Understanding Securities Markets

• Securities markets exist as a hub for financial assets, such as stocks and bonds.
• The goal of securities markets is to facilitate quick and fair transactions of buying and selling activity.

Types of Markets

• Money markets handle short-term loans, such as for a few weeks or months.
• Capital markets handle long-term investments like stocks, bonds, and company ownership.
• Broker markets connect buyers and sellers directly through a middleman.
• Dealer markets involve dealers who buy and sell from their own inventory.
• High-frequency trading uses fast computers for buying and selling.

Market Conditions

• Bull markets exist when prices are rising, and people feel confident.
• Bear markets exist when prices are falling, and people are nervous.

Primary Markets & IPO Process

• The primary market lets companies sell stock to the public for the first time.
• The Initial Public Offering (IPO) process facilitates the introduction of a company's stock to the market.
• Underwriting involves investment banks who help sell the stock.
• A prospectus provides information about the company and its stock offering.
• A quiet period restricts talking about the stock before its launch.
• A road show involves the company presenting to big investors to generate interest.
• Investment bankers help companies launch IPOs.
• Direct listing allows companies to sell shares without using intermediaries or creating new shares.

Secondary Market Transactions

• Secondary markets facilitate the trading of stocks after their initial release.

Key Markets

• National Securities Exchanges such as NYSE and Nasdaq are the major players.
• Over-the-Counter (OTC) markets are for smaller, riskier companies.

Broker vs. Dealer

• Brokers connect buyers and sellers.
• Dealers buy and sell from their own stock.

Nasdaq vs. OTC

• Nasdaq lists big tech companies, such as Apple, Amazon, and Google.
• OTC lists small, risky companies.

Globalization of Securities Markets

• Investing internationally is possible because the world is interconnected.
• One way to invest globally is to buy U.S. companies with international sales.
• Investing in foreign stock markets is also a way to invest globally.
• American Depositary Shares (ADS) are foreign stocks traded in the U.S.
• Political risk can be a risk of investing globally, due to different laws and government instability.
• Currency exchange rates could affect profits.

Basic Securities Transactions

• Long purchases involve buying stock expecting the price to increase so it can be sold at a profit.
• An example of a long purchase is if one buys Apple stock at $150 and sells at $180 for a $30 gain.
• Margin trading involves using borrowed money to buy stocks, which can increase profits but also losses.
• Short selling involves selling a stock without owning it, hoping the price drops so it can be re-purchased cheaper.

Investment Information

• Investment profits equal income (dividends/interest) plus capital gains (price increase).
• The time value of money means a dollar today is worth more than a dollar in the future.
• Nominal return is the return before adjusting for inflation.
• Real return is the return after adjusting for inflation, which is more accurate.
• The risk-free rate is the return on 100% safe investments, like U.S. Treasury bonds.
• Risk premium is the extra return for taking on higher risk.

Investment Risks:

• Business risk involves factors that could make the company fail.
• Financial risk involves factors such as owing too much debt.
• Inflation risk involves the risk of money losing value over time.
• Market risk involves the overall economy affecting the investment.
• Liquidity risk involves it being hard to sell quickly without losing money.

Standard Deviation & Risk Tolerance

• Standard deviation measures how much a stock's price moves.
• Risk tolerance defines that risk-averse investors prefer safety and lower returns.
• Risk-seeking investors are willing to gamble for high rewards.