Investment Study Guide - Securities Markets and Transactions PDF

**Chapter 2: Securities Markets and Transactions** **1. Securities Markets Overview** Think of the **securities market** like a giant shopping mall for financial assets (stocks, bonds, etc.). - **Goal:** Make sure **buying & selling** happens quickly and fairly, just like a well-organized s...

**Chapter 2: Securities Markets and Transactions** **1. Securities Markets Overview** Think of the **securities market** like a giant shopping mall for financial assets (stocks, bonds, etc.). - **Goal:** Make sure **buying & selling** happens quickly and fairly, just like a well-organized store checkout. - **Types of Markets:** - **Money Market** → Short-term loans (like borrowing money for a few weeks/months). - **Capital Market** → Long-term investments (stocks, bonds, company ownership). - **Broker Market** → A middleman (broker) helps connect buyers and sellers directly. - **Dealer Market** → Dealers buy/sell from their own stash (like a used car dealer). - **High-Frequency Trading** → Super-fast, computer-driven buying/selling. - **Market Conditions:** - **Bull Market 🐂** → Prices are **rising**, people feel **confident** (like a charging bull). - **Bear Market 🐻** → Prices are **falling**, people feel **nervous** (like a hibernating bear). **2. Primary Market & IPO Process** The **primary market** is where companies sell their stock to the public for the first time (like a **new sneaker release**). - **IPO (Initial Public Offering) Process:** - **Underwriting** → Investment banks help sell the stock, like a marketing team hyping a new product. - **Prospectus** → A brochure explaining everything about the company and stock offering. - **Quiet Period & Red Herring** → Limited talking about the stock before launch (like a movie spoiler ban). - **Road Show** → A company presents to big investors to **build hype** before going public. - **Investment Bankers:** Help companies launch IPOs, like event planners for a big party. - **Direct Listing:** Companies skip the middleman and sell **without** new shares (like a garage sale instead of a big launch). **3. Secondary Market Transactions** Once stocks are out in the world, they **trade on the secondary market**---kind of like **reselling sneakers on eBay**. - **Key Markets:** - **National Securities Exchanges** → The \"big leagues\" (NYSE, Nasdaq). - **Over-the-Counter (OTC) Market** → Where smaller, riskier companies trade. - **Broker vs. Dealer:** - **Brokers** connect buyers & sellers (like a real estate agent). - **Dealers** buy & sell from their own stock (like a used car lot). - **Nasdaq vs. OTC:** - **Nasdaq** → Big tech names like Apple, Amazon, Google. - **OTC** → Small, risky companies---like shopping at a **flea market**. **4. Globalization of Securities Markets** The world is connected, and you can **invest internationally** just like buying foreign brands. - **Ways to Invest Globally:** - Buy U.S. companies with international sales (e.g., McDonald\'s, Coca-Cola). - Trade on foreign stock markets. - Buy **American Depositary Shares (ADS)**, which are foreign stocks traded in the U.S. - **Risks:** - **Political Risk** → Different laws, government instability. - **Currency Exchange Risk** → Exchange rates can eat into profits. **5. Basic Securities Transactions** **Long Purchases (Playing Offense) 🏀** - Buying a stock expecting the price to **go up** → profit comes from selling higher later. - **Example:** Buying Apple stock at \$150 and selling at \$180 = **\$30 gain**. **Margin Trading (Borrowing to Invest) 💰** - Using **borrowed money** to buy stocks. Can **increase profits** but also **increase losses**. - **Example:** Investing \$1,000 with \$500 borrowed → if the stock rises, you profit **big**, but if it falls, you **lose more** than expected. **Short Selling (Betting Against a Stock) 📉** - Selling a stock **you don't own**, hoping the price **drops** so you can buy it back cheaper. - **Example:** Borrow Tesla stock at \$300, sell it, then buy it back at \$250 → **\$50 profit**. - **Big risk:** If the price goes **up**, you can **lose unlimited money**! **Chapter 3: Investment Information & Securities Transactions** **1. Online Investing** - **Pros:** Cheaper fees, faster access, more control. - **Cons:** No advisor to help, risks of overtrading, margin trading dangers. **2. Types of Investment Information** - **Descriptive:** Past data on companies (sales, stock prices). - **Analytical:** Predictions, expert opinions, and financial reports. - **Sources:** - News (Wall Street Journal, Forbes). - Government reports. - Company reports (Annual Reports, SEC filings). **3. Market Averages & Indexes** Think of indexes as **scoreboards** for the stock market. - **Dow Jones (DJIA):** Top 30 U.S. companies. - **S&P 500:** 500 major companies (better overall market view). - **Nasdaq:** Tech-heavy index (Google, Amazon, Tesla). - **Russell 2000:** Tracks small, fast-growing companies. **4. Role of Stockbrokers** - **Full-Service Brokers:** Personal advice, research, but **expensive**. - **Discount Brokers:** Cheaper, fewer services. - **Online Brokers:** Cheapest but **DIY investing**. **5. Securities Transactions & Protection** - **Market Order:** Buy/sell immediately at the best price. - **Limit Order:** Buy/sell only at a specific price. - **Stop-Loss Order:** Automatically sell when price drops too much. **Chapter 4: Return & Risk** **1. What is Return?** Your **profit** from an investment = **Income (dividends/interest) + Capital Gains (price increase).** **2. Time Value of Money (TVM) 📆💰** A **dollar today is worth more** than a dollar in the future (because you can invest it now). **3. Measuring Return** - **Nominal Return:** Before adjusting for inflation. - **Real Return:** **After** adjusting for inflation (more accurate). - **Risk-Free Rate:** Return on **100% safe** investments (like U.S. Treasury bonds). - **Risk Premium:** Extra return for taking on **higher risk**. **4. Investment Risks 🚨** - **Business Risk:** The company might fail. - **Financial Risk:** The company has too much debt. - **Inflation Risk:** Your money loses value over time. - **Market Risk:** The whole economy affects your investment. - **Liquidity Risk:** Hard to sell quickly without losing money. **5. Standard Deviation & Risk Tolerance** - **Standard Deviation:** Measures **how much** a stock's price moves up/down. - **Risk Tolerance:** - **Risk-Averse:** Prefers safety, lower returns. - **Risk-Seeking:** Willing to gamble for high rewards.