DAVAO ORIENTAL STATE COLLEGE

OF SCIENCE AND TECHNOLOGY

INVESTMENT AND PORTFOLIO MANAGEMENT

FM 131 | 1st Semester SY 2020-2021
 Securities Market
Securities Markets are forums that
allow supplier and demanders of
securities to make financial
transactions. Their goal is to permit
such transactions to made quickly
and at a fair price
 Types of Markets
Money Markets: the market where short-term securities are
bought and sold
Capital Market: the market where long-term securities such
as stocks and bonds are bought and sold
Primary Market: the market in which new issues of securities
are sold to the public
Secondary Market: the market in which securities are traded
after they have been issued
 Primary Markets
Initial Public Offering (IPO)
First public sale of a company’s stock
Requires SEC approval
Three Choices to Market Securities in Primary Market
Public offering: an offering to sell to the investing public a set number of
shares of a firm’s stock at a specified price
Rights offering: an offering of a new issue of stock to existing stockholders,
who may purchase new shares in proportion to their current ownership
Private Placement: an offering of a company's securities that is not registered
with the Securities and Exchange Commission (SEC) and is not offered to the
public at large.
 Going Public: The IPO Process
Underwriting the offering: promoting the stock and facilitating the sale of
the company’s 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 filed when company must
restrict what is said about the company
Road Show: series of presentations to potential investors
Figure 2.1 Cover of a Preliminary
Prospectus for a Stock Issue
Figure 2.2 The Selling Process
for a Large Security Issue
 Secondary Markets
Secondary Market: the market in which securities are traded after they
have been issued
Role of Secondary Markets
Provides liquidity to security purchasers
Provides continuous pricing mechanism
Securities Exchanges: forums where buyers and sellers of securities are
brought together to execute trades
Nasdaq Market: employs an all-electronic trading platform to execute
trades
Over-the-counter (OTC) Market: involves trading in smaller, unlisted
securities
 Broker Markets and Dealer Markets
Broker Markets: consists of national and regional securities exchanges
60% of the total dollar volume of all shares in U.S. stock market trade here
New York Stock Exchange (NYSE) is largest and most well-known
Trades are executed when a buyer and a seller are brought together by a broker
and the trade takes place directly between the buyer and seller
Dealer Markets: consists of both the Nasdaq OMX market and the OTC market
Trades are executed with a dealer (market maker) in the middle.
Sellers sell to a market maker at a stated price.
The market maker then offers the securities to a buyer.

A broker executes the trade on behalf of others, a dealer trades on their own behalf.
Figure 2.3 Broker and Dealer Markets
 Broker Markets
New York Stock Exchange (NYSE) Options Exchanges
Largest stock exchange—over 2,700 companies Allows trading of options
Over 350 billion shares of stock traded in 2005 Best-known: Chicago Board Options Exchange
Accounts for 90% of stocks traded on exchanges (CBOE)
Specialists make transactions in key stocks Futures Exchanges
Strictest listing policies
Allows trading of financial futures
NYSE Amex (formally American Stock Exchange) Best-known: Chicago Board of Trade (CBT)
More than 500 companies listed
Major market for Exchange Traded Funds
Typically smaller and younger companies who
cannot meet stricter listing requirements for NYSE
Regional Stock Exchanges
Typically lists between 100–500 companies,
usually with local and regional appeal
Listing requirements are more lenient than NYSE
Often include stocks that are also listed on NYSE
or NYSE Amex
Best-known: Midwest, Pacific, Philadelphia,
Boston, and Cincinnati
 Dealer Markets
No centralized trading floor; comprised of market Over-the-counter (OTC) Bulletin Board
makers linked by telecommunications network Lists smaller companies that cannot or don’t
Both IPOs and secondary distributions are sold wish to be listed on Nasdaq
on OTC Companies are regulated by SEC
40% of the total dollar volume of all shares Over-the-counter (OTC) Pink Sheets
in U.S. stock market trade here
Lists smaller companies that are not
Both IPOs and secondary distributions are regulated by SEC
sold on OTC Liquidity is minimal or almost non-existent
Bid Price: the highest price offered by market Very risky; many nearly worthless stocks
maker to purchase a given security
Ask Price: the lowest price at which a market
maker is willing to sell a given security
Nasdaq
Largest dealer market
Lists large companies (Microsoft, Intel, Dell,
eBay) and smaller companies
 General Market Conditions
Bull Market Bear Market
Favorable markets Unfavorable markets
Rising prices Falling prices
Investor/consumer optimism Investor/consumer pessimism
Economic growth and recovery Economic slowdown
Government stimulus Government restraint
 Globalization of Securities Markets
Diversification: the inclusion of a number of different investment
vehicles in a portfolio to increase returns or reduce 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
 Globalization of Securities Markets
Indirect Ways to Invest in Foreign Securities
Purchase shares of U.S.-based multinational with substantial
foreign operations
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 companies held in
vaults of banks
 Risks of International Investing
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
 Trading Hours of Securities Markets
Regular Trading Session for U.S. Exchanges
and Nasdaq
9:30 A.M. to 4:00 P.M. Eastern time
Extended-Hours Electronic-Trading Sessions
NYSE: 4:15 to 5:00 P.M. Eastern time
Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time
Regional exchanges also have after-hours trading sessions
Orders only filled if matched with identical opposing orders
 Regulation of Securities Markets
Insider Trading
Use of nonpublic information about a company to make profitable securities
transactions
Blue Sky Laws
Laws imposed by individual states to regulate sellers of securities
Intended to prevent investors from being sold nothing but “blue sky”
 Regulation of Securities Markets
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
 Regulation of Securities Markets
Investment Advisors Act of 1940
Required investment advisers to make full disclosure about their
backgrounds and their investments, as well as register with the 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
 Basic Types of Securities Transactions
Long Purchase
• Investor buys and holds securities
• “Buy low and sell high”
• Make money when prices go up
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
 Margin Trading
Advantages
Allows use of financial leverage
Magnifies profits
Disadvantages
Magnifies losses
Interest expense on margin loan
Margin calls
 Margin Formulas
• Basic Margin Formula
Value of securities - Debit balance
Margin =
Value of securities
V -D
=
V
• Example of Using Margin

V -D $6,500 - $1,200
Margin = = = 0.815 = 81.5%
V $6,500
Table 2.3 The Effect of Margin
Trading on Security Returns
• Return on Invested Capital
Total Total Market Market
current interest value of value of
- + -
Return on income paid on securities securities
invested capital received margin loan at sale at purchase
=
from a margin Amount of equity at purchase
transaction

• Example of Return on Invested Capital

Return on
invested capital $100 - $125 + $7,500 - $5,000 $2,475
= = = 0.99 = 99%
from a margin $2,500 $2,500
transaction
 Basic Types of Securities Transactions
Short Selling
Investor sells securities they don’t 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 prices go down
Table 2.5 The Mechanics of a Short Sale
Table 2.6 Margin Positions on Short Sales
 THANK YOU!
SEE YOU NEXT SESSION!