÷




 
 


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‡ Primary stock markets allow suppliers of funds to raise

equity capital
‡ Secondary stock markets are the most closely watched and
reported of all financial markets
‡ Stockholders are the legal owners of a corporation
± have a right to share in the firm¶s profits (e.g., through dividends)
± are residual claimants
± have limited liability
± have voting rights (e.g., to elect board of directors)


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‡ The returns on a stock over one period (2 ) can be divided

into capital gains and dividend returns:

@
º @ º

@
@

@ º
@ º

= stock price at time

 = dividends paid over time 
to
Ô


 

= capital gain over time 
to
 

= return from dividends paid over time 
to


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‡ Common stock is the  

  in a
public or private corporation
‡  are discretionary and are thus not guaranteed
‡ Common stockholders have the lowest priority claim in
the event of bankruptcy (i.e., a  
‡ !  " # implies that common stockholders can
lose no more than their original investment
‡ Common stockholders control the firm¶s activities
indirectly by exercising their 
$ $  in the election
of the board of directors


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‡    have two classes of common shares

outstanding, with different voting rights assigned to each
class
‡ With   
$, the number of votes assigned to
each stockholder equals the number of shares held
multiplied by the number of directors to be elected
± the number of shares needed to elect Ô directors, Ô, is:
Ô = [(Ô ÿ   of shares outstanding)/(  of directors to be elected +

)] +

‡ A 
&# 
 allows stockholders to vote by absentee
ballot (e.g., by mail)


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‡ ( 
 is a hybrid security that has
characteristics of both bonds and common stock
‡ Generally has &  that are paid
quarterly
‡ Generally 
 
 
$ $  unless
dividend payments are missed
‡ )
  $ versus   $
‡   versus 
 


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 (# 
  

‡ (#   are markets in which corporations raise

funds through new issues of stock, most of the time
through   "
‡ Investment banks act as distribution agents in " 
 
 $
‡ Investment banks act as principals in  
 
 $
$
 
 ±  
 =  + 
‡ A #  is a group of investment banks working in
concert to issue stock; the lead underwriter is the

$ $ 



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 (# 
  

‡ An   "

$ Ô ( is the first public issue
of financial instruments by a firm
‡ A 

$ is the sale of additional securities by
a firm whose securities are already publicly traded
±   $  give existing stockholders the ability to
maintain their proportional ownership
‡ A  $ 
  is a preliminary version of the
prospectus that describes a new security issue
‡  $  
 allows firms to offer multiple issues of
stock over a two-year period with only one registration
statement


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# 
  

‡ 
# 
   are the markets in
which stocks, once issued, are traded among
investors
‡ The U.S. has three major stock markets
± the ) -
 
 .&$ .
& Ô)-.
.
& 
± the ) 
 /
 

   
/
  0
 
 Ô)/ /0
± the / 
 .&$ Ô/.1


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‡ Created by the $ of )-. 3

4 5 and
.
& )565 on April 4, 2007 to become the first
truly global stock market
‡ Over 3,200 different stocks trade on NYSE Euronext
‡ Trading occurs at a specific place on the floor of the
exchange called a $ 

‡ Each stock has a special market maker called a
 that maintains liquidity for the stock at all
times


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 )-. .
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‡ Three types of transactions occur at trading posts

± a 
 is an order to transact at the best price available
when the order reaches the trading post
± a 
 is an order to transact at a specified price
± specialists transact for their own account
‡ (
$ $ is the simultaneous buying and selling
of a portfolio of at least
different stocks valued at more
than $
million using computer programs to initiate the
trades
‡  " give investors time to make informed
choices during periods of high market volatility


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 )-. .
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Order Order Order

Investor Shares Broker Shares Comm. Shares Market
or Maker or
Cash Cash Floor Cash Other Floor
Broker Broker


   —
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  0


‡ Name ‡ Volume
‡ Symbol ‡ 2 Wk High
‡ Open ‡ 2 Wk Low
‡ High ‡ Div
‡ Low ‡ Yield
‡ Close ‡ P/E
‡ Net Chg ‡ YTD % Chg
‡ % Chg


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‡ Generally lists smaller firms than NYSE Euronext

‡ Operates as a broker-specialist market-maker
system similar to NYSE Euronext
‡ Pioneered &$   Ô.78
± ETFs are index funds that are listed on an exchange
and can be traded intraday


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 )/ /0  7  
‡ NASDAQ is the 
+   
  and has
no physical trading floor
‡ Provides continuous trading for the most active stocks
traded
  
  Ô7
‡ Primarily a dealer market in which often more than 20
dealers act as market makers
‡ A 
 & 
 #  Ô. provides
automatic order execution for orders of less than or equal
to
,000 shares
‡ The NASD maintains an electronic ³7 " 
"
´ and ³  ´ for small firms that are not part
of the NASDAQ


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# 
  

‡ Choice of market listings

± NYSE has extensive listing requirements (e.g., firm market value
and trading volume)
± AMEX listing requirements are less stringent than NYSE and
NASDAQ requirements are even less so
‡ . 
 
 
  
 Ô.)
± normal trading occurs between 9:30 a.m. and 4:00 p.m. eastern
standard time
± extended-hours trading occurs through computerized   
$ #  Ô/7 a.k.a. ECNs
‡  $ via the internet is becoming increasingly
popular to both individual and professional investors


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  &

‡ A 
  & is the composite value of a group
of secondary market-traded stocks
‡ ( $  &
± the Dow Jones Industrial Average (DJIA), composed of 30
companies, is the most widely know stock market index
‡ 6 $  &
± NYSE Composite
± Standard & Poor¶s 00
± NASDAQ Composite
± Wilshire 000


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‡ Households, mutual funds, and private pension

funds are the largest holders of corporate stock
‡ Does the stock market forecast the economy?
‡  # is the speed with which
financial security prices adjust to unexpected
news
± weak form market efficiency
± semistrong form market efficiency
± strong form market efficiency


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  $ 


‡ The    .&$ 


 Ô. is the
primary regulator of stock markets
‡ The main emphasis of SEC regulation is on full and fair
disclosure of information on securities
‡   /

,  .&$ /

,
‡ The SEC delegates certain regulatory responsibilities to
the exchanges for the day-to-day surveillance of activity
‡ Recently imposed regulations aim to reduce excessive
price fluctuations and increase auditing oversight


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 / 


  
‡ U.S. stock markets are the world¶s largest
‡ European markets have increased their share of the global
market with the advent of a common currency, the Euro
‡ Growth has recently strengthened in the U.K., Canada,
Japan, and Pacific Basin countries
‡ International stock markets allow investors to diversify by
holding stocks issued by corporations in foreign countries
‡ International diversification can increase risk due to
incomplete information about foreign stocks as well as
foreign exchange and political risk


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