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Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-76
PPT 19-41
Understanding Stock Quotations
UNDERSTANDING STOCK
QUOTATIONS
19-41
LO 19-6
Stock quotations are now readily available on numerous
websites.
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.
1. Financial information is now readily available online.
This slide lists some of the sites where information can
be easily gathered.
2. If time allows, encourage students to visit these web
sites and evaluate their usefulness.
3. Ask students: Which of these web sites was the best?
Why would it be a good idea to consult more than one
of these web sites before deciding to invest?
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?
A junk bond has a rating of BB or less.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-77
PPT 19-44
Understanding Bond Quotations
UNDERSTANDING BOND
QUOTATIONS
19-44
LO 19-7
PPT 19-45
Investing in Mutual Funds and
Exchange-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
1. KaChing is a web site where professional investors
share everything about their portfolios.
2. Fast Company shows how KaChing can help investors
understand what they’re getting into.
3. The magazine uses the example of Morningstar and
how most of its portfolio managers didn’t invest in
their own funds. Potential investors would like to
know information like that!
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-78
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
1. This slide presents the percentage of US households
owning mutual funds over the past 30 years.
2. Ask the students: Do you or your parents own mutual
funds? How did they get involved in purchasing them,
and what type of research do they do before buying
them? Did they develop investment objectives or was
it based on some tip or advice?
3. It should be pointed out to the students that people
may get into investing for the right reasons and with
right intentions (retirement, savings for college, vaca-
tions, home buying, etc.). However, it is very im-
portant to maintain discipline. Many people, if not
most, deviate from these investment objectives and
start to invest based on the so-called “hot tip.” Mutual
funds should be treated as investments which you
commit to based on researched information and not
hot tip or quick hit gambling.
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
1. This slide lists three varieties of ETFs that are availa-
ble.
2. ETFs have numerous benefits when compared to mu-
tual funds. If time permits, have students prepare a list
of and/or discuss the advantages of ETFs. (Transpar-
ent pricing, lower fees, and returns at least equal to the
index that the ETF tracks, are just some of the ad-
vantages students might discuss.)
3. Traditional ETFs include: SPY which tracks the S&P
500 and TIP which tracks inflation protected govern-
ment bonds.
4. Niche ETFs include: IXJ which tracks the S&P Glob-
al Healthcare Sector.
5. Exotic ETFs include: FXA which tracks the Australi-
an Dollar and GLD which tracks the price of gold.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-79
PPT 19-49
Understanding Mutual Fund Quotations
UNDERSTANDING
MUTUAL FUND QUOTATIONS
19-49
LO 19-8
The price per share for a mutual fund is referred to as the
net asset value or NAV.
PPT 19-50
Comparing Investments
COMPARING INVESTMENTS
19-50
LO 19-8
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-80
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?
1. When a company splits its stock 2 for 1 the sharehold-
ers receive two shares of stock for each share they
own. The current share price is cut in half, so the num-
ber of shares increases, the total value of the invest-
ment remains the same. The board may decide to split
a company’s stock 2 for 1, 3 for 2 or any other ratio
they determine is appropriate. The reason that a com-
pany splits its stock is to reduce the price of the stock
which will hopefully increase the demand.
2. When an investor buys on margin, they use money
borrowed from their broker to purchase stock.
3. A mutual fund is an investment fund that buys stocks
and bonds then sells shares in those securities to the
public. The pooling of funds allows small investors to
invest in a broader selection of stocks and bonds.
Most mutual funds are professionally managed. ETFs
are similar to mutual funds, but are traded on exchang-
es like individual stocks and are passively managed.
4. The key benefit to investing in a mutual fund or ETF is
that the investor gets instant diversification.
PPT 19-52
The 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.
1. The Dow Jones Industrial Average is the oldest index
which was originally created in 1896 by Charles Dow
and Edward Jones.
2. The original average had twelve companies, one of
which, GE, is still in the Dow Jones Industrial average
after all these years.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-81
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.
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
1. Since the economic crisis hit, Wall Street has taken
many cuts.
2. This slide shows how Bloomberg Businessweek sees
the new way for Manhattan bankers to unwind.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-82
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.
1. The downturn of 1987 prompted the U.S. exchanges to
create mechanisms called curbs and circuit breakers to
restrict program trading whenever the market moves
up or down by a large number of points in a trading
day. A key computer is turned off and program trading
is halted.
2. If you watch programming on CNBC or MSNBC,
you’ll see the phrase “curbs in” appear on the screen.
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.
1. This slide reviews some of the players in the economic
crisis.
2. Like all complex problems, one group did not cause
this crisis.
3. You could actually include another culprit (not listed
on this slide): worldwide saving surplus. Gulf States,
China, Japan and Brazil all reinvested export earnings
in US dominated assets, primarily government bonds.
This had the effect of keeping interest low, thus allow-
ing consumers and the United States Government (as
well as many state and local governments) to spend
beyond their means, racking up massive consumer and
federal debt.
4. To discuss the crisis ask students: Who’s at fault for
the economic crisis? (When discussing this highly
charged topic it is important to make sure students un-
derstand that the fault lies not just with Wall Street
and Washington, but with consumers including them-
selves.)
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-83
PPT 19-59
Cleaning Up the Street
CLEANING UP the STREET
19-59
LO 19-9
1. Dodd-Frank represents the most sweeping change in
financial regulation since the Great Depression.
2. Although it’s not perfect, the Dodd-Frank Act at least
resolves some of the most pressing issues facing our
economy today, while setting the stage for a stronger
financial future.
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.
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 in-
dustry. Recently, Cisco and Travelers replaced Citi
and GM.
3. Program trading occurs when investors give instruc-
tions to their computers to execute a sell order if the
stock price dips to a certain point. Many attribute the
stock market crash of 1987 to program trading as
computer sell orders caused many stocks to fall to in-
credible levels.
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-84
lecture
enhancers
“Play the game for more than you can afford to lose . . . only then will you
learn the game.”
Winston Churchill
“You may know where the market is going, but you can’t possibly know
where it’s going after that.”
Heisenberg Principle of Investment
“Money is made by discounting the obvious and betting on the unexpected.”
George Soros
lecture enhancer 19-1
TWITTER’S IPO VICTORY
When Facebook launched its highly anticipated IPO last year, the upbeat mood among Wall
Street insiders transformed from fanfare to fiasco as the trading day wore on. Misplaced orders, a sky-
high valuation and glitches within the Nasdaq exchange sent the young stock on a downward spiral that
would continue for weeks. While Facebook’s share price has since evened out, the company’s IPO expe-
rience set a clear example of what not to do when debuting a social network on the stock exchange.
Judging from the way Twitter handled its IPO earlier this month the message was received loud
and clear. First of all, the company opted to trade on the New York Stock Exchange rather than the
Nasdaq. Although the latter is the preferred destination for many tech firms, Twitter’s decision paid off as
the NYSE got the stock off and running within 90 minutes of the opening bell. In Facebook’s case,
Nasdaq was late putting the stock up for sale, which caused it to debut with a higher price tag than most
traders had anticipated. Conversely, Twitter hit the market promptly at the expected price of $45.10 per
share and closed just twenty cents below at the end of the day.
But it’s when Twitter debuted that matters just as much as where. Facebook hit the scene in May
2012 when the stock market was undergoing a downturn. Twitter, on the other hand, landed on an ex-
change that had seen 25 percent growth over the year to that date. Furthermore, the company made the
wise decision to debut in November, which is traditionally one of the best months for gains in the market.
Twitter’s good timing goes beyond the macro level, though. Whereas Facebook had been a profitable
company with more than 1 billion users upon its debut, Twitter still held the image of a promising up-
and-comer to which stock speculators flock. All these factors together led to a single-day haul of more
than $2.1 billion in investments and a market capitalization of $25 billion for the San Francisco-based
company. Expect even more firms to follow Twitter’s template as they look for a similarly sized “pop” of
capital from their IPOs.i
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-85
lecture enhancer 19-2
THE TOKYO EXCHANGE TYPING ERROR
Computerized trading systems common on stock exchanges these days have reduced the trade er-
ror rate significantly. Yet, the computers’ infallibility is only as good as the accuracy of the person enter-
ing the information.
In December 2005, the Tokyo Stock Exchange was rocked by an erroneous trade that caused Mi-
zuho Securities to lose at least 27 billion yen ($225 million). The cause of the turmoil was eventually
traced to a trader at Mizuho Securities, who meant to sell 1 share of stock in J-Com Co., a job recruiting
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
three times, but the exchange’s policy is not to cancel transactions even if they are executed on erroneous
orders. By the end of the day, Mizuho Financial Group had lost at least 27 billion yen.ii
lecture enhancer 19-3
RATINGS AGENCY DOWNGRADES FRANCE
Credit rating agencies like Standard & Poor’s (S&P) and Moody’s help investors determine the likelihood
that a debtor will be able to repay their debts. These appraisals can make or break the reputations of cor-
porations and even nations. After all, America’s financial clout took a hit when S&P downgraded the
country’s credit to AA+ from AAA. At least the U.S. isn’t alone in its shame, though. Several other prom-
inent countries have had to endure downgrades due to their habits of over-borrowing in the days before
the economic downturn.
Then there are strange cases like France. S&P notched the European nation down to AA+ as well, but not
because it was borrowing beyond the budget. Instead, the agency downgraded France’s credit due to the
policies of its president Francois Hollande. Rather than cutting government spending, the socialist head of
state has elected to fight economic stagnation by raising taxes, especially on corporations and the rich. In
the eyes of S&P, this does nothing but hurt the nation’s efforts towards growth. “We believe the French
government's reforms to taxation, as well as to product, services, and labor markets, will not substantially
raise France's medium-term growth prospects,” S&P said. “Furthermore, we believe lower economic
growth is constraining the government's ability to consolidate public finances.”
While S&P says the downgrade stems from fiscal circumstances, critics like economist Paul
Krugman see it as a political attack. The trend among most ailing European nations has been to adopt aus-
terity policies in order to balance the budget. Rather than cut key social services, however, President Hol-
lande is keeping them afloat with increased tax revenue. Although some in the country have protested the
new policy, the current economic data indicates that France is performing just as well as most of its
neighbors. In fact, the budget deficit has continued its two-year slide downward, and the IMF has predict-
ed France’s GDP will remain relatively stable for the next five years. There are several other countries
with far less attractive statistics that have retained their AAA ratings.iii
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-86
lecture enhancer 19-4
THE DANGERS OF ETFS
It’s no secret that the stock market is an unpredictable entity. Nevertheless, every day savvy in-
vestors the world over try to find a way to consistently and safely earn money through clever investing.
But on the New York Stock Exchange, nothing is assured and even the safest bets have their dark sides.
For instance, exchange-traded funds (ETFs) are bundles of stocks, bonds, or other investments that trade
like a single stock. Many different companies and funds comprise an ETF, but normally they all fall under
one central industry or commodity, such as oil or gold. In this way, ETFs ideally provide an easy and
profitable way to diversify a portfolio.
ETFs have been a hot item on the stock market for the past few years, growing at rate of $1.5 bil-
lion a week and totaling to an estimated $838 billion overall. But as their popularity grows, Wall Street is
increasingly issuing misleading ETFs that contradict the funds’ safe reputation. For one, ETFs are closing
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-
versification tool instead find themselves saddled with commissions and transfer fees for a new invest-
ment.
Sometimes ETFs fail to perform the same way as the indices or products they track. For example,
an ETF called the PowerShares FTSE RAFI Emerging Markets Portfolio rose 67% in 2009. A solid return
to be sure, except that the collection of stocks it tracked rose 78%. While such tracking errors can occur in
some funds from time to time, they’re becoming especially common in ETFs, which differ from their in-
dices by an average of 1.25%. So although ETFs are still about as safe a bet as one can make on Wall
Street, their reputation is being polluted by the day thanks to miscalculations and increasingly convoluted
bundles of securities.iv
lecture enhancer 19-5
LINEUP CHANGES ON THE DOW JONES
The Dow Jones Industrial average is often considered a bellwether for the economy. This stock
index of 30 large publicly traded American companies offers a snapshot of the nation’s fiscal wellbeing
for analysts and day traders alike. Regardless of its popularity, however, the Dow is hardly perfect. Decid-
ing which companies comprise the index is a delicate process that sometimes omits major players. For
instance, a couple years ago we shared a story in the newsletter about Apple’s absence from the Dow, a
matter that some found inconceivable for a company valued at $415 billion.
While Apple remains too unwieldy for the Dow, strategists at the index determined three compa-
nies that nonetheless reflect growing portions of America’s economy. On September 20 the Dow added
Nike, Visa and Goldman Sachs to its prestigious roster. In order to make room for the new guys, though,
the index decided to ditch Bank of America, Hewlett-Packard and Alcoa on account of their underper-
forming stocks. As the Dow is weighted by price, that means the companies with the highest valued
stocks hold the most sway over the benchmark. The three outgoing companies comprised only 3 percent
of the total average, making their impact on the index as a whole minimal.
Besides booming stock prices, the Dow’s freshman entrants also diversify the index to include a
better mix of industries. But for the companies on the way out, the change merely serves to highlight
Chapter 19 - Using Securities Markets for Financing and Investing Opportunities
19-87
greater problems. Alcoa, a Dow fixture for more than 50 years, left the index after falling 7 percent this
year and selling at a paltry average of about $8 per share. The move represents the Dow’s biggest shakeup
since 2004 when AT&T, Kodak and International Paper made way for Verizon, Pfizer and AIG. Still,
while no doubt a major change, this latest substitution is unlikely to have much of an effect on prices of
individual stocks. “Despite the popularity of the Dow Jones Industrial Average in the press, it's a lot less
significant than an addition to the Russell 2000 or an addition to the S&P 500, because it's just not an in-
dex that institutions benchmark to,” says an analyst at Credit Suisse Group.v
lecture enhancer 19-6
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
increased another 25%. The national economy, while showing signs of weakness, did not discourage the
speculation boom. Investors with as little as 10% cash margin flocked into the market, lured by news of
steadily increasing prices. The DJIA reached a peak of 381 on September 3, 1929.
The Federal Reserve Board made a half-hearted attempt to slow down the expansion, jolting pric-
es down briefly during September, but it was not until October 24, a Thursday, that the slide became a
crash. On that day, nearly 13 million shares changed hands, 56% more than the previous record. As prices
dropped, brokers called investors for more margin, fueling more selling. Only when the nation’s top five
banks agreed to pool their resources to support the market did the hysteria lessen temporarily.
Monday the selling began again, dropping the Dow by one-day record 38 points, fully 13% of the
total market value. There was nothing the banks could do. The next day, Tuesday, October 29, the bottom
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
market managed to regain the ground it lost in those three years.
lecture enhancer 19-
INVESTING IN COMMODITIES
Commodities can be high-risk investments for most investors. Investors willing to speculate in
commodities hope to profit handsomely from the rise and fall of prices of items such as coffee, wheat,
pork bellies (slabs of bacon), petroleum, and other articles of commerce (commodities) that are scheduled
for delivery at a given (future) date. Trading in commodities is not for the novice investor; it demands
much expertise. Small shifts in the prices of certain items can result in significant gains and losses. It’s
estimated, in fact, that 75 to 80% of the investors who speculate in commodities lose money in the long
term.
