Chapter 19-Using Securities Markets for Financing and Investing

What are the two primary purposes of securities exchange?

-assist businesses in finding long-term funding to finance capital needs-expanding operations, develop new products, buy major goods and services
-provide private investors a place to buy and sell securities -stocks and bonds

Identify the stock exchanges where securities are traded.

stock exchanges are securities markets whose members are engaged in buying and selling securities such as stocks and bonds

What role do investment bankers play in securities markets?

-specialists who assist in the issue and sale of new securities (stocks and bonds)

What does NASDAQ stand for? How does this exchange work?

National Association of Securities Dealers Automated Quotations
-first electronic based market
-electronic-based network links dealers so they can buy and sell securities electronically

What government agency oversees the securities industry?

Securities and Exchanges Commission (SEC)

What is a prospectus?

A document required by federal or state securities laws that describes the financial operations of a corporation, thus allowing investors to make informed decisions.

What are stock exchanges?

are securities markets who members engaged in buying and selling different securities (stocks and bonds)

What are the difference exchanges?

NYSE
NASDAQ

What is the over-the-counter market?

-exchange that provides a means to trade stocks not listed on the national exchanges
-not on one of the major stock exchanges

How are securities exchanges regulated?

The Securities and Exchange Commission (SEC) regulates securities exchanges and requires companies that intend to sell bonds or stocks to provide a prospectus to potential investors.

What is insider trading?

the use of information or knowledge that individuals gain that allows them to benefit unfairly from fluctuations in security prices.

What is initial public offering (IPO)?

the first public offering of a corporate stock

What is primary and secondary market?

primary market
-sale of new securities (stocks and bonds)
secondary market
-trading of securities (stocks and bonds) to investors

What are securities?

stocks and bonds

What is stock exchange

An organization whose members can buy and sell (exchange) securities on behalf of companies and individual investors.

What is the Securities and Exchange Commission (SEC)?

federal agency responsible for regulating the various stock exchanges, and sales
registration of stockbrokers

What are the advantages and disadvantages of a company's issuing stocks as a form of equity financing?

Advantages:
-stockholders never have to be repaid for their investments
-no legal obligation to pay dividends to stockholders
-selling stocks can make the organization appear to financially stronger
Disadvantages:
-stockholder has the right to vote for th

What are the major differences between common stock and preferred stock?

Common stock
-by law company can issue only common stock
-holders of CS have the rights
--elect member's of the company's BOD
--vote on important issues
--share in company's profits through dividends
--have preemptive rights to purchase new shares of CS
-

Why are bonds considered a form of debt financing?

Bonds are considered debt financing, since they must be paid back when the bond matures.

Bond____ makes regular _______payments at ________rate and repays _____amount on _______date.

issuer
interest
coupon
principle
maturity

What are different types of government securities that compete with corporate bonds

government bonds
issued by govt.-safest bond investment
treasury bill (T-bill)
-matures less than yr. min. $1000
treasury notes
- matures in 10 yrs or less $1000-1 mill.
treasury bond
-matures in 25 yrs. or more $1000-1 mill
municipal bond
-issued by stat

What organizations assess credit worthiness of bonds issued by corporations?

-Standard & Poor
- Moody's Investor Service
-Fitch Rating

What are the advantages and disadvantages of issuing bonds?

Advantage:
-bondholders are creditors of the firm
-bond interest is a business expense-tax deductible
-temporary source of funding
-can be paid prior to maturity date-it callable
-can be converted to common stock
Disadvantage
-increase debt (long term lia

What does it mean if a firm issues a 9 percent debenture bond due in 2028?

-bond is a unsecured bond( no collateral needed)
-annual rate of 9% interest
-maturity date 2028

What is the difference between unsecured and secured bond?

unsecured
-AKA debenture bond
-no collateral needed( land, equipment)
-only company with good credit ratings, rep
secured
-AKA mortgage bond
-collateral needed ( land, equipment)

Why are convertible bonds attractive to investors?

- they give bondholders the option to convert their bonds into stock.
- stocks tend to appreciate faster than bonds do.

What is a sinking fund?

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Why are sinking funds generally attractive to issuing firms and investors?

-provide for orderly repayment of a bond issue
-reduce risk bond will not be repaid
-support the market price of bond-reduce risk of bond will not be paid

What is the difference between callable bond and convertible bond?

callable bonds
-can be repaid early
convertible bonds
-can be exchanged for CS in a company

What is a stock broker?

a person licensed only to buy and sell securities for clients

What are criteria when selecting investment options?

investment risk-chance that investment will be worth less in the future
yield-expected return on investment(interest on dividends)
duration-length of time your money is committed to the investment
liquidity-how quick you can get back money invested
tax co

What is diversification?

buying several different investment alternatives to spread the risk of investing

What is the key advantage of investing through online broker? What is the primary disadvantage?

Advantage:
-is lower fees, because the investor does their own research
Disadvantage:
-a lower level of information

What are the three key factors to remember in establishing your investment strategy?

-risk
-return
-trade-off

What is the primary purpose of diversifying investment?

-maximizing returns in investments
-reduce risk on investment

What is difference between market order and limit order ?

market order
-tells a broker to buy or sell immediately at the best price available
limit order
-tells a broker to buy or sell at a specific price

What is bull market vs. bear market?

Bull market
-the overall stock pricing rising
Bear market
-when stock pricing is declining

What is capital gains?

the positive difference between the purchase price of stocks and its sale price

What is blue-chip stock?

-stock issued by higher-qualified companies
-pay regular dividends and experience consistent price appreciation

What is the difference between growth stocks and income stocks

growth stocks
-earnings expected to grow at a faster rate than other stocks
-risker with higher return
income stocks
-has a high dividend yield-keeps pace with inflation

What does it mean when a stock splits?

-when a stock splits, stockholders receive two (or more) shares of stock for each share they own.
-each is worth half (or less) of the original share, so while the number of the shares increases
-the total value of stockholders' holdings stays the same
-s

What does buying on margin mean?

borrowing money to help pay for the stock

Who sets margin rates in the US market?

Federal Reserve System

What types of information do stock quotation give you?

-highest and lowest price in the last 52 weeks
-dividend yield
-price/earning ratios
-total shares traded that day
-closing price
-net change in price from previous day

What is the difference between a bond selling at a discount and a bond selling at a premium?

selling at discount in the secondary market
- below its face value
selling at a premium in the secondary market
-price above its face value

What is a junk bond?

high- risk and high-interest bonds

How can mutual funds help individuals diversify their investments?

-investing a variety of index funds
-investing in mutual funds

What are EFTs?

Exchange-traded funds (ETF)
-like stocks and mutual funds
-collection of stocks that are traded on exchange
-are traded more like individual stocks

What is the Dow Jones Industrial Average?

an average of stock prices of major industries
-30 select industrial stocks
-used to give an indication of the direction of the stock market over time

What is the difference between dividends and retained earnings?

retained earnings
-profits that a business earns minus any stock dividends or other distributions
dividends
-payment made by a company to owners of the company stock

What is par value?

An assigned dollar value is given to each share of stock

What is a mutual fund?

-organization they buy stocks and bond
-sells shares in those securities to the public

What are index funds?

-constructed to match or track components of marketing index- S&P 500
-very low cost
-easy to obtain
-can be held by investors for long period of time
-matched or beat performance of higher price funds-managed by professional money managers
-recommended f

List investments their degree of risk, the expected income, and possible growth(capital gain)

Investment
-bonds/low/secured/little
-PS/medium/steady/little
-CS/high/variable/good
-mutual funds/medium/variable/good
-EFT/medium/variable/good

What is the Securities Act of 1933 ?

-protects investors by requiring full disclosure of financial information
-regulating various stock exchanges
-prevents insiders within the company from taking advantage of privileged information they may have
-a prospectus must be sent to prospective inv