Securities Markets & Transactions, Study notes of Investment Management and Portfolio Theory

Download Securities Markets & Transactions and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! I. UNIT TITLE/CHAPTER TITLE: PREPARING TO INVEST (PART I) II. LESSON TITLE : SECURITIES MARKETS & TRANSACTIONS III. LESSON OVERVIEW This lesson educate the students about initial public offering process, and securities offered in the secondary markets. The students also learn the different types and source of information needed in investing especially the use of internet to develop a financial plans and set investment goals and objectives. IV. LESSON CONTENT SECURITIES MARKET These are forums that allow suppliers and demanders of securities to make financial transactions. Their goal is to permit such transactions to be made quickly and at a fair price. Types of Securities Markets In general, securities and markets are broadly classified as either money markets or capital markets. Money Markets are markets where short-term debt securities (with maturities less than one year) are bought and sold. Investors used the money market for short term borrowing and lending. Capital markets are classified as either primary or secondary, depending on whether securities are being sold initially to investors by the issuer (primary market) or resold among investors (secondary market) on a long term securities. THE IPO (INITIAL PUBLIC OFFERING) The most significant transaction in the primary market is the Initial public offering (IPO). This marks the first public sale of the company’s stock and result in the company’s taking on a public status. Selling Securities in Primary Market Before offering its securities for public sale, the issuer must register them and obtain approval from the Securities And Exchange Commission (SEC). This federal regulatory agency must confirm both adequacy and the accuracy of the information provided to potential investors before a security is publicly offered for sale the firm has three choices: 1. Public offering- the firm offers its securities for sale for public investors. 2. Right offering--- the firms offers shares to existing stockholder on a pro rata basis 3. Private placement--- the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies, investment management funds, and pension funds. Initial Public Offering (IPO) PROCESS 1. Obtain the approval of its current shareholders, the investors who own its privately issued stock. 2. The company’s auditors and lawyers must certify that all financial disclosure documents for the company are legitimate. 3. Find an investment bank willing to underwrite the offering. This bank is the lead underwriter and is responsible for promoting the company’s stock and facilitating the sale of the company’s IPO  Prospectus- is a disclosure document that describes a financial security for potential buyers.  Red Herring/ preliminary prospectus- Preliminary version of prospectus given to prospective investors. A first draft registration statement filed by a firm prior to proceeding with an initial public offering of securities  Quiet Period- period during which there are restrictions on what can be said with the company  Road show- series of presentations to prospective investors INVESTMENT BANKERS ROLE The investment banker is a financial intermediary (such as Goldman, Sach& Co.) that specializes assisting companies to issue new securities and advising firms with regard to major financial transactions. The main activity of the investment banker is underwriting. This process involves purchasing the securities from the issuing firm at an agreed-on price and bearing the risk of reselling them to the public. example is shown below: SECONDARY MARKET refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. Role of the Secondary Market For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by Sample Distribution of Investment Banking Fees Public Offering Price $20.00 per share Manager's Fee $.25 The underwriting manager receives this for all share's sold. Underwriter's Allowance $1.75 The syndicate member receives this for every share that it sells. Selling Concession $1.00 What the selling group earns per share. Reallowance $.50 Per share for a broker or dealer who is not part of the syndicate or any selling group. Amount Received by Issuer $18.00 per share SECURITIES TRANSACTIONS INTERNET TRANSACTIONS Today the Internet is a major force in the investing environment. It provides individual investors which access to tools formerly restricted to professionals. With these tools you can find and process a wealth of information online and also trade many types of securities. ONLINE INVESTING The Growth of Online Investing The percentage of securities transactions increased from 27% to more than 50% from 1998 to 1999 alone. Investors have opened 16 million accounts at over 170 brokerage firms that offer online accounts. About 4 million households manage over 550 billion in assets online. The internet makes buying and selling securities convenient, relatively simple, inexpensive, and fast. The internet provides the most current information which is updated continuously. INVESTMENT EDUCATION WEB SITES Internet offers many articles, tutorials and online classes to educate the novice investors. Even experienced investors can find sites that will expand their investing knowledge. Although most investing oriented Web sites and financial portals include many educational resources. 1. Investing Online Resource Center (www.investing online.org) Educational site that provides a wealth of information for those getting started online as well as those already investing online. Includes an online quiz that, based on your answer, will categorize your readiness for trading online. The is even an investment simulator that creates online interactive learning experience that allows the user to ”test drive” online trading. 2. Investors Guide.com (www.investorsguide.com) A free educational site offering Investors Guide University, which is a collection of educational articles about investing and personal finance. In addition , the site it provides access to quotes and charts, portfolio tracking software, research, news and commentary, and a glossary through InvestorsWords.com (www.Investorswords.com) 3. The Motley Fool (www.fool.com) Has sections on investing basics, mutual fund investing, choosing a broker, and investment strategies and styles, as well as lively discussion boards and more. 4. Investopedia (www.investopedia.com) An educational site featuring tutorials on numerous basic and advanced investing and personal finance topic’s, a dictionary of investing terms, and other useful investment aids. 5. WJS.com (www.wsj.com) Free site from the Wall Street Journey, is an excellent starting place to learn what the Internet can offers to investors. 6. Nasdaq (www.nasdaq.com) Has both an Investing and a Personal Finance section that provides links to a number of investment education resources. 7. Others good educational sites: Money (money.cnn.com , Kiplinger’s Personal Finance Magazine (kiplenger.com) and Smart Money(www.smartmoney.com) INVESTING TOOLS Once you are familiar with investing basics, you can use the Internet to develop financial plans and set investment goals, find securities that meet your objectives, analyze potential investment, and organize your portfolio these tools, used only by professional investment advisers, are free online. Planning Online calculators and worksheets help you find answer to your financial planning and investing questions. Using them you can figure out how much to save each month for a particular goal, such as the down payment for your first home, a college education for your children, or retiring when you are 60. Screening Screening tools, you can quickly sort through huge databases of stocks, bonds and mutual funds to find those that have specific characteristics. For stocks, you can specify low o high price/earnings ratios, small market value, high dividend return, specific revenue growth, and low debt to equity ratio. For bonds, you can specify a given industry, maturity date or yield. For mutual funds, you might specify low minimum investment, a particular industry or geographical sector, and low fees. Each screening tool uses a different method to sort. Charting A technique that plots the performance of securities over a specified time period, from months to decades or beyond. Stocks Quotes and Portfolio Tracking- almost every investment related web site includes stock quotation and portfolio tracking tools. Simply enter the stock symbol to get the price, either in real time or delayed several minutes. TYPES AND SOURCES OF INVESTMENT As you learned in Charter 1, becoming successful investors starts with developing investment plans and meeting your liquidity needs. Types of Information 1. Economic and current event information Includes background and forecast data related to economic, political and social trends on both domestic and global scale. Such information provide a basis for assessing he environment in which decisions are made. 2. Industry and Company Information Includes background and forecast data on specific industries and companies. Investors use such information to assess the outlook for a given industry or specific company. Because it’s a company orientation, it is most relevant to stock, bond, or options investments. 3. Information on alternative investment vehicles Includes background and forecast data for securities other than stocks, bonds, and ash, such as real estate, private equity, or commodities. 4. Price information Includes price quotations on investment securities. These quotation are commonly accompanied by statistics on the recent price behavior of the security. 5. Information on personal investment strategies Includes recommendations on investment strategies, or specific purchase or sale recommendations. In general this information tends to be educational or analytical rather than descriptive. Source of Information 1. Economic and Current Event Information Investors who are aware of current economic, political, and business events tend to make better investment decisions. 2. Financial Journals Wall Street Journals is the most popular source of financial news.in addition to giving daily price quotations on thousands investment securities, the Journal report world national, regional and corporate news. 3. General Newspaper Major metropolitan newspapers such as the New York Times, Washington Post Los Angeles Times, and Chicago Tribune provide investors with a wealth of financial information in their print and online editions most major newspaper contain price quotations for major exchanges, price quotations on stocks of local interest, and a summary of the major stock market averages and indexes. 4. Institutional news The monthly economic letters of the nation’s leading banks, such as bank of America (based in charlotte, North Carolina), Northern Trust and Wells Fargo provide useful economic information. 5. Business Periodicals Business periodicals vary in scope. Some present general business and economic articles, other cover securities markets and related topics, and still other focus solely on specific industries. Regardless of the subject matter, most business periodicals presents descriptive information and some also include analytical information. 6. Government Publications A number of government agencies publish economic data and reports useful to investors. The annual Economic Report of the President, which can be found at the U.S. Government Printing Office (www.gpo.gov) provides a broad view of the current and expected state of the economy. This document reviews and summarizes economic policy and conditions and includes data on important aspects of the economy. 7. Special Subscription Investors who want additional insights into business and economic conditions can be subscribe to a special services. These reports include business and economic forecasts and give notice of new government policies, union plans and tactics, taxes, prices, wages, and so on. One popular service is the Kiplinger Washington Letter, a weekly publication that provides a wealth of economic information and analyses. 8. Industry and Company Information Of special interest to investors is information on particular industries and companies. Often, after choosing an industry in which to invest, an investors will want to analyze specific companies. A recent change in disclosure rules, discussed following, gives individuals investors access to more company information than before. The internet makes it easy to research specific industries and companies at the Company’s Website. A publication’s archive search, or database services such as the