Today's lecture will be on Chapter 17:
Using securities markets both for
investing opportunities as well as
finding financing opportunities.  So what
are securities markets?  They are, in
essence, a financial marketplace for
securities, such as stocks and bonds are
bought and sold.  securities markets serve
two primary functions:  The first part of
this lecture will look at how it assists
businesses and corporations in finding
long-term funding to finance their capital needs.
The second part of today's
lecture will look at how individuals,
such as you and I, serves as a place
for us to buy and sell stocks and bonds
and other securities in order to make
money.  Let's look at the first aspect
assisting businesses first.  So securities
markets are divided into two markets:
primary and secondary.  Primary
markets handle the sale of new
securities and secondary markets handle
the treatment securities between
investors every other type of trade.  So a
security is sold once on the primary market
and thus every subsequent sale is
done on the secondary market.  Oftentimes,
offerings of securities are done on the
primary market through an IPO, that's an
initial public offering, or the first
offering of a corporation's stock.
How do we have IPOs?  They are often facilitated through specialists known as investment bankers.
These people assist in the issuance sale of new securities.
There's also institutional investors.  Now we're individual investors. but institutional
investors are large companies such as
pension funds mutual funds and other
funds that buy securities on a much
larger scale.  Securities are usually
bought and sold on an exchange.  An
exchange as an organization whose
members can buy or sell securities on
the behalf
of their individual investors.  The
largest stock exchange in the world is
the New York Stock Exchange in lower
Manhattan.  A specialized type of an
exchange is known as an over-the-counter
market.  This type of exchange provides
companies and investors with the means to trade stocks that are not listed on a
national securities exchange.  The biggest
over-the-counter market is to Nasdaq.
it's a completely electronic marketplace
located in midtown Manhattan.
A governmental agency known as the
Security and Exchange Commission is in
charge for the regulation of the sale
purchase and sale of securities such as
stocks and bonds.  It was created in 1934.
 Whenever a company wants to issue a
security, whether a stock or a bond, they
have to issue what's called a prospectus.
And that's a smaller condensed version
of both economic as well as financial
information .  The company must file with
the Securities and Exchange Commission
before issuing stock and it must also be
sent to prospective investors.  So let's
learn the language of stocks, or equities.
 Equity, or stock, means ownership.
So stocks is shares of ownership in a
company.  Back in the old days you used to
get a stock certificate when you bought
stocks but everything is electronic now.
So you don't get that anymore so
whenever you buy a share of stock you're
buying a proportional share of ownership
in that corporation.  Remember only
corporations issue stock.  A corporation
may issue dividends.  Dividends is part of
the firm's profits that the corporation
may distribute back to its owners or
shareholders either as cash or in the
form of additional shares.
Corporations can choose to have a dividend or not have a dividend or raise or lower or suspend it.
What are the advantages
for corporations the issues stocks?
Shareholders are owners of the firm and
you never have to be repaid their investment.
So when I sell stock I sell
stock on primary market for the first
time to an investor, I don't have to pay
that person back.  They now are owners
and I have their money.   As I said there's
no legal obligation to pay dividends.
In addition, issuing stock can improve the
company's Balance Sheet because there's
no liability, you don't know anything so the
assets go up but the liabilities don't go up as well.
However, there are disadvantages for corporations to issue stock.
Now shareholders are owners and
thus have the right to vote for such
things it's Borad of Directors or to amend the Articles of Incorporation.
If you issue... when you issue a new shares stock, it alters the
control the company.  To the extent you
pay dividends, they are paid from after-tax
profits and are not tax deductible.  There
are two main classes of stock or equity:
common stock and preferred stok.  All
corporations issues common stock.
Common stock is the most basic form of stock.  Shareholders of common stock have the
right to vote for the Board of Directors
and sharing the profits if dividends are approved.
Some corporations issue a second type of stock known as preferred stock.
With preferred stock, owners are
given preference in two main ways:
The first way is that they have a preference
over common shareholders to dividends.
In addition, they also have a preference to
common shareholders if the corporation
goes bankrupt or has to liquidate its
assets which means preferred
shareholders would get paid in full
before common shareholders get paid at all.
Couple other things of note would
preferred stock.
It may be callable, which means....if you're the owner of
preferred stock you may be required to
sell the shares back to the corporation.
If the corporation calls it back
preferred stock may be convertible which
means you may be have the I you have the
option to convert your preferred shares
to common shares.  And finally preferred
stock is cumulative which means any
dividends not paid out to preferred
shareholders has to be paid back first
before you can pay any common
shareholders any dividend.
Now let's talk a little bit about bonds.
Bonds are not stocks.  Remember stocks are
ownership.  Bond means you have lent out
money..bond is a corporate
certificate indicating that the person
who purchased the bond. or the bond
investor has lent money to the
corporation (or if a government has
issued it to the government).  The
principal of the bond is the face value
of a bond.  Most bonds are issued in
$1,000 increments.  And usually
bonds have interest.  So the payment...
interest is the payment that the
corporation or issuer of the bond
makes to the bondholder that compensate
them for the use of their borrowed money.
There are several different types of
bonds.  Here all these by the way our
government bonds.  None of these are
corporate bonds so these are all bonds
different types of bonds issued by by
the government.  Federal government for
the first four, municipal bonds are issued
by state cities or counties, and Yankee
bonds are bonds issued by foreign
governments.  What are some advantages for
corporations to issue bonds (as well as
governments)?  Well the holders of the
bonds are creditors, not owners like
shareholders.  Thus bondholders can't vote
on corporate matters, they have no
ownership interest.  The interest that the
corporation pays on a bond is
tax-deductible.  That was not the case of
if the corporation paid out a dividend to
its shareholders.  In addition you may be
able to pay back the bond before the
maturity date if they're callable.
However there are disadvantages for
corporations (as well as governments) to
issue bonds.  First bonds increases a debt
of the corporation.  In effect the markets
perception of the company paying interest
is you have to pay interest.  You never,
remember you don't have to pay a
dividend on a stock.  And finally, unlike a
stock, you got to pay back the face value
of the bond or the principal
with the bond must be paid back when
the bond matures.  All bonds have ratings
and you can see the three major rate
rating agencies: Moody's, Standard &
Poor's, and Fitch.  AAA generally
speaking is the highest quality and as
you get down to I want to say is you get
down to BB and that yes you start
getting into junk-rated bonds.  The lower the ranking the higher
amount of interest that the corporation
has to offer to entice people to buy the
bonds  Bonds will either be secured or
unsecured and as you know by now secured
means it's backed by collateral or
property or equipment.  If it's not
secured the opposite is unsecured, or a
debenture bond which is not backed by
any specific collateral.  Other issues
with bonds.  If you know what's called a
sinking fund and that's a reserve
account set up by the corporation to
ensure that enough money is available to
retain the bondholders when those bonds
become due on the maturity date.  And just
like with preferred stock, bonds can be
callable, which means permits the
corporation to pay off the principal
before the maturity date.  Oftentimes that
happens when interest rates go down
after you've issued the bond, so you
don't want to keep paying a higher
amount of principal when you could call
the bond back and re-issue the bond at
a lower interest rate.  And bonds, just
like preferred stock can be convertible,
which means... allows the bond holders to
convert their bonds into shares of common stock.
Now let's move over to the second part
of today's lecture here is buying stocks
and this is for individual investors
like you and me.  Now back in the day you
had to use a stockbroker who is a
representative and worked as a intermediary to buy and sell stocks and bonds for your clients.
Today you don't need this anymore because of the Internet, and now there's free trading,
which is pretty much made stockbrokers
obsolete.
so whenever someone's looking to make an investment they should look at criteria.
And here's some of the criteria should
look at.  First thing is risk.  Risk that
that the investment may go down to zero
potentially.  Yield, or interest that you
may make while you're owning the stock
or bond.  How long you plan to hold the
stock or bond?  Sometimes I hold things
for a few minutes, or other
times for my lifetime. How liquid is the
investment?  Which means can you get in
and out of it quickly or find a seller.
And finally what are some of the tax
consequences?  Depending on what type of an account you hold it in, or what type
of security it is will have tax
ramifications.  So you should do certain
things before you as an individual make
your first investment in stocks and
bonds.  Well take an investing class such
as my Business 121 class.  Or attend a
conference or do a lot of reading you
can see over the long haul which is
since 192,6 here really which is even
before the Great Depression stocks have
returned on average over somewhere close
to 10%.  Bonds don't return quite as much
because they're not as risky as an
investment but no matter if you buy
stocks or bonds it's very important to
be diversified.  Diversification is the
idea of buying several different
types of investments in a in an effort
to spread the risk of your overall
investment portfolio.  So you can see you
diversify, you put some things in stocks
but some things in bonds may be
something in real estate.  Or with in stocks you diversify you have
money in technology or financial or
healthcare etc.  There are always bulls or
bears in a market.  A bull is an investor
who believes that the stock prices and
overall market are goning to rise.  The
opposite are bears, those who believe
that stock prices are going to decline. 
 It takes two to make a market.
I wonder if they're gonna put 2020 up as the next time period for drops in stock
prices because stock prices just in the
last month have dropped over 30%. But you
can see this is not the first time if
you ride these things out you will do
fine in the long run.  Hopefully, it's not
a bad problem to have what's called a
capital gain.  In a capital gain is the
difference in a positive manner between
the price for which you bought to stock
our bond and from what you sold it for.
So to the extent you have a gain as
knnown as a capital gain.  You can also pick
different types of stocks: blue-chip
stocks are usually your largest companies.
Growth stocks are ones that our sales are growing at a higher rate
but there tend to be more expensive
relative to their earnings.  Income stocks
usually are cheaper stocks relative to
their earnings but they produce a
dividend.  And penny stocks you should
avoid.  Stock splits are actions by
corporation it gives shareholders two or
more shares of additional stock for
every share that you own.  However stock splits cause no change in
the company's ownership structure and no
change in the investments value.  So when
a stock splits "two for one" here's what
happens.  Let's say you owned 100
shares of stock XYZ and traded for $100
per share and then the stock split two
for one.  So you had a $10,000 investment
($100 times 100 shares).
Now the stock splits two for one.  Now you
have 200 shares (twice as many shares) but each
share is worth half as much they were
worth (now they're worth f$50).
So again 200 times $50 is $10,000.  So don't ever think to the stock split makes you
more money it may give you more shares
but each share will be worth a
proportionally less amount.  Usually you
buy stocks with money that you have.
However, you have the ability to borrow
money to buy stock that's known as
buying stock on margin.  I would highly
disregard I would highly tell you not to
buy stocks on margin unless you are an
experienced investor.  This was taken
maybe seven eight years ago.   Microsoft
even now Microsoft today is training
$150 per share was I think close to $200 a share before
this latest drop off but you can see you
can put money into a stock and hopefully
make money.  Now let's look at not so much investing in stocks but investing in
bonds.  So usually novice bond investors ask
two general questions:  one:  you have to
hold on the bond till the maturity date?
And the answer's no just like with the
stock you can sell a bond at any time.
And then how can I assess the investment
risk of a particular bond.
Well you can do that by looking at
the ratings from the three rating agencies:
Moody's Fitch and Standard &
Poor's.  Junk bonds are bonds that have
very low ratings because there are a
credit risk so you want to be very
careful about purchasing a junk bond.
Just as with stocks bonds you can go on
to Yahoo Finance or anywhere else to
find information about bonds as well.
Other things you can buy besides stocks
and bonds are mutual funds and ETFs.
I would highly have avoid buying a mutual
fund unless you have to a mutual fund is
an organization that buy stocks and
bonds and then sells those shares in
those securities to the public.  The fund
pools investors money and
stocks according to the funds purpose
they usually charge high fees.  A better
way to buy if you don't want to buy an
individual stock or an individual bond
is to buy an ETF or an exchange-traded
fund.  These again are collections of
stocks and bonds that are traded on
different exchanges but are treated more
like individual stocks and thus have a
much lower fee.  Most ETFs have fees of
under a quarter of 1% , where mutual funds
can have fees sometimes 2-8%.
There are a variety of ETFs and I would
just do a google search on different
types of ETFs.  But you can buy ETFs to
just track index funds like the S&P 500
or the Dow or the Nasdaq.  You can buy
them to attract a certain industry.
So comparing different types of investments and you can see on the left side we have
bond,s preferred stock, common stock,
mutual funds, and ETF's.  And look at the
different degrees of risk, the expected
income and the possible growth.
So the Dow, known as the Dow 30 actually
is 30 industrial stocks.  So whenever you
hear the Dow going up or the Dow going
down it's really the rate of these 30
stocks.  A couple of these stocks
that are on the right side are no longer
in the Dow and so the 30 stocks make up
the Dow Jones Industrial Average.
I believe along with other critics of the
Dow 30 is too small and I use the S&P 500
as more of a guideline.  The S&P 500
tracks 400 industrial stocks,
40 financial, 40 public utility stocks, and
20 transportation stocks to give a
better overall gauge of how the markets
are doing.  As we said, markets can go up
like they had and they can go down like
they are right now.  The key is not to
panic when stocks go down though the
last collapse before the one that were
recently experienced now happened in
2008 as a collapse of the real estate
market.  But stocks recovered a lot from
then you can never time the stock market
because most of the stocks are traded on
both the New York Stock Exchange and the
Nasdaq are done through computer
programs.
So when we have economic crisis who's to
blame oftentimes you want to blame Wall
Streeter there's those those greedy
stockholders and owners and a lot of
times they have issues as well but
please don't think that other people
don't share blames when there's economic
crisis as well our politicians in
Washington and even you and I on Main
Street who live beyond their means.
fFnally one of the key provisions of the
last economic crisis in 2008 was the
Dodd-Frank Act and this gave the
government a lot more power to regulate
the financial services industry.  This
concludes our lecture on chapter 17:
understanding security markets for both
financing opportunities as well as
investing opportunities.
