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10
2003 South-Western/Thomson Learning
Chapter Objectives
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Describe the stock exchanges where stocks are traded Analyze the process of the initial public offering of stock by a company Be able to interpret a stock quote Explain the institutional use of stock markets Describe the globalization of stock markets
Common stock = certificate representing equity or partial ownership in a corporation Issued in primary market by corporations that need long-term funds Stock is then traded in the secondary market, creating liquidity for investors and company evaluation for managers
Election of board of directors Authorization to issue new shares Amendments to corporate charter Other major events
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Many investor assign their vote to management via a proxy Households own about half of all common stock, the rest is owned by institutional investors
Represents equity or ownership interest, but usually no voting rights Trade voting rights for stated fixed annual dividend Dividend paid before common if dividends are declared by board of directors Dividend may be omitted
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First-time offering of shares to the public Firm must provide information to public
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Performance of IPOs
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New stock issued by firm that already has shares outstanding 1982 SEC rule Allows firms to place securities without the time lag associated with registering with SEC
Shelf Registration
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Execute secondary market transactions Examples: NYSE, AMEX, Midwest, Pacific NYSE is largest, controlling 80 percent of value of all organized exchanges
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National Association of Securities Dealers Automatic Quotations Thousands of small firms, plus high-tech giants Tiny firms that do not meet requirements for NASDAQ
Pink sheets
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Role of specialists
Market order Limit order Stop order
Types of orders
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Changes in technology
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Online trading Real-time quotes Company information Electronic Communications Networks (ECNs) Specify amount of borrowed versus amount in cash
Margin requirements
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Borrow a portion of the funds from broker Margin is the amount of equity an investor provide Magnifies returns (both good and bad) Borrow stock and sell Repay stock loan, hopefully at a lower price Investor able to have potential profit from decline in stock price
Short sales
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Stock Quotation
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Stock Quotation
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52-week price range (high/low and YTD% change) Stock symbol Dividend annualized and dividend yield Price-earnings ratio Volume in round lots Previous days price close and net daily change Remainders in cents, not eighths
Exhibit 10.6
Yld% .6 Dividend yield, which represents the annual dividend as a percentage of the prevailing stock price
Vol 100s 71979 Trading volume during the previous trading day
Net Chg 1 1.06 Change in the stock price on the previous trading day from the close on the day before
Stock Indexes
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Price-weighted average 30 large U.S. firms Value-weighted 500 large U.S. firms
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Amex, NASDAQ
Stock value = proportional value of total company Investor return = dividend yield + capital gain/loss New information translated into trading decisions impacting supply/demand for shares New equilibrium price established until new information appears
Exhibit 10.8
New Favorable Information Disclosed to Investors Increased Valuation of Security by Investors Increased Demand for Security Increase in Equilibrium (Market) Price of Security
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Simultaneously buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million Most commonly used by securities firms Program refers to the use of computers Impact on stock volatility
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Often blamed for rise or fall in stock market Studies show that program trading does not increase volatility
Shareholder activism
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An investor who is dissatisfied with the way managers are running a firm has three choices:
Sell
Do Nothing Flush!
Shareholder Activism
CALPERS
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Stock price declines due to poor management Subject to possible takeover Antitakeover amendments Poison pills Golden parachutes
Stock repurchases
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Dividend alternative or undervalued stock Excessive cash relative to +NPV investments If managers believe the stock price undervalued, they may buy the outstanding shares with borrowed funds Signals overvalued shares
Stock offerings
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Foreign stock offerings in the United States International placement process Global stock exchange characteristics Emerging stock markets
Direct purchases American Depository Receipts (ADRs) International mutual funds World equity benchmark shares
All major stock markets declined, indicating the underlying cause systematically affected all markets Example: August 27, 1998 Bloody Thursday Russian financial crisis
Increased integration associated with increased financial technology, competition, and lessened government regulation