Securities

Markets
Chapter 4
Charles P. Jones, Investments: Analysis and
Management,
Tenth Edition, John Wiley & Sons

Prepared by
G.D. Koppenhaver, Iowa State University

4-1
The Role of Financial Markets

Help firms and governments raise cash

by selling claims against themselves
Provide a place where investors can act
on their beliefs
Help allocate cash to where it is most
productive
Help lower the cost of exchange

4-2
Markets in New Securities

New securities are issued in a primary

market
Initial public offerings versus seasoned new
issues
Issue facilitated by investment banker
Specialists in advice, design, and sales
Intermediaries between issuer and investor

4-3
Investment Banking

Client advice includes type and features

of security, offer price, and timing of
sale
Underwriting services: Risk of selling to
investors assumed from issuer
Coordinates marketing by helping
issuer register securities, issue
prospectus, and sell securities

4-4
Investment Banking

Rule 415 (shelf rule) allows certain

issuers to sell new securities over time
after filing a single registration
Reduces issuance cost
A private placement means new
securities are sold directly to investors,
bypassing the open market
Registration not required

4-5
Secondary Markets

Markets where investors trade

previously issued securities
Auction markets involve bidding in a
specific physical location
Brokers represent investors for a fee
Others trade for their own account
Negotiated markets consist of
decentralized dealer network

4-6
Stock Exchanges

NYSE is a secondary, auction market in

equity shares
Not-for-profit organization of members
Listing requirements for traded firms
Specialists assigned to each traded equity
to make a market in that stock
AMEX and regional exchanges list
smaller firms, have less volume than
NYSE

4-7
NASDAQ

Network of competing dealers trading

listed securities
Automated quotation system with no
fixed number of participants
NASDAQ National Market
NASDAQ SmallCap Market
More firms listed than NYSE
Network connects to other trading
systems
4-8
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
OTC Bulletin Board
ECNs: Additional trading mechanism,
especially after exchanges close

4-9
Foreign Markets

US equity markets account for a

decreasing share of worlds 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

4-10
Equity Market Indicators

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

4-11
Equity Market Indicators

Standard & Poors Composite Index

Composed of 500 large firm stocks
Expressed as index number relative to a
base index value of 10 (1941-43)
Value-weighted index: Prices and shares
outstanding considered
Indicates how much the average equity value of
the 500 firms in the index has increased relative
to the base period

4-12
Equity Market Indicators

NYSE and NASDAQ Composite Indices

Value-weighted indices of broad markets
Nikkei 225 Average
Price-weighted index of 225 actively-traded
stocks on the Tokyo Stock Exchange

4-13
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

4-14
Market Developments

Growth of institutional trading

associated with:
Block trading of stocks (transactions of at
least 10,000 shares)
Affects market structure and operation
Negotiated, not fixed, commissions
Evolution of National Market System
Centralized system for price and activity
reporting, order routing and sequencing

4-15
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4-16