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• With a net worth of $50 billion, Buffett is one of the richest persons in the world in.

• Got his big break when he gained control of Berkshire Hathaway.

• He invests in undervalued companies with strong management.

• Want to buy a share of B-H stock? (BRK.A)

WARREN BUFFETT Berkshire Hathaway

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• Securities markets are financial marketplaces for stocks and bonds and serve two primary functions:

1. Assist businesses in finding long-term funding to finance capital needs.

2. Provide private investors a place to buy and sell securities such as stocks and bonds.

The BASICS of SECURITIES MARKETS

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• Stock Exchange -- An organization whose members can buy and sell securities on behalf of companies and individual investors.

• Over-the-Counter (OTC) Market -- Provides companies and investors with a means to trade stocks not listed on the national securities exchanges.

• NASDAQ -- A telecommunications network –based stock exchange that links dealers across the nation so they can exchange securities.

STOCK EXCHANGES

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• NYSE – the largest

• NASDAQ

• London Stock Exchange

• Tokyo Stock Exchange

• Deutsche Borse

TOP STOCK EXCHANGES

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• Securities and Exchange Commission (SEC) -- The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act.

• Prospectus -- A detailed registration statement that includes extensive economic and financial information that must be sent to prospective investors.

The SECURITIES and EXCHANGE COMMISSION

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• Stocks -- Shares of ownership in a company.

• Stock Certificate -- Evidence of stock ownership.

• Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares.

LEARNING the LANGUAGE of STOCKS

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• Stockholders are owners of a firm and never have to be repaid their investment.

• There’s no legal obligation to pay dividends.

• Issuing stock can improve a firm’s balance sheet since stock creates no debt.

ADVANTAGES of ISSUING STOCKS

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• Stockholders have the right to vote for a company’s board of directors.

• Issuing new shares of stock can alter the control of the firm.

• Dividends are paid from after-tax profits and are not tax deductible.

• The need to keep stockholders happy can affect management’s decisions.

DISADVANTAGES of ISSUING STOCK

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• Common Stock -- The most basic form; holders have the right to vote for the board of directors and share in the profits if dividends are approved.

• Preferred Stock -- Owners are given preference in the payment of company dividends before common stock dividends are distributed. However, preferred stockholders do not have voting rights.

TWO CLASSES of STOCK

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• Bond -- A corporate certificate indicating that an investor has lent money to a firm.

LEARNING the LANGUAGE of BONDS

• The principal is the face value of the bond.

• Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money.

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• Bondholders are creditors, not owners of the firm and can’t vote on corporate matters.

• Bond interest is tax deductible.

• Bonds are a temporary source of funding and are eventually repaid.

• Bonds can be repaid before the maturity date if they contain a call provision.

ADVANTAGES of ISSUING BONDS

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• Bonds increase debt and can affect the market’s perception of the firm.

• Paying interest on bonds is a legal obligation.

• If interest isn’t paid, bondholders can take legal action.

• The face value of the bond must be repaid on the maturity date.

DISADVANTAGES of ISSUING BONDS

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*BOND RATINGS

Rating

Moody’s Standard & Poor’s Description

Aaa AAA Highest Quality

Aa AA High Quality

A A Upper-Medium Grade

Baa BBB Medium Grade

Ba BB Lower-Medium Grade

B B Speculative

Caa CCC, CC Poor

Ca C Highly Speculative

C D Lowest Grade

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• Corporations can issue two classes of bonds:

1. Unsecured bonds (debenture bonds): not backed by specific collateral.

DIFFERENT CLASSES of CORPORATE BONDS

2. Secured bonds: backed by collateral (land or equipment).

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• Stockbroker -- A registered representative who works as a market intermediary to buy and sell securities for clients.

• Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds.

BUYING SECURITIES

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*PRIMARY INVESTMENT SERVICES

CONSUMERS NEED

• Savings and investing advice

• Help with 401k plans

• Retirement planning

• Tax planning

• Estate planning

• Education expense planning

Source: Investment Company Institute.

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1. Investment risk

2. Yield

3. Duration

4. Liquidity

5. Tax consequences

FIVE INVESTMENT CRITERIA

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*AVERAGE ANNUAL RETURN of

ASSET CLASSES (1926-2007)

Investment Return

Small company stocks 12.2%

Large company stocks 9.5%

Corporate bonds 6.0%

Long-term government bonds 5.8%

Treasury bills 4.1%

Source: Ibbotson Associates and Morningstar.

The greater the risk = the greater the return.

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• Bulls: Investors who believe stock prices are going to rise.

PERCEPTIONS of the MARKET

• Bears: Investors who expect stock prices to decline.

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*BEAR MARKET DECLINES

in the S&P 500

Time Period % Drop in Prices

2007-2009 52.5%

2000-2002 51%

1973-1974 48.2%

1968-1970 36.1%

1987-1988 33.5%

Source: Stock Traders Almanac 2009.

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• Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for.

• Investors can also choose stocks according to their strategy:

- Blue-chip stocks- Growth stocks- Income stocks- Penny stocks

SELECTING STOCKS

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*UNDERSTANDING STOCK

QUOTATIONS

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*TOP FINANICIAL NEWS and

RESEARCH SITES

• Yahoo Finance

• AOL Money and Finance

• MSN Money

• Forbes

• Dow Jones & Co.

Source: Entrepreneur Magazine, March 2009.

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• First-time bond investors generally ask two questions:

- Do you have to hold a bond until the maturity date?

- How can I assess the investment risk of a particular bond issue?

• Junk Bonds -- Bonds that have a high risk and high default rates.

IMPORTANT BOND QUESTIONS

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• Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors’ money and buys stocks according to the fund’s purpose.

• Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges but themselves are traded more like stocks than mutual funds.

INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS

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*PERCENTAGE of HOUSEHOLDS

OWNING MUTUAL FUNDS

Source: Investment Company Institute.

Year % of Households

1980 5%

1990 24%

2000 43%

2005 42%

2009 44%

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*THREE VARIETIES of ETFs

Source: Schwab and E*Trade.

ETF Description

TraditionalMost common; include large U.S. stocks, small U.S. stocks, international stocks, or investment-grade bonds.

NicheFocus on an individual sector like healthcare, high-yield bonds, or a single country.

ExoticInvest in unusual, more volatile sectors such as commodities like gold and concepts like clean technology.

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*UNDERSTANDING

MUTUAL FUND QUOTATIONS

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*GROWTH of SOCIALLY

RESPONSIBLE INVESTING

Source: Charles Schwab on Investing.

Year Number of SRIs Total Net Assets

1995 50 $10 Billion

1997 130 $90 Billion

2001 175 $170 Billion

2004 200 $210 Billion

2007 250 $260 Billion

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*COMPARING INVESTMENTS

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• Dow Jones Industrial Average -- The average cost of 30 selected industrial stocks.

• S&P 500 tracks the performance of 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks.

KEY STOCK MARKET INDICATORS

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• The market collapsed into a deep decline in 2000-2002 with the dot-com bubble burst.

- Investors lost $7 trillion in market value.

• In 2008-2009, the collapse of the real estate market sent financial markets into panic.

- The U.S. government made significant investments in private banks and offered a large stimulus package to re-energize the economy.

TURMOIL in the 2000s

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• Wall Street - Issued exotic securities; paid excessive compensation based on bonuses; and investment banks got the SEC to relax capital requirement.

• Main Street - Americans lived beyond their means; lenders gave favorable loans to homebuilders; greedy homeowners took out equity loans; and teaser mortgage rates let people live large.

• Washington - Gramm-Leach-Billey Act allowed commercial and investment banks to partner; housing interest rates were kept low; and Community Reinvestment Act forced lending to people with bad credit.

WHO’S at FAULT for the ECONOMIC CRISIS?

Source: Fortune Magazine, www.fortune.com.