Trading — Giving instructions to
computers to automatically sell if the price of a stock
dips to a certain point to avoid potential losses.
• Analysts believe program trading caused the
turmoil in 1987.
• The exchanges created mechanisms to restrict
program trading.
PPT 19-58
Who’s at Fault for the Economic
Crisis?
WHO’S at FAULT for the
ECONOMIC CRISIS?
Source: Fortune Magazine, www.fortune.com, accessed November 2014. 19-58
LO 19-9
• Wall Street – Issued exotic securities; paid excessive
compensation based on bonuses; and investment banks got
the SEC to relax capital requirements.
• Main Street – Americans lived beyond their means;
lenders gave favorable loans to homebuilders; greedy
homeowners took out equity loans; and teaser mortgage
rates let people live large.
• Washington – Gramm-Leach-Billey Act allowed
commercial and investment banks to partner; housing
interest rates were kept low; and Community Reinvestment
Act forced lending to people with bad credit.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-57
b. Investor trust was shattered by disclosures of
FINANCIAL FRAUD in companies such as
WorldCom, Enron, and Tyco.
c. Investment analysts also came under fire for giv-
ing companies exaggerated evaluations.
9. The market surged upward again in the mid-2000s.
a. The Dow set a new high.
b. Prices for housing also improved, increasing
50% from 2000 to 2006.
c. During the HOUSING BUBBLE, financial institu-
tions reduced their lending requirements and
buyers overspent.
d. The government required more mortgages be
given to low- and moderate-income buyers,
many with weak credit scores.
e. These SUBPRIME LOANS were pooled togeth-
er and sold to investors through a process.
10. The real estate market collapse caused the econo-
my a combined loss of $8 trillion in housing and
commercial property.
a. Major players such as Lehman Brothers went
out of business, and Merrill Lynch was sold to
Bank of America.
b. The federal government bailed out insurer Amer-
ican International Group (AIG).
11. Congress passed an $800 billion financial package
to temper the wild market swings.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-58
bonus case 19-2
THE NEXT GENERATION OF BUB-
BLES
Rapid inflation led to the bursting of several financial bubbles.
Now financial experts are trying to discover what could burst
next. (See the complete case on page 19.96 of this manual.)
PPT 19-59
Cleaning Up the
Street
TEXT FIGURE
19.10
Cleaning Up the
Street
CLEANING UP the STREET
19-59
LO 19-9
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-59
C. INVESTING CHALLENGES IN THE 21st-CENTURY
MARKET
1. Markets in the 21st century will probably experi-
ence heightened volatility.
a. The recent financial crisis also reinforced that
the world’s economies are closely linked.
b. The implosion also affected markets in Europe,
Asia, and South America.
2. The basic lessons are to DIVERSIFY your invest-
ments and UNDERSTAND THE RISKS of invest-
ing.
X. SUMMARY
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-60
lecture enhancer 19–7
INVESTING IN COMMODITIES
Trading in commodities is not for novice investors. (See the
complete lecture enhancer on page 19.86 of this manual.)
test
prep
PPT 19-60
Test Prep
TEST PREP
19-60
• What does the Dow Jones Industrial Average
measure? Why is it important?
• Why do the 30 companies comprising the Dow
change periodically?
• Explain program trading and the problems it can
create.