Financial-Markets-and-Institutions-by-Anthony-Saun

©2009,TheMcGraw-HillCompanies,AllRightsReserved8-1McGraw-Hill/IrwinChapterEightStockMarkets©2009,TheMcGraw-HillCompanies,AllRightsReserved8-2McGraw-Hill/IrwinOverviewofStockMarkets•Primarystockmarketsallowsuppliersoffundstoraiseequitycapital•Secondarystockmarketsarethemostcloselywatchedandreportedofallfinancialmarkets•Stockholdersarethelegalownersofacorporation–havearighttoshareinthefirm’sprofits(e.g.,throughdividends)–areresidualclaimants–havelimitedliability–havevotingrights(e.g.,toelectboardofdirectors)©2009,TheMcGraw-HillCompanies,AllRightsReserved8-3McGraw-Hill/IrwinStockReturns•Thereturnsonastockoveroneperiod(Rt)canbedividedintocapitalgainsanddividendreturns:Pt=stockpriceattimetDt=dividendspaidovertimet–1tot(Pt–Pt–1)/Pt–1=capitalgainovertimet–1totDt/Pt–1=returnfromdividendspaidovertimet–1tot111ttttttPDPPPR©2009,TheMcGraw-HillCompanies,AllRightsReserved8-4McGraw-Hill/IrwinCommonStock•Commonstockisthefundamentalownershipclaiminapublicorprivatecorporation•Dividendsarediscretionaryandarethusnotguaranteed•Commonstockholdershavethelowestpriorityclaimintheeventofbankruptcy(i.e.,aresidualclaim)•Limitedliabilityimpliesthatcommonstockholderscanlosenomorethantheiroriginalinvestment•Commonstockholderscontrolthefirm’sactivitiesindirectlybyexercisingtheirvotingrightsintheelectionoftheboardofdirectors©2009,TheMcGraw-HillCompanies,AllRightsReserved8-5McGraw-Hill/IrwinCommonStock•Dual-classfirmshavetwoclassesofcommonsharesoutstanding,withdifferentvotingrightsassignedtoeachclass•Withcumulativevoting,thenumberofvotesassignedtoeachstockholderequalsthenumberofsharesheldmultipliedbythenumberofdirectorstobeelected–thenumberofsharesneededtoelectpdirectors,Np,is:Np=[(px#ofsharesoutstanding)/(#ofdirectorstobeelected+1)]+1•Aproxyvoteallowsstockholderstovotebyabsenteeballot(e.g.,bymail)©2009,TheMcGraw-HillCompanies,AllRightsReserved8-6McGraw-Hill/IrwinPreferredStock•Preferredstockisahybridsecuritythathascharacteristicsofbothbondsandcommonstock•Generallyhasfixeddividendsthatarepaidquarterly•Generallydoesnothavevotingrightsunlessdividendpaymentsaremissed•Nonparticipatingversusparticipating•Cumulativeversusnoncumulative©2009,TheMcGraw-HillCompanies,AllRightsReserved8-7McGraw-Hill/IrwinPrimaryStockMarkets•Primarymarketsaremarketsinwhichcorporationsraisefundsthroughnewissuesofstock,mostofthetimethroughinvestmentbanks•Investmentbanksactasdistributionagentsinbesteffortsunderwriting•Investmentbanksactasprincipalsinfirmcommitmentunderwritinggrossproceeds–netproceeds=underwriter’sspread•Asyndicateisagroupofinvestmentbanksworkinginconcerttoissuestock;theleadunderwriteristheoriginatinghouse©2009,TheMcGraw-HillCompanies,AllRightsReserved8-8McGraw-Hill/IrwinPrimaryStockMarkets•Aninitialpublicoffering(IPO)isthefirstpublicissueoffinancialinstrumentsbyafirm•Aseasonedofferingisthesaleofadditionalsecuritiesbyafirmwhosesecuritiesarealreadypubliclytraded–preemptiverightsgiveexistingstockholderstheabilitytomaintaintheirproportionalownership•Aredherringprospectusisapreliminaryversionoftheprospectusthatdescribesanewsecurityissue•Shelfregistrationallowsfirmstooffermultipleissuesofstockoveratwo-yearperiodwithonlyoneregistrationstatement©2009,TheMcGraw-HillCompanies,AllRightsReserved8-9McGraw-Hill/IrwinSecondaryStockMarkets•Secondarystockmarketsarethemarketsinwhichstocks,onceissued,aretradedamonginvestors•TheU.S.hasthreemajorstockmarkets–theNewYorkStockExchangeEuronext(NYSEEuronext)–theNationalAssociationofSecuritiesDealersAutomatedQuotation(NASDAQ)–theAmericanStockExchange(AMEX)©2009,TheMcGraw-HillCompanies,AllRightsReserved8-10McGraw-Hill/IrwinNYSEEuronext•CreatedbythemergerofNYSEGroup,Inc.andEuronextN.V.onApril4,2007tobecomethefirsttrulyglobalstockmarket•Over3,200differentstockstradeonNYSEEuronext•Tradingoccursataspecificplaceontheflooroftheexchangecalledatradingpost•Eachstockhasaspecialmarketmakercalledaspecialistthatmaintainsliquidityforthestockatalltimes©2009,TheMcGraw-HillCompanies,AllRightsReserved8-11McGraw-Hill/IrwinNYSEEuronext•Threetypesoftransactionsoccurattradingposts–amarketorderisanordertotransactatthebestpriceavailablewhentheorderreachesthetradingpost–alimitorderisanordertotransactataspecifiedprice–specialiststransactfortheirownaccount•Programtradingisthesimultaneousbuyingandsellingofaportfolioofatleast15differentstocksvaluedatmorethan$1millionusingcomputerprogramstoinitiatethetrades•Circuitbreakersgiveinvestorstimetomakeinformedchoicesduringperiodsofhighmarketvolatility©2009,TheMcGraw-HillCompanies,AllRightsReserved8-12McGraw-Hill/IrwinTradingonNYSEEuronextandAMEXOrderOrderOrderInvestorSharesBrokerSharesComm.SharesMarketorMakerorCashCashFloorCashOtherFloorBrokerBroker©2009,TheMcGraw-HillCompanies,AllRightsReserved8-13McGraw-Hill/IrwinStockMarketQuotes•Name•Symbol•Open•High•Low•Close•NetChg•%Chg•Volume•52WkHigh•52WkLow•Div•Yield•P/E•YTD%Chg©2009,TheMcGraw-HillCompanies,AllRightsReserved8-14McGraw-Hill/IrwinAMEX•GenerallylistssmallerfirmsthanNYSEEuronext•Operatesasabroker-specialistmarket-makersystemsimilartoNYSEEuronext•Pioneeredexc