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Chapter 18 – part 2

Managing Financial Resources. Chapter 18 – part 2. Financing and Investing through Securities Markets. Securities. Three major categories Cash Bonds (fixed income) Equities Asset allocation The percent of your assets in each asset category. Securities. Equities. Stock Common Stock

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Chapter 18 – part 2

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  1. Managing Financial Resources Chapter 18 – part 2 Financing and Investing through Securities Markets

  2. Securities • Three major categories • Cash • Bonds (fixed income) • Equities • Asset allocation • The percent of your assets in each asset category

  3. Securities

  4. Equities • Stock • Common Stock • Share of ownership in a company. • Common stock owners can vote on major company decisions • Types of returns • Dividends • Capital gains (price goes up)

  5. Equities • Stock • Preferred Stock • Stock whose holders receive preference in the payment of dividends • Seldom confers voting rights • Dividends are fixed

  6. Equities • Stock • Convertible Securities • Bonds or stock that contains a conversion feature • Gives the holder the right to exchange their securities for a fixed number of shares of common stock

  7. Primary Investment Objectives by Type of Security

  8. Securities Purchasers • Taxes and Investing • Interest received from bonds, and dividends received from stocks, are considered ordinary income which is taxed at the investor’s marginal tax rate • Profits made from the sale of securities owned for over a year are taxed at the capital gains rate • Other, special tax rules apply for investment income

  9. Securities Exchanges • Stock Exchange—centralized marketplace where primarily common stock are traded. • Stock exchanges are secondary markets, selling securities which have already been issued by firms and sold in the primary market

  10. Securities Exchanges • The New York Stock Exchange • NYSE (Big Board)—the largest, and probably the most famous, stock market in the world • Also one of the oldest, having been founded in 1792

  11. Securities Exchanges • The NASDAQ Stock Market • NASDAQ stock market—second-largest stock market in U.S., trading stock issues of firms that are typically smaller, less well-known than those on the NSYE • Unlike trading on the NSYE, which takes place face-to-face or the trading floor, trading on the NASDAQ takes place on an electronic network

  12. Securities Exchanges • Other U.S. Stock Markets • American Stock Exchange (AMEX)— focuses on stocks of smaller firms as well as other financial instruments such as options • Several regional stock exchanges also operate in the United States including the Chicago, Pacific (San Francisco) Boston, Cincinnati, and Philadelphia exchanges

  13. Securities Exchanges • Foreign Stock Markets • Virtually all developed, and many developing, countries have stock exchanges • Examples include Bombay, Helsinki, Hong Kong, Mexico City, Paris, and Toronto

  14. Buying and Selling Securities • Brokerage Firm—financial intermediary that buys and sells securities for individual and institutional investors • Examples: • Schwab • Merrill Lynch • E*trade: An Online Brokerage Firm

  15. Buying and Selling Securities • Placing an Order • A market order instructs a brokerage firm to obtain the highest price possible – if the investor is selling – or the lowest price possible – if the investor is buying • A limit order instructs the brokerage firm not to pay more than a specified price for stock if the investor is buying, or accept less than a specified price if the investor is selling

  16. Costs of Trading • When investors buy or sell securities through a brokerage firm, they pay a fee • These costs vary widely among brokerage firms • A full-service firm charges higher fees, but provides a large number of services and offers investment advice • A discount firm charges lower fees, but offers less advice and fewer services • BEWARE OF TRANSACTION FEES • They can wipe out your earnings

  17. Financial News • Sources of business news • Bloomberg radio, AM 1130 • WCBS radio, AM 880 at 25 and 55 past the hour • CNBC • The Wall Street Journal • Business section of most newspapers • cnn.money.com, vanguard.com, fidelity.com • See the resources on the class web site

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