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Chapter 4Charles P. Jones, Investments: Analysis andManagement,
Tenth Edition, John Wiley & Sons
Prepared byG.D. Koppenhaver, Iowa State University
Securities
Markets
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The Role of Financial Markets
Help firms and governments raise cashby selling claims against themselves
Provide a place where investors can acton their beliefs
Help allocate cash to where it is mostproductive
Help lower the cost of exchange
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Markets in New Securities
New securities are issued in a primarymarket
Initial public offerings versus seasoned newissues
Issue facilitated by investment banker
Specialists in advice, design, and sales
Intermediaries between issuer and investor
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Investment Banking
Client advice includes type and featuresof security, offer price, and timing ofsale
Underwriting services: Risk of selling toinvestors assumed from issuer
Coordinates marketing by helping
issuer register securities, issueprospectus, and sell securities
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Investment Banking
Rule 415 (shelf rule) allows certainissuers to sell new securities over timeafter filing a single registration
Reduces issuance cost
A private placement means newsecurities are sold directly to investors,
bypassing the open market Registration not required
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Secondary Markets
Markets where investors tradepreviously issued securities
Auction markets involve bidding in aspecific physical location
Brokers represent investors for a fee
Others trade for their own account
Negotiated markets consist ofdecentralized dealer network
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Stock Exchanges
NYSE is a secondary, auction market inequity shares
Not-for-profit organization of members
Listing requirements for traded firms
Specialists assigned to each traded equityto make a market in that stock
AMEX and regional exchanges listsmaller firms, have less volume thanNYSE
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NASDAQ
Network of competing dealers tradinglisted securities
Automated quotation system with nofixed number of participants
NASDAQ National Market
NASDAQ SmallCap Market
More firms listed than NYSE Network connects to other trading
systems
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Over-the-Counter Markets
Network of dealers standing ready toeither buy or sell securities at specifiedprices Dealers profit from spread between buy and
sell prices
Handle unlisted securities
OTC Bulletin Board
ECNs: Additional trading mechanism,especially after exchanges close
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Foreign Markets
US equity markets account for adecreasing share of worlds stockmarket capitalization
Many different equity markets exist
Emerging market: Stable politicalsystem, low regulation, low
standardization in trading activity Risks: Illiquidity, lack of information,
political uncertainty
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Equity Market Indicators
Provide a composite report of marketbehavior on a given day
Dow Jones Industrial Average
Composed of30 blue-chip stocks
Price-weighted index: Essentially adds theprices of30 stocks, divides by 30
Adjusted for stock splits, stock dividends Oldest, most well-known measure
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Equity Market Indicators
Standard & Poors Composite Index
Composed of500 large firm stocks
Expressed as index number relative to abase index value of10 (1941-43)
Value-weighted index: Prices and sharesoutstanding considered
Indicates how much the average equity value of
the 500 firms in the index has increased relativeto the base period
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Equity Market Indicators
NYSE and NASDAQ Composite Indices
Value-weighted indices of broad markets
Nikkei
225Average
Price-weighted index of225 actively-tradedstocks on the Tokyo Stock Exchange
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Bond Markets
Secondary bond market is primarily anover-the-counter network of dealers
NYSE features an automated bond systemto execute orders.
Mostly corporate bonds, thinly traded
Treasury and agency bonds actively tradein dealer markets
Municipal bonds less actively traded
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Market Developments
Growth of institutional tradingassociated with:
Block trading of stocks (transactions of at
least 10,000 shares)
Affects market structure and operation
Negotiated, not fixed, commissions
Evolution ofN
ationalM
arket System Centralized system for price and activity
reporting, order routing and sequencing
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Copyright 2006 John Wiley & Sons, Inc. All rightsreserved. Reproduction or translation of this workbeyond that permitted in Section 117 of the 1976 Unitedstates Copyright Act without the express writtenpermission of the copyright owner is unlawful. Requestfor further information should be addressed to thePermissions department, John Wiley & Sons, Inc. Thepurchaser may make back-up copies for his/her own useonly and not for distribution or resale. The Publisherassumes no responsibility for errors, omissions, or
damages, caused by the use of these programs or fromthe use of the information contained herein.