Chapter 16: Buying and Selling Securities

Objectives

• Explain the operation and regulation of securities markets.

• Discuss factors to consider when selecting a brokerage firm.

• Interpret newspaper quotations for listed securities.

Objectives

• Describe the process of buying and selling securities.

• List the major sources of investment information about securities.

• Estimate and calculate potential returns on investments.

Objectives

• Explain the 12-step investment process.

Buying and Selling Securities

specializes in buying and selling negotiable

securities, such as stocks, bonds, and

mutual funds.

BROKERAGE FIRM

• Initial public offerings (IPOs)

• Investment banking firms

• Venture capitalists

Securities Markets

PRIMARY MARKET:

Flow of Stocks and Bonds in Primary Markets

Securities Markets

• Securities markets

• Stock broker

• Account executive

• Registered representative

SECONDARY MARKETS:

Flow of Securities in Secondary Markets

• New York Stock Exchange

• American Stock Exchange

• Regional Stock Exchanges

• NASDAQ Over-the Counter Market

Securities Markets

ORGANIZED STOCK EXCHANGES:

SECURITIES MARKET REGULATION:

• Self-regulation

• State

• Federal

• Investor’s insurance

Securities Markets

• General brokerage firms

• Commissions and fees

• Discount brokerage firms

• Opening an account

Brokerage Firm Operation

Interpretation of Quotations

• Columns 1 and 2: 52 weeks, high and low

• Column 3: Stocks

• Column 4: Sym

• Column 5: Div

• Column 6: Yld%

• Column 7: P/E

• Column 8: Vol 100s

• Column 9,10,11: High, Low, Close

• Column 12: Net Chg

• Trading process

• Matching or negotiating prices

• Types of orders

• Market Order• Limit Order• Stop Order

Securities Transactions and the Investor

• Time limits

• Purchasing mutual funds

• Direct purchase

• Contractual accumulation plan

Securities Transactions and the Investor

• General economic conditions

• Securities market indexes

• Dow Jones Industrial Average (DJIA)• Standard & Poor’s 500• New York Stock Exchange Composite• American Stock Exchange (AMEX)• NASDAQ Composite• Nikkei Dow

Information About Securities

• Information about industries

• Trade associations

• Industry-oriented investment publications

Information About Securities

• Information about specific companies and funds

• Annual reports

• Prospectuses

• Profile prospectuses

• 10-K reports

• Investment rating publications

• Research reports

Information About Securities

• Use Beta to calculate estimated required rate of return

• Calculate potential rate of return on particular investment

• Compare estimated required rate of return with projected rate of return

Estimating and Calculating Potential Returns on Investments

Total Estimated Rate of Return Calculation

1. Identify personal investment philosophy.

2. Identify desired total return.

3. Keep an eye on local situations.

4. Set time horizon for investing objectives.

5. Choose your preferred investment

medium.

6. Study available investment alternatives.

How to Invest: A Twelve-Step Process

7. Choose an investment for it components.

8. Invest in companies that will out earn competitors.

9. Develop plan for investing and stick with it.

10. Diversify portfolio.

11. Invest regularly.

12. Reinvest earnings.

How to Invest: A Twelve-Step Process