Chapter 12

Securities Markets

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Learning Objectives
1. Identify and describe the primary and
secondary securities markets.
2. Trade securities using a broker.
3. Locate and use several different sources
of investment information to trade
securities.

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Introduction
One way to improve changes of success is to
understand how the securities markets work.
Success cannot be guaranteedbut the first
step to becoming rich through a great
investment is learning how to make that
investment.

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Securities Markets
Securitiesstocks and bondsare issued by
corporations to raise money.
Securities Marketsa place where you buy
and sell securitiesprimary and secondary
markets.
After the initial issue, securities are traded
among investors.

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Primary Markets
Place where new securities are traded
Initial public offering (IPO)
Seasoned new issues
Investment Banker
Underwriter
Tombstone advertisement
Prospectus
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Figure 12.1 Five Best and Worst

IPOs of 2010

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Secondary MarketsStocks
Markets in which previously issued securities
are traded.
Organized exchangea physical location
where stocks trade.
Over-the-counter markettransactions
conducted over phone or computer.
Regional stock exchanges

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Secondary Markets - Stocks

New York Stock Exchange (NYSE)
American Stock Exchange (AMEX)
Over-the-Counter (OTC) Market
Bid price
Ask price

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Table 12.1 Initial Listing

Requirements for the NYSE, 2011

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Secondary Markets - Bonds

Tend to be for smaller, individual investors.
Some bonds trade at the NYSE, most trading
by bond dealers deal directly with large
financial institutions.
Small investors access bond dealers through
broker.
Volume of trading for government bonds is
enormous dominated by Federal Reserve,
commercial banks, financial institutions.
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International Markets
Around for centuries
Some foreign shares traded on exchanges
in the U.S.
American Depository Receipt (ADR)
- International stocks can be traded through ADRs

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Figure 12.2 The World Stock

Market

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Regulation of the
Securities Markets
Aimed at protecting investors so that all
have a fair chance of making money.
Securities and Exchange Commission (SEC)
Self-regulation
Insider trading and market abuses
churning

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The Role of the Specialist in

Securities Trading
Continuous marketsmarkets in which
trading can occur at any time, with prices
free to fluctuate as trading occurs.
Specialistan exchange member who
oversees the trading in one or more stocks
to maintain a fair and orderly market.

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Order Characteristics
Order Size
Odd lots
Round lots

Time Period for Which the Order Will Remain

Outstanding
Day orders
Open orders or Good-till-cancelled (GTC) orders
Discretionary account

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Types of Orders
Market Ordersbuy or sell immediately at
the best price available.
Limit Orderstrade is to be made only at a
certain price or better.
Stop Orders or Stop-Loss Orderorder to
sell if the price drops below a specified level
or to buy if the price climbs above a
specified level.
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Short Selling
Short sellingthe more the price drops, the
more money your make.
Borrow stock from the broker and then sell
it.
Margin requirementcollateral
Sell high and later buy low and return stock
to broker.
If price increases, you buy back for more
than the sold price, and lose money.
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Figure 12.3 Profits from

Purchasing Versus Selling Short

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Dealing with Brokers

Most common way to purchase stock is
through stockbrokerlicensed to buy or sell
stocks for others.
Brokerage Accounts
Asset Management Accounts

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Types of Brokers
Full-Service Brokers or Account Executive
paid commissions based on sales volume.
Discount and Online Brokersexecute
trades but do not provide advice.
Premium discount brokers
Deep discount brokers

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Cash Versus Margin Accounts

Cash Accounts
Margin Accounts
Margin or Initial Margin
Maintenance margin
Margin call

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Checklist 12.1

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Registration: Street Name

or Your Name
Securities can be registered in your name or
street name.
Street Nameregistered securities remain in
the brokers custody and are a computer entry
in your name.
More convenient to sell.
May have maintenance fee for inactivity.

Avoid fee by registering stock in your name.

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Joint Accounts
Joint Tenancy with Right of Survivorship
when one owner dies, the other receives
full ownership of assets in the account.
Tenancy-in-Common Accountthe
deceaseds portion of the account goes to
the heirs of the deceased, not the surviving
account holder.

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Choosing a Broker
Using a full-service brokerpersonal service
and advice but for higher price
Using a discount brokerkeep transaction
costs down because cost 10 to 20 times less
personal service but some offer free
research reports
Making the decision

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Checklist 12.2

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The Cost of Trading

Sales commission to buy stock
Commission to sell stock
Transaction fee
Annual fee for inactive accounts
Use discount broker for large purchases

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Online Trading
Day traderstrade, generally on internet,
with a very short-term time horizon.
Be prepared to suffer severe financial losses.
Dont confuse day trading with investing.
Dont believe claims of easy profits.
Watch out for hot tips or expert advice.

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Checklist 12.3

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Sources of Investment
Information
Corporate Sources
Brokerage Firm Reports
The Press
Investment Advisory Services
Internet Sources
Investment Clubs
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Summary
Primary securities markets is where new
securities are sold.
Previously issued securities are traded in the
secondary markets which can be organized
exchanges.
Investors must specify time period for orders
in day orders, open orders, or fill-or-kill
orders.

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Summary
Short selling involves borrowing stocks
from a broker, selling high and buying back
low, making a profit, and returning the
stocks to the broker.
Be careful on where you get information to
make investment decisions.

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Table 12.2 Major Stock Exchanges:

Year Ended 31 December 2010

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Table 12.3 Great Sources of

Investment Information on the Web

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