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