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INVESTMENT MANAGEMENT
IMELDA T. ANGELES
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Identify the basic types of securities markets and describe their
characteristics;
Explain the initial public offering (IPO) process;
Describe broker markets and dealer markets, and discuss how
they differ from alternative trading systems;
Review the key aspects of the globalization of securities markets,
and discuss the importance of international markets;
Discuss trading hours and the regulation of securities markets;
Explain long purchases, margin transactions and short sales.
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are forums that allow suppliers anddemanders of securities to make financial
transactions.
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Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)
ISSUINGFIRM
LEAD UNDERWRITER
INVESTMENT
BANKER A
INVESTMENT
BANKER B
INVESTMENT
BANKER C
INVESTMENT
BANKER C
PRIVATE INVESTORS
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Every IPO release by the exchange are mostlylikely observed by hundred of buyer around themarket, since all of us is looking forward as an
inception of a new or better trading prospect.
The best way to hit profit from an IPO is to buy the stocks as early as possible andhope that the crowd will follow, and as per history, yes they will do. Before this new
publicly listed company will be crowded by another new buyers and speculators,established immediately your target price and be realistic that your target is reallyachievable. Remember, your buying only this share for trading and not for your long-term investment as of now. When everything are all set, sell all your purchasedstocks, run and enjoy your profit! Just back back again when the price will return toits fundamental value.
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Good example from our local publicly listedcompanies in the Philippines is the Century PeakMetal Holdings, Inc. (CPM). From the opening
on October 6, 2009, the stock price first posted isonly Php1.50 per share, continuously surge untilDecember 16, 2009 where it peaked at 7.10 pershare. Based on that, lets say that you managed
only to buy 3.0 per share and sold it at 6.0 pershare, and then you profited 100% in just twomonths of holding a share. But after that blast,the company stock price is downed back to 3.50per share until today.,
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Underwriting the offering: promoting the stock andfacilitating the sale of companys shares
Prospectus: registration statement describing the
issue and the issuer Red Herring: preliminary prospectus available during
the waiting period
Quiet Period: time period after prospectus is filedwhen company must restrict what is said about thecompany
Road Show: series of presentations to potential
investors
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assist companies to issue new securities advise firms with regard to major financial
transactions UNDERWRITING - process that involves
purchasing the securities from the issuingfirm at an agreed-on price and
bearing the risk of reselling themto the public.
Investment & Capital Corporation of the Philippines (ICCP)
is a leading Philippine investment house
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UNDERWRITING SYNDICATE
SELLING GROUP
GROSS SPREAD lead underwriters managementfee, syndicate underwriters discounts, sellinggroups selling concession.
Ex: P24 to P24.25, P24.25 to P25.25, P26 to P25.25
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Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)
ISSUINGFIRM
LEAD UNDERWRITER
INVESTMENTBANKER A
INVESTMENTBANKER B
INVESTMENTBANKER C
INVESTMENTBANKER C
PRIVATE INVESTORS
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SECONDARYMARKET
BROKERMARKET
NATIONALEXCHANGES
REGIONALEXCHANGES
DEALERMARKET
NASDAQ OVER THECOUNTER
BUYER AND SELLER AREBROUGHT TOGETHER
OFFER TO BUY OR SELL ACERTAIN AMOUNT OF
SECURITIES AT STATEDPRICES.
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Secondary Market: the market in which securities are tradedafter they have been issued
Role of Secondary Markets Provides liquidity to security purchasers
Provides continuous pricing mechanism
Organized Securities Exchanges: centralizedinstitutions in which transactions are made in alreadyoutstanding securities
Over-the-counter (OTC) Market: widely scatteredtelecommunications network in which transactions are madein both initial public offerings and already outstandingsecurities
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-15
The New York Stock Exchange (NYSE) Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges
Specialists make transactions in key stocks Strictest listing policies
The American Exchange (AMEX) Second largest stock exchangeabout 800 companies
and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot
meet stricter listing requirements for NYSE
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-16
Regional Stock Exchanges Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,
and Cincinnati
Options Exchanges Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)
Futures Exchanges Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-19
Nasdaq Electronic network that connects OTC dealers with buyers
and sellers
About 7,000 stocks trade on the Nasdaq Both IPOs and secondary distributions are sold on OTC
Bid Price: the highest price offered by marketmaker to purchase a given security
Ask Price: the lowest price at which a market makeris willing to sell a given security
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It is the largest electronic screen-based equity securities trading market inthe United States and second-
largest by market capitalization in the
world
http://en.wikipedia.org/wiki/Electronic_tradinghttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Electronic_trading8/4/2019 -INV MGT CHAPT2_1
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How firms issue securities? Primary Markets Secondary Markets
Primary Markets: IPOs, Private Placementand Rights Offering
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2-22
Underwriting the offering: promoting the stock andfacilitating the sale of companys shares
Prospectus: registration statement describing the
issue and the issuer Red Herring: preliminary prospectus available during
the waiting period
Quiet Period: time period after prospectus is filedwhen company must restrict what is said about thecompany
Road Show: series of presentations to potential
investors
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How firms issue securities? Primary Markets Secondary Markets
Primary Markets: IPOs, Private Placementand Rights Offering Secondary Markets: Organized Exchanges,
Over-the-counter market, Direct tradingbetween two parties
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2-24
Organized Securities Exchanges:centralized institutions in which transactionsare made in already outstanding securities
Over-the-counter (OTC) Market: widely
scattered telecommunications network inwhich transactions are made in both initialpublic offerings and already outstandingsecurities.
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-25
The New York Stock Exchange (NYSE) Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges
Specialists make transactions in key stocks Strictest listing policies
The American Exchange (AMEX) Second largest stock exchangeabout 800 companies
and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot
meet stricter listing requirements for NYSE
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-26
Regional Stock Exchanges Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,
and Cincinnati
Options Exchanges Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)
Futures Exchanges Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-27
Third Market Large institutional investors go through market makers on the
OTC market Institutional investors (mutual funds, life insurance companies,
pension funds) receive reduced trading costs due to large sizeof transactions
Fourth Market Large institutional investors deal directly with each other to bypass
OTC market makers Electronic Communications Networks (ECNs) allow direct trading ECNs account for about a third of all Nasdaq transactions
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How firms issue securities? Primary Markets Secondary Markets
Primary Markets: IPOs, Private Placementand Rights Offering Secondary Markets: Organized Exchanges,
Over-the-counter market, Direct tradingbetween two parties
Investment Banking
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2-29
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-30
Bull Market Favorable markets Rising prices Investor/consumer optimism
Economic growth and recovery Government stimulus
Bear Market Unfavorable markets Falling prices Investor/consumer pessimism Economic slowdown Government restraint
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GLOBALIZATION OF
SECURITIES
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THE INTEGRATION OF FINANCIAL INSTITUTIONS IN THEEUROPEAN SECURITIES MARKETS
TO CREATE CROSS-BORDER MARKETS TO COMPETE MORE EFFECTIVELY IN THE PAN-
EUROPEAN-EQUITY TRADING MARKETS
TO CREATE A WORLDWIDE STOCK EXCHANGE
THE TOP FOUR SECURITIES MARKET IN THEWORLD ARE:
NYSE New York Stock Exchange
NASDAQ National Association
of Securities Dealers AutomatedQuotationsISE- London International Stock Exchange
TSE Tokyo Stock Exchange
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PARIS, AMSTERDAM,BRUSSELS, LISBON
EXCHANGES
EURONEXT
SCANDINAVIAN MARKETS-
NOREX
TOKYO AND AUSTRALIASTOCK EXCHANGES
NASDAQ+JAPAN,HONGKONG, CANADA,
AUSTRALIA
INTERNATIONALINVESTMENT
PERFORMANCE
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Diversification: the inclusion of a number of differentinvestment vehicles in a portfolio to increase returns orreduce risks.
Use of international securities improves diversification More industries and securities available Securities denominated in different currencies Opportunities in rapidly expanding economies
International Investment Performance Opportunities for high returns Foreign securities markets do not necessarily move with the
U.S. securities market Foreign securities markets tend to be more risky than U.S.
markets
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Financial Market
Money market Capitalmarket
Primarymarket Secondary
market
Commercialbanks
Firms raisecapital
Over-the
countermarket
debt
equity
Public Privateplacement
Short terminstruments
PrimaryMkt Inst
Organizedexchanges
Credit
unions
Investment
Bankers
Brokers andAgents
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Direct Ways to Invest in Foreign Securities Purchase securities on foreign stock exchanges
Buy securities of foreign companies that trade on U.S.
stock exchanges Buy American Depositary Receipts (ADRs): dollar
denominated receipts for stocks of foreign companiesheld in vaults of banks
Indirect Ways to Invest in Foreign Securities Buy mutual funds that invest in foreign securities
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Usual investment risks still apply Government policies risks Unstable foreign governments
Different laws in trade, labor or taxation Different economic and political conditions Less stringent regulation of foreign securities markets
Currency exchange rate risks Value of foreign currency fluctuates compared to
U.S. dollar Value of foreign investments can go up and down with
exchange rate fluctuations
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Regular trading session for U.S. Exchangesand Nasdaq 9:30 A.M. to 4:00 P.M. Eastern time
Extended-hours electronic-trading sessions Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time Orders only filled if matched with identical
opposing orders
24-hour market probably in near future After-hours trades Brokerage firms allow after-hours trading to individuals
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-40
Securities Act of 1933 Required full disclosure of information by companies
Securities Act of 1934
Established SEC as government regulatory body
Maloney Act of 1938 Allowed self-regulation of securities industry through
trade associations such as the National Association of
Securities Dealers (NASD) Investment Company Act of 1940 Created & regulated mutual funds
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Copyright 2005 Pearson
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Investment Advisors Act of 1940 Required investment advisers to make full disclosure about their
backgrounds and their investments, as well as register withthe SEC
Securities Acts Amendments of 1975 Abolished fixed-commissions and established an electronic
communications network to make stock pricing more competitive
Insider Trading and Fraud Act of 1988 Prohibited insider trading on nonpublic information
Sarbanes-Oxley Act of 2002 Tightened accounting and audit guidelines to reduce
corporate fraud
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Copyright 2005 Pearson
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Long Purchase
Investor buys and holds securities
Buy low and sell high
Make money when prices go up
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-43
Margin Trading
Uses borrowed funds to purchase securities
Currently owned securities used as collateral for margin
loan from broker
Margin requirements set by Federal Reserve Board Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement, investor puts up
$2,222.50 and broker will lend remaining $2,222.50
Can be used for common stocks, preferred stocks, bonds,mutual funds, options, warrants and futures
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INITIAL MARGIN
MAINTENANCE MARGIN
MARGIN CALL
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-45
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Copyright 2005 Pearson
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Advantages Allows use of financial leverage Magnifies profits
Disadvantages Magnifies losses Interest expense on margin loan
Margin calls
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Copyright 2005 Pearson
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Basic Margin Formula
Example of Using Margin
Margin Value of securities Debit balance
Value of securities
V D
V
Assume that an investor buys a 100 shares ofstock at P50 per share, putting up a 60%
margin.
a. Compute for the debit balance.b. how much equity capital must the investor
provide to make this transaction?c. If the stock price rises to P60 per share,
what is the investors new margin position?d. If the price of the stock goes down to P40
per share, what is the investors new margin
position?
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-48
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Copyright 2005 Pearson
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Return on Invested Capital
Example of Return on Invested Capital
Return on
invested capitalfrom a margin
transaction
Total
current
income
received
Total
interest
paid on
margin loan
Market
value of
securities
at sale
Market
value of
securities
at purchaseAmount of equity at purchase
Assume you want to buy 100 shares of stock atP50 per share because you feel it will rise to
P75 within six months. The stock pays P2 pershare stock annual dividend. Stocks are boughtwith a 50% margin and will pay 10% interest onthe margin loan.
How much is the return on invested capital froma margin transaction?
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Copyright 2005 Pearson
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Short Selling
Investor sells securities they dont own
Investor borrows securities from broker Broker lends securities owned by other investors
that are held in street name
Sell high and buy low
Investors make money when stock pricesgo down
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Advantages Chance to profit when stock price declines
Disadvantages Limited return opportunities: stock price cannot go
below $0.00
Unlimited risks: stock price can go up anunlimited amount
If stock price goes up, short seller still needs to buy sharesto pay back the borrowed shares to the broker
Short sellers may not earn dividends
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-52
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Elmo Inc.s stock is currently selling at P60 per share. For
each of the following situations (ignoring brokeragecommissions), calculate the gain or loss that Courtney
realizes if she makes a P100-share transaction.
She sells short and repurchases the borrowed sharesat P70 per share.
She takes a long position and sells the stock at P75 per
share. She sells short and repurchases all borrowed shares at
45 per share. She takes a long position and sells the stock at P60 per
share.
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Copyright 2005 Pearson
Addison-Wesley. All rightsreserved. 2-54
Learning Goals
1. Identify the basic types of securities markets anddescribe the IPO process.
2. Explain the characteristics of organized securitiesexchanges.
3. Understand the over-the-counter markets and
alternative trading systems, and the generalconditions of securities markets.
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Copyright 2005 Pearson
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Learning Goals (contd)
4. Review the importance of global securities markets, theirperformance, procedures and and associated risks.
5. Discuss trading hours and regulation ofsecurities markets.
6. Explain the motives, procedures and calculations in longpurchases, margin transactions and short sales.
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Jesse Livermore was a famous american stockmarket investor and influential stock trader of the 20thcentury.
I know from experience that nobody can give me a tip orseries of tips that will make money for me than my own
judgment.
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Ben Graham is a famous Americanstock market investor that influenced
the investing style of Warren Buffett.
If you are shopping forcommon stocks, choose
them the way you wouldbuy groceries, not the wayyou would buy perfume.
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The worlds richest man, Warren
Buffett, is also the most famousstock investor.
I don't look to jump over 7-foot
bars: I look around for 1-footbars that I can step over.
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Peter Lynch is a Wall Street stockinvestor. Lynch's achieved dollarsuccesses in a range of stocks
including Fannie Mae, Ford, Philip
Morris, MCI, Volvo, General Electric,General Public Utilities, Student Loan
Marketing, Kemper, and Lowes.
Although it's easy to forgetsometimes, a share is not a
lottery ticket... it's part-ownership of a business.
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WHAT ISGLOBALIZATION?
Is an integration of worldeconomy.
products and services information barriers
technology for global
trading round-the-globe, round-
the-clock automatedsystem
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Globalization of equity securities trading is a term thatcovers a variety of related growth trends. cross-listing of securities in several countries, cross-national portfolio diversification and hedging, holding membership (generally through affiliates) in
another countrys exchanges, legal or contractual tiesbetween exchanges,
electronic systems for 24- hour trading, passing the
book, the development of cross-national stock indexderivative products, and
related phenomena such as multinational primaryofferings of stock and international mutual funds.
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DIVERSIFICATION OF SECURITIES enableinvestors to seek out opportunities to profitfrom rapidly expanding economies
throughout the world.
A wider range of securities and industries; Securities traded in a larger number of
markets Securities denominated in different
currencies
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