Chapter 12

1
Chapter 12 Securities Markets

• Where financial assets are traded
• Primary market First time a security sold
• Initial Public Offering (IPO's)
• Secondary market existing securities
• Investment bankers financial advice to
  companies
• Underwrite purchase entire new issue
• Merrill Lynch, Goldman Sachs, Citibank

2
Terminology to Understand

• Securities and Exchange Commission
• Registration (prospectus) required by SEC
• Fair, truthful, accurate info about new issues
• Does not prohibit sale of risky assets
• Organized exchanges such as NYSE
• Has physical location trades listed securities
  generally of larger companies
• Nine exchanges in the US

3
Stock MarketsNYSE, NASDAQ, ECNs

• New York Stock Exchange
• 2,800 listed stocks
• Most liquid market
• Humans (specialists) match bids and offers
• Physical floor on Wall Street
• Owned by 1,366 seat holders

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NASDAQ or Over-the-Counter

• National Association of Securities Dealers
  Automated Quotation System
• Trades 3,400 stocks
• No formal listings
• But traded companies must register with SEC
• Traders at hundreds of locations
• Loose federation of electronic traders

5
Electronic Communications Networks (ECNs)

• Trade exchange-listed and NASDAQ stocks
• Collect and post bids and offers
• Match orders electronically
• Execution is immediate
• Have 7 of the trading volume in NYSE stocks and
  83 of OTC stocks
• Biggest Instanet, Island and ArcaEx

6
Regulation

• SEC plus self-regulation
• Securities Act of 1933 associated with new
  securities
• Securities Exchange Act 1934 regulates
  secondary market and financial reporting
• Investment Advisors Act of 1940 covers all
  types of advisors and mutual funds

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Stock Trading

• Exchange assigns stock to a "specialist" who buys
  and sells the issue to "maintain a fair and
  orderly market".
• Orders can take various forms
• Short selling borrow a stock, sell it in
  expectation of buying back at lower price
• Market order immediate at best possible price

8
Brokers

• Licensed by SEC
• Can sanction rule-breakers names in newspapers
• Types full service versus discount brokers
• 500 shares _at_ 20 10,000 investment
• Commissions FS 253 Discount 7 to 30
• Registration you can hold paper certificates or
  broker can hold electronically

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Stock Brokers

• A person who buys and sells stock on behalf of
  clients.
• Operates as an agent
• Doesnt own the securities but matches buy and
  sell orders
• Securities Investor Protection Corp (SPIC)
  insures customer accounts against financial
  failure of brokers

10
SIPC

• Securities Investor Protection Corp.
• Federal agency but not like FIDC
• Does not protect against loss of value
• Replaces securities stolen by a broker or loss
  through failure of brokerage holding your
  securities
• Up to 500,000 99 recovery rate

11
Brokerage Fees

• Have been increasing
• What can you do to hold down?
• Do you even need a broker?
• Trade online
• Watch asset level- big balances help a lot
• Consolidate household accounts
• Opt for e-mail confirms

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Sources of Information

• Annual reports to shareholders
• (Full service) broker reports
• Rating agencies
• Press WSJ, Barons, Fortune Value Line
• SEC's online EDGAR
• Watch out for "free advice"

13
Registration

• Book entry completely electronic
• No paper certificates
• More convenient, less costly
• Joint tenancy with Right of Survivorship
• Surviving owner receives full ownership
• Tenancy-in-Common - goes to heirs

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Key Topics

• IPO
• Investment banker
• Exchanges vs OTC
• International Market

• Intent of regulation
• Market orders only
• Sources of info