Securities Markets and Financial Roles" (46 characters)
In the world of securities markets, learn about primary versus secondary markets, underwriting, and the workings of equity markets like NYSE and Nasdaq. Explore how financial markets help firms and governments raise capital and provide platforms for buying and selling securities. Discover the roles of investment banks, auction markets like NYSE, and negotiated markets like Nasdaq. Delve into the functions and mechanisms of different types of markets in the financial world.
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Presentation Transcript
FIN352 Vicentiu Covrig Securities Markets (chapter 4) 1
FIN352 Vicentiu Covrig The Role of Financial Markets Help firms and governments raise cash by selling claims against themselves Provide a place where investors can buy and sell securities ( investments) Help the private companies to become public and original investors to cash out 2
FIN352 Vicentiu Covrig Primary vs Secondary Markets New securities are issued with the help of investment banks (or underwriter) New issues are sold on the primary market first, and subsequently sell on the secondary market. - The secondary markets are the security exchanges. The selling of shares for the first time in a new company is called a initial public offering (IPO) A private placement means new securities are sold directly to investors, bypassing the open market Registration not required 3
FIN352 Vicentiu Covrig Underwriting Investment banks: advise or underwrite new issues; distribute shares to institutional investors through road shows For Large Issues, a Syndicate is Used Hot Issue Market - During some periods, over 50 news firms go public every month. - Many investors want these shares - Initial returns are high Who gets shares? - Those who want shares ask their broker. - When more shares are sought, than are being issued, priority tends to go to the large shareholders and the broker s best clients. - If you are a small-money investor and receive shares of an IPO, look out, it may be a lemon! 4
FIN352 Vicentiu Covrig Secondary Markets Markets where investors trade previously issued securities Auction markets involve bidding in a specific physical location (example NYSE) - Brokers represent investors for a fee - Others trade for their own account Negotiated markets consist of decentralized dealer network (example NASDAQ, Bond markets, FX markets) 5
FIN352 Vicentiu Covrig Equity Markets New York Stock Exchange - An Auction Market Market in which brokers represent buyers and sellers and prices are determined by supply and demand. - Trading All trading in a specific stock is done at the post where that stock is assigned on the NYSE floor. Trading is managed by the specialist. 6
FIN352 Vicentiu Covrig Nasdaq Electronic market NASDAQ National Market Market makers: make a market by buying low shares and reselling them at a higher price Market makers are dealers - They quote bid-ask prices (ask is greater than bid) - Bid: price dealer/market maker buys - Ask: price dealer/market maker sells 4,000+ issues - more technology firms - Dell, Microsoft, Google Facebook 7
FIN352 Vicentiu Covrig Over-the-Counter Markets Network of dealers standing ready to either buy or sell securities at specified prices - Dealers profit from spread between buy and sell prices - Handle unlisted securities Nasdaq SmallCap Market - 800 small firms seeking Nasdaq market maker sponsorship Over-the-Counter Bulletin Board - 3,000+ securities offered by 300+ market makers - Penny stocks traded here Better Alternative Trading System (BATS) - Appeals to hedge funds, others who want speed Electronic Communication Networks (ECNs) - Offer automation, lower costs, anonymity 8
FIN352 Vicentiu Covrig Foreign Markets US equity markets account for a decreasing share of world s stock market capitalization - Many different equity markets exist Emerging market: Stable political system, low regulation, low standardization in trading activity - Risks: Illiquidity, lack of information, political uncertainty 9
FIN352 Vicentiu Covrig Equity Market Indicators/Indices Provide a composite report of market behavior on a given day Dow Jones Industrial Average - Composed of 30 blue-chip stocks - Price-weighted index: Essentially adds the prices of 30 stocks, divides by 30 Adjusted for stock splits, stock dividends - Oldest, most well-known measure Charles Dow and Edward Davis Jones - Credited with inventing the stock index - DJIA was started in 1896 with 12 stocks DJUA, DJTA 10
FIN352 3M Co. Vicentiu Covrig Altria Group Inc. Alcoa Inc. Problems with price-weighted averages American Express Co. American International Group Inc. Boeing Co. Stock splits require changes in the divisor Larger priced stocks move the index more than smaller priced stocks for the same % price move. - A $100 stock that increases 10% changes by $10. A $10 stock that increases 10% changes by $1. A change of $10 moves the DJIA ten times more than a $1 change. Difficult to index to a price-weighted average. Caterpillar Inc. Citigroup Inc. Coca-Cola Co. E.I. DuPont de Nemours & Co. Exxon Mobil Corp. General Electric Co. General Motors Corp. Hewlett-Packard Co. Home Depot Inc. Honeywell International Inc. Intel Corp. International Business Machines Corp. Johnson & Johnson JPMorgan Chase & Co. McDonald's Corp. Merck & Co. Inc. Microsoft Corp. Pfizer Inc. Procter & Gamble Co. SBC Communications Inc. United Technologies Corp. Verizon Communications Inc. Wal-Mart Stores Inc. 11 Walt Disney Co.
FIN352 Vicentiu Covrig Standard & Poor s 500 Index The 500-firm index started in 1957 - Value weighted index Determine market capitalization of each firm (stock price shares outstanding) Add up the market capitalization for all 500 firms - Generally the largest 500 firms in the U.S. However, it is designed to match the sectors weights of the overall market composition. 12
FIN352 Vicentiu Covrig More Popular Indices Russell Indexes - Russell 3000 uses the 3,000 largest U.S. companies Represents 98% of the investable US equity - Russell 1000 uses the 1,000 largest U.S. companies Represents 92% of the investable US equity - Russell 2000 uses the 2,000 smallest companies n the Russell 3000 Considered a small cap index. 13
FIN352 Vicentiu Covrig Nasdaq Indexes Nasdaq Composite Index - All common stocks listed on the Nasdaq Stock Market - 3,175 firms - Market value-weighted Nasdaq 100 Index - Largest 100 firms on the Nasdaq Stock Market - Large stock index, but technology oriented 14
FIN352 Vicentiu Covrig Standard & Poor s S&P 500 S&P MidCap 400 Index - 400 firms - Stocks with market caps of $1.5 to $10 billion S&P SmallCap 600 Index - 600 firms - Average market cap of $600 million 15
FIN352 Vicentiu Covrig Global Stock Indexes Major Local Stock Market Index - Nikkei, Dax, FTSE Morgan Stanley Capital International Indexes - Global, regional, and local indexes - Emerging and developed markets 16
FIN352 Vicentiu Covrig Bond Markets Secondary bond market is primarily an over- the-counter network of dealers - NYSE features an automated bond system to execute orders. Mostly corporate bonds, thinly traded - Treasury and agency bonds actively trade in dealer markets Municipal bonds less actively traded 17
FIN352 Vicentiu Covrig Learning objectives Discuss the differences between primary and secondary markets Know the IPO process Discuss the differences between NYSE, AMEX and Nasdaq OTC markets Discuss the DJIA and S&P indices. Differences between price weighted and value weighted indices No need to know the formulas and how to calculate price weighted and value weighted indices Recommended end of chapter questions: 4.1 to 4.10; 4.15 to 4.18 Problems: None 18
