Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
9 views

CH 04

Uploaded by

Ahsan
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
9 views

CH 04

Uploaded by

Ahsan
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 22

Investments: Analysis and

Management
Fourteenth Edition
Gerald R. Jensen and Charles P. Jones

Chapter 4
Securities Markets
The Role of Financial Markets
• Channel funds from savers to borrowers
• Help firms and governments raise cash by selling
securities
• Provide a place where investors can earn a return
• Help allocate cash to where it is most productive
• Help lower the cost of exchange

Copyright ©2020 John Wiley & Sons, Inc. 2


Primary Market
• Securities are issued in the primary market
• Initial public offerings (I POs)
• Average investors benefit little from IPOs
• Seasoned offerings
• Issuance is facilitated by investment banks
• Buy securities from issuer at a discount and resell to
investors
• Difference between two amounts is spread

Copyright ©2020 John Wiley & Sons, Inc. 3


The Underwriting Process 1

1. Determine issue features - $'s required, type of security,


security features, etc.
2. File registration statement with the Securities and
Exchange Commission (SEC)
• Distribute red herring prospectus
3. After SEC approval, distribute prospectus with issue
price
4. Form underwriting syndicate and selling group

Copyright ©2020 John Wiley & Sons, Inc. 4


The Underwriting Process 2

5. Distribute securities
6. Maintain secondary market (IPO's)
• Shelf Registration - allows large firms to issue securities
more quickly by updating a master registration filed
with the SEC
• Many IPO’s are underpriced Why?

Copyright ©2020 John Wiley & Sons, Inc. 5


Investment Banking 1

Copyright ©2020 John Wiley & Sons, Inc. 6


Investment Banking 2

• Private (direct) placement - new securities are


sold directly to investors, bypassing the open
market
• SEC registration not required
• Can be cheaper and faster for issuer
• Often have higher interest rates and restrictions

Copyright ©2020 John Wiley & Sons, Inc. 7


Secondary Market
• Market where investors trade previously issued
securities
• Allow for trading of stocks, bonds, derivatives
• NYSE, Nasdaq, and BATS are major U.S. exchanges
• Investors are represented by brokers who facilitate
trades between buyers and sellers for a fee

Copyright ©2020 John Wiley & Sons, Inc. 8


Major U.S./Global Stock Exchanges
Intercontinental Exchange (ICE)
• NYSE
• ArcaEx

Nasdaq OMX Group


• Electronic screen-based equity market

BATS (Better Alternative Trading System)


• Established in 2005 as an ECN
• Appeals to traders wanting speed, hedge funds

Copyright ©2020 John Wiley & Sons, Inc. 9


Other Secondary Markets
• Over-the-Counter (OTC)
• Not an organized marketplace or exchange
• Forum for securities not listed on a U.S. exchange
• Many firms are small and/or financially distressed
• May trade via Pink Sheets or OTC Bulletin Board

Copyright ©2020 John Wiley & Sons, Inc. 10


Electronic Communications Network 1

• ECN – electronic communications network


• An electronic market place for trading securities
• Allow subscribers to enter limit orders that the computer
matches (avoids middleman)
• Allows for after hours trading
• Original ECNs were acquired by exchanges (e.g. NYSE and
Nasdaq)

Copyright ©2020 John Wiley & Sons, Inc. 11


Electronic Communications Network 2

• Offers low transactions costs


• Offers an open order book
• Provides anonymity
• Best ECN offers are posted on Nasdaq
• Allow traders to sequence offers

Copyright ©2020 John Wiley & Sons, Inc. 12


Foreign Markets
• US equity markets account for a decreasing share of
world’s stock market capitalization
• Foreign markets include developed and emerging
markets
• Emerging markets
• Offer large potential for profits and large risks
• Illiquidity, lack of information, political uncertainty
• BRIC markets have grown and attracted investor
attention

Copyright ©2020 John Wiley & Sons, Inc. 13


Features of Stock Market Indexes
• Stock index levels do not incorporate dividends
Three Index Weighting Methods.
• Equal or un-weighted: good indicator for investors that
invest equal $’s in each member.
• Price-weighted: good indicator for investors that
purchase the same number of shares in each stock.
• Value-weighted: best indicator of overall market
movement.

Copyright ©2020 John Wiley & Sons, Inc. 14


Price-Weighted Series
• Calc. as an arithmetic average of current prices
• Higher (lower) priced members have more (less) influence
on series movements
• Dow Jones Industrial Average (D JIA) and Nikkei-Dow Jones
Average are examples
• DJIA - 30 industry leaders (blue chips) listed on N YSE
(added 2 Nasdaq firms in 19 90’s)
• Small sample size, performance bias, unrepresentative

Copyright ©2020 John Wiley & Sons, Inc. 15


Value-Weighted Series
• Derived by summing the total market value of each
member, then converted to a base value
• Large (small) firms have more (less) influence on series
movements
• Automatically adjusts for stock splits and stock dividends
• Most common weighting method
• S and P 500, Wilshire 5000, E AFE, Financial Times-Actuaries
World, Russell Indexes

Copyright ©2020 John Wiley & Sons, Inc. 16


Un-Weighted Series
• Index movements are calculated as an arithmetic
average of percent movements in the members’ prices
or values
• a geometric average is sometimes used
• All members have an equal influence on the
movements of the series
• Value Line indexes provide the best examples

Copyright ©2020 John Wiley & Sons, Inc. 17


Foreign Stock Market Indicators
• MSCI EAFE Index
• A non-American developed market index
• Dow Jones World Stock Index
• Capitalization-weighted, represents about 80% of world’s
stock markets
• Euro STOXX 600
• Covers 18 European countries
• S and P Asia 50 (major Asia countries) and Nikkei 225
(largest Japanese firms)

Copyright ©2020 John Wiley & Sons, Inc. 18


Bond and Derivatives Markets
• Secondary bond markets
• Necessary or investors might avoid bonds
• Primarily an over-the-counter network of dealers
• Bond brokers often buy for their own accounts and resell
• Derivatives
• Options trade on exchanges
• Futures markets mostly electronic

Copyright ©2020 John Wiley & Sons, Inc. 19


Bond Versus Stock Indexes
• Bond universe is broader - T-bonds to D
• Bond universe is constantly changing: bonds mature,
are converted, or are retired
• Volatility changes constantly with maturity
• Bond prices are less reliable
• Bond index values incorporate total returns
• High yield bonds have equity characteristics
• Foreign bond indexes are primarily govt.

Copyright ©2020 John Wiley & Sons, Inc. 20


Market Globalization
• Electronic trading systems allow for after-hours trading
• Stock prices can change even when exchanges are
closed
• Bonds also being traded around the clock
• Individual investors can benefit from globalization
• Can trade in foreign markets and in foreign currencies

Copyright ©2020 John Wiley & Sons, Inc. 21


Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.

Copyright ©2020 John Wiley & Sons, Inc. 22

You might also like