Chapter Twenty-One Understanding Securities Markets and Investments.
Securities and Investments Gateway to Business Fall 2007.
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Transcript of Securities and Investments Gateway to Business Fall 2007.
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Securities and InvestmentsGateway to Business
Fall 2007
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Topics
• Securities• Common Stock, Bonds, Mutual Funds
• Securities Markets• Primary, Secondary
• Investment Banking• Mutual Funds• Risk and Return
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What is a Security?
• An instrument for personal protection
• Legal claim on corporate assets and profits
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Corporate Securities
• Issued (sold) by corporations to investors
• Represent legal claims against the corporation’s assets and profits
• Most common examples:• Common Stocks• Bonds
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Corporate SecuritiesAssets Corporate
BondsDebt(Borrowed Money)
Common StockEquity(Owners’ Money)
Corporate Assetsare financed byDebt and Equity
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Common Stocks and Corp Bonds
• Corporate Bonds are Debt Securities• money borrowed by the corporation• money invested by lenders to the corporation• provide fixed income to bondholders
• Common Stocks are Equity Securities• money invested by owners of the corporation• provide variable (residual) income to stockholders
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Common Stocks and Corp Bonds
• Corporations pay Interest to Bondholders• Failure to pay interest results in default
• Corporations pay Dividends to Stockholders• Firms have no obligation to pay dividends
• When would they pay dividends?• When wouldn’t they pay dividends?
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How do Corps Issue (Sell) Stock?
• Initial Public Offering (IPO)• Initial sale of a corporation’s stock to the “public”• Known as “Going Public”
• Google IPO August 19, 2004• Issued 22.5 million shares of stock at $85 per
share• GOOG raised $1.9 Billion from Equity Investors in
the Primary Market.
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GOOG Stock Price in the Secondary Market
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Price-Earnings (P/E) Ratio
• P/E ratio is Stock Price divided by EPS
• It is what investors are willing to pay for $1 of current Earnings• i.e., it is the Market Value of $1 of current
earnings
• How does Google’s stock price and P/E ratio compare to a more mature company like Proctor and Gamble?
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Google valuation data
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Proctor and Gamble valuation data
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Wal-Mart or Dicks Sporting Goods?
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Wal-Mart (WMT) vs. Dick’s (DKS)November 9, 2007
WMT
DKS
Stock Price $42.90
$27.50
Shares Out (million)
4,068
110
Market Cap ($billion)
174.5
3.1
Sales ($billion) 348.6
3.1
Assets ($billion) 151.2
1.5
Net Income ($million)
11,280
112
EPS $2.99
$1.28
P/E Ratio 14.5x
22x
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WMT or DKS?
Growth Jan-07Jan-
06Jan-
05Jan-
04 AvgRevenue 10.5 9.6 11.3 4.9 9.1%Net income 0.5 9.4 13.4 12.6 9.0%EPS 1.1 11.2 16.4 14.4 10.8%
Growth Feb-07Jan-
06Jan-
05Jan-
04 AvgRevenue 18.6 24.4 43.4 15.6 25.5%Net income 54.3 5.9 30.5 38.0 32.2%EPS 50.4 3.8 23.8 12.2 22.6%
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Wal-Mart & Dick’sSince January, 2003
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A recent check-in on Dick’s vs. Wal-MartOctober 2008 – October 2010
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Wal-Mart & Dick’sEach had their growth phase
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Mutual Fund
• An investment company (corporation) that invests in common stocks and bonds issued by other corporations• Allows diversification for individual investors• Professional investment management
• A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund, or a security can rise in value. A fund can also lose money and drop in value.
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Risk and Return
Return
Risk
Short-term US Treasury securities
Long-term US Treasury securities
Corporate Bonds
Large company Common Stocks
Small company Common Stocks
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Terms
• Market capitalization (market cap)• Price-earnings ratio• Common stock—ownership, residual income,
dividends• Corporate bond--debt security, fixed income,
interest• Investment bank• IPO, going public• Primary and secondary markets• Mutual Fund
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Web References
• Wall Street Journal (www.wsj.com)• New York Stock Exchange (www.nyse.com)• NASDAQ Market (www.nasdaq.com)• Investment Company Institute (www.ici.org)• The Motley Fool (www.fool.com)• Investor Words (www.investorwords.com)