Investment Chap2

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Chapter 2
Markets and Transactions
T Outline
Learning Goals
I. Securities Markets A) Types of Securities Markets 1. The Primary Market a. Going Public: The IPO Process b. The Investment Banker’s Role 2. Secondary Markets B) Organized Securities Exchanges 1. The New York Stock Exchange a. Trading Activity b. Listing Policies 2. The American Stock Exchange 3. Regional Stock Exchanges 4. Options Exchanges 5. Futures Exchanges C) The Over-the-Counter Market 1. New Issues and Secondary Distributions 2. The Role of Dealers 3. Nasdaq 4. Alternative Trading Systems D) General Market Conditions: Bull or Bear Concepts in Review II. Globalization of Securities Markets A) Growing Importance of International Markets B) International Investment Performance C) Ways to Invest in Foreign Securities D) Risks of Investing Internationally Concepts in Review

Chapter 2

Markets and Transactions


III. Trading Hours and Regulation of Securities Markets A) Trading Hours of Securities Markets B) Regulation of Securities Markets 1. Securities Act of 1933 2. Securities Exchange Act of 1934 3. Maloney Act of 1938 4. Investment Company Act of 1940 5. Investment Advisors Act of 1940 6. Securities Acts Amendments of 1975 7. Insider Trading and Fraud Act of 1988 8. Sarbanes-Oxley Act of 2002 Concepts in Review IV. Basic Types of Securities Transactions A) Long Purchase B) Margin Trading 1. Essentials of Margin Trading a. Magnified Profits and Losses b. Advantages and Disadvantages 2. Making Margin Transactions a. Initial Margin b. Maintenance Margin 3. The Basic Margin Formula 4. Return on Invested Capital 5. Uses of Margin Trading C) Short Selling 1. Essentials of Short Selling a. Making Money When Prices Fall b. Margin Requirements and Short Selling c. Who Lends the Securities? d. Advantages and Disadvantages 2. Uses of Short Selling Concepts in Review

Putting Your Investment Know-How to the Test Discussion Questions Problems Case Problems 2.1 Dara’s Dilemma: Hold, Sell, Or? 2.2 Ravi Dumar’s High-Flying Margin Account Excel with Spreadsheets Trading Online with OTIS


Gitman/Joehnk • Fundamentals of Investing, Ninth Edition

T Key Concepts
1. 2. 3. 4. 5. 6. 7. 8. 9. The types of securities markets in which transactions are made. The operations, function, and nature of organized securities exchanges and the over-the-counter market. The importance of international securities markets and a discussion on the performance and risk involved in these investments. General market conditions and extended hours trading. Regulation of the securities markets The basic long transaction. The motives for margin transactions and the procedures for making them. Margin requirements, formulas for initial and maintenance margin, and the uses of margin trading. The short sale transaction, why one shorts securities, and the uses of short selling.

T Overview
1. The text divides securities markets into money markets and capital markets. The instructor should explain the difference. Both primary and secondary transactions are carried out in capital markets. The instructor should define these transactions for students and explain the role of the investment banker in the selling of new securities (primary transactions). The secondary markets include various organized securities exchanges and the over-the-counter (OTC) market. The instructor should emphasize the importance of the NYSE among all these markets. The instructor might also discuss these aspects of organized security exchanges: the membership of an exchange; its listing policies; the role of the brokers, traders, and specialists; trading activity; and the auctioning process. The OTC markets are described next. The instructor should point out that the OTC market is not a physical institution like the organized securities exchanges and should discuss the importance of the OTC market, especially with respect to Nasdaq, trading bonds, and unlisted securities. Third and fourth...
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