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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

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