The Financial System and Interest Chapter 5 2 Read

Transcript:The Financial System and Interest Chapter 5 2 Read:
The Financial System and Interest Chapter 5 2 Read Ch. 5 (ch. 4 in the 4th edition) Possible test questions handed out in lab Interesting books on investing One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch, John Rothchild Take On the Street: What Wall Street and Corporate America Don't Want You to Know by Arthur Levitt 3 Primary and Secondary Markets Purpose of a financial market is to facilitate the flow of funds from savers to production sector (investment in business projects) This occurs in the: Primary market (market in which securities are initially sold) Investors trade securities between each other in the Secondary market 4 Primary and Secondary Markets Corporations, even though they do not raise money in the secondary market, are interested in the stock’s price in the secondary market Goal: Max. Stock Price Influences how much money can be raised in future stock issues Senior management’s compensation is usually tied to the stock price 5 The Stock Market and Stock Exchanges Stock market—a network of exchanges and brokers Exchange—a physical marketplace (NYSE, AMEX, regional exchanges) Broker—individual whose job is to assist people in buying and selling securities Work for brokerage firms Members of stock exchange 6 Exchanges New York Stock Exchange (NYSE) Trades securities for 1,200 of largest, strongest companies in U.S. Handles about 85% of trading activity American Stock Exchange (AMEX) Handles slightly smaller, younger firms than NYSE NASDAQ Regional stock exchanges (Philadelphia, Chicago, San Francisco, etc.) Exchanges are linked electronically 7 Exchanges The Market The stock market refers to the entire interconnected set of places, organizations and processes involved in trading stocks Regulation Securities are regulated under state and federal laws Securities Act of 1933 Required companies to disclose certain information Securities Act of of 1934 Set up Securities and Exchange Commission Securities law is primarily aimed at disclosure 8 Private, Public, and Listed Companies, and the NASDAQ Market Assume a business is successful and the owner decides to raise money for expansion by incorporating and selling stock to others Privately held companies—can’t sell securities to the general public (also, sale of securities is severely restricted by regulation) Publicly traded companies—have received approval of the SEC to offer securities to the general public Process of obtaining approval and registration is known as ‘going public’ 9 Private, Public, and Listed Companies, and