Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-61
PowerPoint slide notes
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
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-62
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.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-63
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!
Company: McDonalds
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
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-64
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.
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.
Investment bankers help companies by: (1) gaining approv-
al from the SEC for a firm to issue stocks or bonds and (2)
underwriting.
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.
1. In 2013, the NYSE Euronext was acquired by the In-
tercontinental Exchange (ICE) for $8.2 billion.
2. The trading floor is largely symbolic now as most
trading is done electronically.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-65
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
1. This slide profiles the largest stock exchanges in the
world.
2. To be listed on the NYSE, the company must have at
least 2200 shareholders, average daily volume of at
least 100,000 shares, a market cap of $750 million, or
pretax earnings of $10 million.
3. NASDAQ is an acronym which stands for the Na-
tional Association of Securities Dealers Automated
Quotations.
4. London Exchange merged with the Italian Exchange,
both of which have been operating for over 200 years.
5. Tokyo exchange operated a trading floor for 120
years. In 1999, the trading floor was closed as the
Tokyo Stock Exchange went to all electronic trading
similar to NASDAQ.
6. The Deutsche Borse is located in Frankfurt, Germany.
PPT 19-11
Giving Small Business a Jump on
Funding
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.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-66
PPT 19-12
The Securities and Exchange Commis-
sion
The SECURITIES and
EXCHANGE COMMISSION
19-12
LO 19-2
• 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.
The Securities and Exchange Act also prohibits insider
trading by using knowledge or information gained through
a person’s position in a firm that allows them to benefit
unfairly.
PPT 19-13
Test Prep
TEST PREP
19-13
• What is the primary purpose of a securities
exchange?
• What does NASDAQ stand for? How does this
exchange work?
1. The primary purpose of a securities exchange is to al-
low members of the exchange to buy or sell securities
on behalf of investors.
2. NASDAQ stands for National Association Securities
Dealers Automated Quotations. This exchange is
completely electronic allowing for orders to be quickly
matched up via computers.
PPT 19-14
Learning the Language of Stocks
LEARNING the
LANGUAGE of STOCKS
19-14
LO 19-3
• 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
shares.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-67
PPT 19-15
Advantages of Issuing Stock
ADVANTAGES of
ISSUING STOCK
19-15
LO 19-3
• 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
debt.
PPT 19-16
Disadvantages of Issuing Stock
DISADVANTAGES of
ISSUING STOCK
19-16
LO 19-3
• 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 after-tax profits and are
not tax deductible.
• The need to keep stockholders happy can affect
management’s decisions.
PPT 19-17
Two Classes of Stock
TWO CLASSES of STOCK
19-17
LO 19-3
• 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
also be:
– Callable
– Convertible
– Cumulative
In the event of bankruptcy, the rights of common stock-
holders are subordinated to preferred stockholders.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-68
PPT 19-18
Test Prep
TEST PREP
19-18
• Name at least two advantages and disadvantages
of a company’s issuing stock as a form of equity
financing.
• What are the major differences between common
stock and preferred stock?
1. Advantages of issuing stock: equity never has to be
repaid, the company is under no legal obligation to pay
dividends, and selling stock can improve a company’s
balance sheets since it doesn’t create debt. Disad-
vantages: equity holders have the right to vote, divi-
dends are not tax deductible, and the need to keep
shareholders happy can affect managers decisions.
2. Common stock holders have the right to vote, while
preferred stock holders do not. Preferred stock holders
have rights if the company enters bankruptcy. Pre-
ferred stock holders receive a fixed dividend, while
common holders are not guaranteed to be paid a divi-
dend.
PPT 19-19
Learning the Language of Bonds
• Bond — A corporate certificate indicating that an
investor has lent money to a firm (or a government).
LEARNING the
LANGUAGE of BONDS
19-19
LO 19-4
• 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
money.
Unlike dividends, interest payments are tax-deductible.
PPT 19-20
Types of Bonds
TYPES of BONDS
19-20
LO 19-4
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-69
PPT 19-21
Advantages of Issuing Bonds
ADVANTAGES of
ISSUING BONDS
19-21
LO 19-4
• 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
eventually repaid.
• Bonds can be repaid before the maturity date if
they are callable.
PPT 19-22
Disadvantages of Issuing Bonds
DISADVANTAGES of
ISSUING BONDS
19-22
LO 19-4
• 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
action.
• The face value of the bond must be repaid on the
maturity date.
PPT 19-23
Bond Ratings
BOND RATINGS
19-23
LO 19-4
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-70
PPT 19-24
Different Classes of Corporate Bonds
• Corporations can issue two classes of bonds:
DIFFERENT CLASSES of
CORPORATE BONDS
19-24
LO 19-4
1. Unsecured bonds
(debenture
bonds): not
backed by specific
collateral.
2. Secured bonds:
backed by
collateral (land or
equipment).
PPT 19-25
Special Features in Bond Issues
SPECIAL FEATURES in
BOND ISSUES
19-25
LO 19-4
• 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.
PPT 19-26
Test Prep
TEST PREP
19-26
• Why are bonds considered a form of debt
financing?
• What does it mean if a firm issues a 9%
debenture bond due in 2025?
• Explain the difference between an unsecured and
secured bond.
• Why are convertible bonds attractive to investors?
1. Bonds are considered debt financing, since they must
be paid back when the bond matures.
2. A 9% debenture bond due in 2025 has a coupon rate or
interest rate of 9 percent and matures in 2025.
3. A secured bond is backed by some form of collateral.
While an unsecured bond or debenture is not backed or
secured by any collateral.
4. Convertible bonds are attractive, because they give
bondholders the option to convert their bonds into
stock. This is attractive since stocks tend to appreciate
faster than bonds do.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-71
PPT 19-27
Buying Securities
BUYING SECURITIES
19-27
LO 19-5
• Stockbroker — A registered
representative who works as
a market intermediary to buy
and sell securities for clients.
• Online trading services,
such as TD Ameritrade,
E*Trade, and Scottrade,
offer securities trading
services online to buy and
sell stocks and bonds.
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?
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
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-72
PPT 19-30
Investment 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.
1. Some people want to jump right into an investment.
2. This slide shows three ways to learn about investment
strategies.
3. Ask students: Would you take an investing class or
jump straight into the market? Would you know how
to do the needed research?
PPT 19-31
Average Annual Return of Asset Clas-
ses
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
1. This slide profiles average returns since 1926 for vari-
ous asset classes.
2. Although the recession since 2008 has been harsh, this
chart shows that over the long-term equity is a solid
investment.
3. Ask students: Why do you think small companies have
a higher rate of return than any other asset class?
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
Diversification helps spread risk by buying different types
of investments.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-73
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 Consum-
ers 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
1. This slide presents the needs of consumers when it
comes to financial planning.
2. Today’s brokers provide more than simply the buying
and selling of stocks and bonds.
3. Companies like Charles Schwab and Fidelity help in-
dividuals plan for the future.
PPT 19-35
Progress Assessment
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?
1. The main advantage of investing through online bro-
kers is that the fees charged tend to be lower than tra-
ditional brokers. The key disadvantage is that inves-
tors must generally do their own research and make
their own investment decisions without direct assis-
tance from their broker.
2. The goal of diversification is to reduce the overall risk
an investor assumes.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-74
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
1. This slide profiles the bear market declines over the
past forty years.
2. The past decade has been abysmal with two significant
bear markets.
3. Have students think about the times when bear mar-
kets have caused declines in the S&P. What was go-
ing on in the country or world at these times? What
might have been the causes of these bear markets?
What were the effects?
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
19-75
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.
1. An important point to note is investment value does
not change immediately after the stock split. The in-
vestor has the same original dollar value as before the
split. The hope for the investor is that the lower price
will cause the demand for the stock to increase, raising
the stock price (which will increase their total invest-
ment value since they have more shares due to the
stock split).
2. Dividend rates are also divided according to the degree
of split.
3. Most stock splits are two-for-one splits.
4. Since 1975, Wal-Mart has split their shares on eight
different occasions. If an individual investor pur-
chased 100 shares in 1980 they would own 25,600
shares after adjusting for splits!
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.
Investors purchasing on margin are increasing their pur-
chasing power, so they can own more stock without fully
paying for it.
Students should know the risk associated with buying
stocks on margin. Margin exposes investors to the follow-
ing risks:
• You can lose more money than you invested.
• You may have to deposit additional cash or securi-
ties in your account on short notice to cover market
losses.
• You may be forced to sell some or all of your secu-
rities when falling stock prices reduce the value of
your securities.
• Your brokerage firm may sell some or all of your
securities without consulting you to pay off the loan
it made to you.
• Know that your firm charges you interest for bor-
rowing money, which will affect the total return on
your investments.