-INV MGT CHAPT2_1

8/4/2019 -INV MGT CHAPT2_1

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INVESTMENT MANAGEMENT

IMELDA T. ANGELES


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Identify the basic types of securities markets and describe their

characteristics;

Explain the initial public offering (IPO) process;

Describe broker markets and dealer markets, and discuss how

they differ from alternative trading systems;

Review the key aspects of the globalization of securities markets,

and discuss the importance of international markets;

Discuss trading hours and the regulation of securities markets;

Explain long purchases, margin transactions and short sales.


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are forums that allow suppliers anddemanders of securities to make financial

transactions.


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Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)

ISSUINGFIRM

LEAD UNDERWRITER

INVESTMENT

BANKER A

INVESTMENT

BANKER B

INVESTMENT

BANKER C

INVESTMENT

BANKER C

PRIVATE INVESTORS


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Every IPO release by the exchange are mostlylikely observed by hundred of buyer around themarket, since all of us is looking forward as an

inception of a new or better trading prospect.

The best way to hit profit from an IPO is to buy the stocks as early as possible andhope that the crowd will follow, and as per history, yes they will do. Before this new

publicly listed company will be crowded by another new buyers and speculators,established immediately your target price and be realistic that your target is reallyachievable. Remember, your buying only this share for trading and not for your long-term investment as of now. When everything are all set, sell all your purchasedstocks, run and enjoy your profit! Just back back again when the price will return toits fundamental value.


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Good example from our local publicly listedcompanies in the Philippines is the Century PeakMetal Holdings, Inc. (CPM). From the opening

on October 6, 2009, the stock price first posted isonly Php1.50 per share, continuously surge untilDecember 16, 2009 where it peaked at 7.10 pershare. Based on that, lets say that you managed

only to buy 3.0 per share and sold it at 6.0 pershare, and then you profited 100% in just twomonths of holding a share. But after that blast,the company stock price is downed back to 3.50per share until today.,


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Underwriting the offering: promoting the stock andfacilitating the sale of companys shares

Prospectus: registration statement describing the

issue and the issuer Red Herring: preliminary prospectus available during

the waiting period

Quiet Period: time period after prospectus is filedwhen company must restrict what is said about thecompany

Road Show: series of presentations to potential

investors


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assist companies to issue new securities advise firms with regard to major financial

transactions UNDERWRITING - process that involves

purchasing the securities from the issuingfirm at an agreed-on price and

bearing the risk of reselling themto the public.

Investment & Capital Corporation of the Philippines (ICCP)

is a leading Philippine investment house


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UNDERWRITING SYNDICATE

SELLING GROUP

GROSS SPREAD lead underwriters managementfee, syndicate underwriters discounts, sellinggroups selling concession.

Ex: P24 to P24.25, P24.25 to P25.25, P26 to P25.25


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Enumerate (just enumerate, no need to define or explain) the four components of a Marketing Information System (points)

ISSUINGFIRM

LEAD UNDERWRITER

INVESTMENTBANKER A

INVESTMENTBANKER B

INVESTMENTBANKER C

INVESTMENTBANKER C

PRIVATE INVESTORS


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SECONDARYMARKET

BROKERMARKET

NATIONALEXCHANGES

REGIONALEXCHANGES

DEALERMARKET

NASDAQ OVER THECOUNTER

BUYER AND SELLER AREBROUGHT TOGETHER

OFFER TO BUY OR SELL ACERTAIN AMOUNT OF

SECURITIES AT STATEDPRICES.


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Secondary Market: the market in which securities are tradedafter they have been issued

Role of Secondary Markets Provides liquidity to security purchasers

Provides continuous pricing mechanism

Organized Securities Exchanges: centralizedinstitutions in which transactions are made in alreadyoutstanding securities

Over-the-counter (OTC) Market: widely scatteredtelecommunications network in which transactions are madein both initial public offerings and already outstandingsecurities


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Copyright 2005 Pearson

Addison-Wesley. All rightsreserved. 2-15

The New York Stock Exchange (NYSE) Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges

Specialists make transactions in key stocks Strictest listing policies

The American Exchange (AMEX) Second largest stock exchangeabout 800 companies

and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot

meet stricter listing requirements for NYSE


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Regional Stock Exchanges Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,

and Cincinnati

Options Exchanges Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)

Futures Exchanges Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)


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Nasdaq Electronic network that connects OTC dealers with buyers

and sellers

About 7,000 stocks trade on the Nasdaq Both IPOs and secondary distributions are sold on OTC

Bid Price: the highest price offered by marketmaker to purchase a given security

Ask Price: the lowest price at which a market makeris willing to sell a given security


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It is the largest electronic screen-based equity securities trading market inthe United States and second-

largest by market capitalization in the

world
http://en.wikipedia.org/wiki/Electronic_tradinghttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Electronic_trading


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How firms issue securities? Primary Markets Secondary Markets

Primary Markets: IPOs, Private Placementand Rights Offering


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Underwriting the offering: promoting the stock andfacilitating the sale of companys shares

Prospectus: registration statement describing the

issue and the issuer Red Herring: preliminary prospectus available during

the waiting period

Quiet Period: time period after prospectus is filedwhen company must restrict what is said about thecompany

Road Show: series of presentations to potential

investors


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Primary Markets: IPOs, Private Placementand Rights Offering Secondary Markets: Organized Exchanges,

Over-the-counter market, Direct tradingbetween two parties


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Organized Securities Exchanges:centralized institutions in which transactionsare made in already outstanding securities

Over-the-counter (OTC) Market: widely

scattered telecommunications network inwhich transactions are made in both initialpublic offerings and already outstandingsecurities.


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The New York Stock Exchange (NYSE) Largest stock exchangeover 3,025 companies Accounts for 90% of stocks traded on exchanges

Specialists make transactions in key stocks Strictest listing policies

The American Exchange (AMEX) Second largest stock exchangeabout 800 companies

and 4% of stocks traded on exchanges Major market for Exchange Traded Funds Typically smaller and younger companies who cannot

meet stricter listing requirements for NYSE


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Regional Stock Exchanges Typically lists between 100500 companies Most listed stocks also listed on NYSE or AMEX Best-known: Chicago, Pacific, Philadelphia, Boston,

and Cincinnati

Options Exchanges Allows trading of options Best-known: Chicago Board Options Exchange (CBOE)

Futures Exchanges Allows trading of financial futures (discussed in Chapter 15) Best-known: Chicago Board of Trade (CBT)


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Third Market Large institutional investors go through market makers on the

OTC market Institutional investors (mutual funds, life insurance companies,

pension funds) receive reduced trading costs due to large sizeof transactions

Fourth Market Large institutional investors deal directly with each other to bypass

OTC market makers Electronic Communications Networks (ECNs) allow direct trading ECNs account for about a third of all Nasdaq transactions


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Primary Markets: IPOs, Private Placementand Rights Offering Secondary Markets: Organized Exchanges,

Over-the-counter market, Direct tradingbetween two parties

Investment Banking


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Bull Market Favorable markets Rising prices Investor/consumer optimism

Economic growth and recovery Government stimulus

Bear Market Unfavorable markets Falling prices Investor/consumer pessimism Economic slowdown Government restraint


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GLOBALIZATION OF

SECURITIES


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THE INTEGRATION OF FINANCIAL INSTITUTIONS IN THEEUROPEAN SECURITIES MARKETS

TO CREATE CROSS-BORDER MARKETS TO COMPETE MORE EFFECTIVELY IN THE PAN-

EUROPEAN-EQUITY TRADING MARKETS

TO CREATE A WORLDWIDE STOCK EXCHANGE

THE TOP FOUR SECURITIES MARKET IN THEWORLD ARE:

NYSE New York Stock Exchange

NASDAQ National Association

of Securities Dealers AutomatedQuotationsISE- London International Stock Exchange

TSE Tokyo Stock Exchange


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PARIS, AMSTERDAM,BRUSSELS, LISBON

EXCHANGES

EURONEXT

SCANDINAVIAN MARKETS-

NOREX

TOKYO AND AUSTRALIASTOCK EXCHANGES

NASDAQ+JAPAN,HONGKONG, CANADA,

AUSTRALIA

INTERNATIONALINVESTMENT

PERFORMANCE


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Diversification: the inclusion of a number of differentinvestment vehicles in a portfolio to increase returns orreduce risks.

Use of international securities improves diversification More industries and securities available Securities denominated in different currencies Opportunities in rapidly expanding economies

International Investment Performance Opportunities for high returns Foreign securities markets do not necessarily move with the

U.S. securities market Foreign securities markets tend to be more risky than U.S.

markets


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Financial Market

Money market Capitalmarket

Primarymarket Secondary

market

Commercialbanks

Firms raisecapital

Over-the

countermarket

debt

equity

Public Privateplacement

Short terminstruments

PrimaryMkt Inst

Organizedexchanges

Credit

unions

Investment

Bankers

Brokers andAgents


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Direct Ways to Invest in Foreign Securities Purchase securities on foreign stock exchanges

Buy securities of foreign companies that trade on U.S.

stock exchanges Buy American Depositary Receipts (ADRs): dollar

denominated receipts for stocks of foreign companiesheld in vaults of banks

Indirect Ways to Invest in Foreign Securities Buy mutual funds that invest in foreign securities


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Usual investment risks still apply Government policies risks Unstable foreign governments

Different laws in trade, labor or taxation Different economic and political conditions Less stringent regulation of foreign securities markets

Currency exchange rate risks Value of foreign currency fluctuates compared to

U.S. dollar Value of foreign investments can go up and down with

exchange rate fluctuations


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Regular trading session for U.S. Exchangesand Nasdaq 9:30 A.M. to 4:00 P.M. Eastern time

Extended-hours electronic-trading sessions Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time Orders only filled if matched with identical

opposing orders

24-hour market probably in near future After-hours trades Brokerage firms allow after-hours trading to individuals


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Securities Act of 1933 Required full disclosure of information by companies

Securities Act of 1934

Established SEC as government regulatory body

Maloney Act of 1938 Allowed self-regulation of securities industry through

trade associations such as the National Association of

Securities Dealers (NASD) Investment Company Act of 1940 Created & regulated mutual funds


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Investment Advisors Act of 1940 Required investment advisers to make full disclosure about their

backgrounds and their investments, as well as register withthe SEC

Securities Acts Amendments of 1975 Abolished fixed-commissions and established an electronic

communications network to make stock pricing more competitive

Insider Trading and Fraud Act of 1988 Prohibited insider trading on nonpublic information

Sarbanes-Oxley Act of 2002 Tightened accounting and audit guidelines to reduce

corporate fraud


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Long Purchase

Investor buys and holds securities

Buy low and sell high

Make money when prices go up


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Margin Trading

Uses borrowed funds to purchase securities

Currently owned securities used as collateral for margin

loan from broker

Margin requirements set by Federal Reserve Board Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement, investor puts up

$2,222.50 and broker will lend remaining $2,222.50

Can be used for common stocks, preferred stocks, bonds,mutual funds, options, warrants and futures


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INITIAL MARGIN

MAINTENANCE MARGIN

MARGIN CALL


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Advantages Allows use of financial leverage Magnifies profits

Disadvantages Magnifies losses Interest expense on margin loan

Margin calls


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Basic Margin Formula

Example of Using Margin

Margin Value of securities Debit balance

Value of securities

V D

V

Assume that an investor buys a 100 shares ofstock at P50 per share, putting up a 60%

margin.

a. Compute for the debit balance.b. how much equity capital must the investor

provide to make this transaction?c. If the stock price rises to P60 per share,

what is the investors new margin position?d. If the price of the stock goes down to P40

per share, what is the investors new margin

position?


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Return on Invested Capital

Example of Return on Invested Capital

Return on

invested capitalfrom a margin

transaction

Total

current

income

received

Total

interest

paid on

margin loan

Market

value of

securities

at sale

Market

value of

securities

at purchaseAmount of equity at purchase

Assume you want to buy 100 shares of stock atP50 per share because you feel it will rise to

P75 within six months. The stock pays P2 pershare stock annual dividend. Stocks are boughtwith a 50% margin and will pay 10% interest onthe margin loan.

How much is the return on invested capital froma margin transaction?


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Short Selling

Investor sells securities they dont own

Investor borrows securities from broker Broker lends securities owned by other investors

that are held in street name

Sell high and buy low

Investors make money when stock pricesgo down


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Advantages Chance to profit when stock price declines

Disadvantages Limited return opportunities: stock price cannot go

below $0.00

Unlimited risks: stock price can go up anunlimited amount

If stock price goes up, short seller still needs to buy sharesto pay back the borrowed shares to the broker

Short sellers may not earn dividends


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Elmo Inc.s stock is currently selling at P60 per share. For

each of the following situations (ignoring brokeragecommissions), calculate the gain or loss that Courtney

realizes if she makes a P100-share transaction.

She sells short and repurchases the borrowed sharesat P70 per share.

She takes a long position and sells the stock at P75 per

share. She sells short and repurchases all borrowed shares at

45 per share. She takes a long position and sells the stock at P60 per

share.


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Learning Goals

1. Identify the basic types of securities markets anddescribe the IPO process.

2. Explain the characteristics of organized securitiesexchanges.

3. Understand the over-the-counter markets and

alternative trading systems, and the generalconditions of securities markets.


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Learning Goals (contd)

4. Review the importance of global securities markets, theirperformance, procedures and and associated risks.

5. Discuss trading hours and regulation ofsecurities markets.

6. Explain the motives, procedures and calculations in longpurchases, margin transactions and short sales.


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Jesse Livermore was a famous american stockmarket investor and influential stock trader of the 20thcentury.

I know from experience that nobody can give me a tip orseries of tips that will make money for me than my own

judgment.


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Ben Graham is a famous Americanstock market investor that influenced

the investing style of Warren Buffett.

If you are shopping forcommon stocks, choose

them the way you wouldbuy groceries, not the wayyou would buy perfume.


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The worlds richest man, Warren

Buffett, is also the most famousstock investor.

I don't look to jump over 7-foot

bars: I look around for 1-footbars that I can step over.


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Peter Lynch is a Wall Street stockinvestor. Lynch's achieved dollarsuccesses in a range of stocks

including Fannie Mae, Ford, Philip

Morris, MCI, Volvo, General Electric,General Public Utilities, Student Loan

Marketing, Kemper, and Lowes.

Although it's easy to forgetsometimes, a share is not a

lottery ticket... it's part-ownership of a business.


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WHAT ISGLOBALIZATION?

Is an integration of worldeconomy.

products and services information barriers

technology for global

trading round-the-globe, round-

the-clock automatedsystem


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Globalization of equity securities trading is a term thatcovers a variety of related growth trends. cross-listing of securities in several countries, cross-national portfolio diversification and hedging, holding membership (generally through affiliates) in

another countrys exchanges, legal or contractual tiesbetween exchanges,

electronic systems for 24- hour trading, passing the

book, the development of cross-national stock indexderivative products, and

related phenomena such as multinational primaryofferings of stock and international mutual funds.


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DIVERSIFICATION OF SECURITIES enableinvestors to seek out opportunities to profitfrom rapidly expanding economies

throughout the world.

A wider range of securities and industries; Securities traded in a larger number of

markets Securities denominated in different

currencies

-INV MGT CHAPT2_1

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