Jimmy Gentry presents "Teaching Markets" during the Reynolds Center for Business Journalism's annual Business Journalism Week, Jan. 4, 2014. Gentry is the Clyde M. Reed Teaching Professor at the University of Kansas' School of Journalism and Mass Communications.
The annual event features two concurrent seminars, Business Journalism Professors and Strictly Financials for journalists.
For more information about business journalism training, please visit http://businessjournalism.org.
Understanding Markets Business Journalism Professors Jan. 4, 2014
Donald W. Reynolds National Center For Business Journalism At Arizona State University
n n n n n James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas [email protected]
Basic Types of Risk n n Systematic or market Unsystematic or nonmarket. Also called business risk. Can be diversified away. Strictly Financial
Specific Types of Risk n n n n n n n n n Financial risk, credit risk, default risk Market risk Interest rate risk Purchasing power or inflation risk Event risk Exchange-rate or foreign exchange risk Liquidity risk Political or sovereign risk Tax risk
Types of Businesses n n n Sole proprietorship Partnership Corporation n n n n n Limited liability Greater access to capital Permanency Flexibility Double taxation
Types of Structures Private corporations n Public corporations n Non-profits n
Types of Investments n n n Stocks Bonds Other n Options, futures, commodities, real estate, collectibles, currencies
Types of Markets n n n Equity: Stocks Credit: Bonds, debt or fixed income Others n n Derivatives (such as options and futures), commodities, real estate, collectibles, currencies Historically, the amount of long-term debt financing issued in the U.S. greatly exceeds the volume of equity financing Strictly Financial
Stock n Stockholders want: n n n Stock price to increase Dependable dividend stream Increase in size of dividend
Types of Stock n n Common stock Preferred stock
Common Stock n n Risk: Lose your money if company falters Reward: Owners share in success when company does well n n Appreciation Dividends
Dividends n n n n Represent a return on capital invested by shareholders. Board must declare dividend for it to be paid. Dividend payment is not a business expense. It is an after-tax expense. Usually relationship between companys age and size, and the dividends it pays.
Preferred Stock n n n n Reduced risk but reward may be limited Dividend amount is stated and is paid before dividends on common If company is liquidated, holders are preferred over common holders. Dividends dont necessarily increase if company prospers.
Bond n n n n n n Bond is debt a company owes Individual or company loans money to the company by buying a bond Bond pays interest over a fixed period of time Principal is repaid to the lender or holder of the bond at end of the term Interest rate is typically fixed when the bond is sold (i.e., fixed income security) Interest rate is comparable to what other bonds, with that rating, are paying
Bond Terminology n n n n Interest rate: Fixed percentage of the bonds purchase price that is paid annually to the bond holder Yield: Return on investment if bond is held to maturity. Equals interest rate. If bond is traded before maturity date, yield could change although interest rate stays the same. Par value: Dollar amount paid for bond at time of issue Maturity date: When bond comes due
Issuers Prefer Bonds n n n When companies need to raise money, they can issue stock or sell bonds They often prefer bonds, in part because issuing more stock can dilute the value of shares investors already own Bonds also may have income tax advantages
A Quasi-Bond? n n n Is preferred stock debt (i.e., a bond) in disguise? Preferred holders have a guaranteed dividend. Is that like the fixed interest rate of a bond? Why do investors pick common, preferred or bonds?
Risk and Reward
Yield Yield Curve Maturity
Equity or Securities Markets n Primary market n n n Go public Private placement Secondary market
Going Public n n n n Entrepreneurs have an idea. Company grows with an investment from the private equity market (venture capital). Owners decide to go public. Register with SEC to make an initial public offering (IPO). Investment bankers typically underwrite the offering through a syndicate.
Going Public (cont.) n n Company prepares a prospectus, which is a detailed analysis of the companys financial history, its products and services, as well as managements background and experience. Prospectus should identify and assess risk factors the company faces.
IPO Terms n n n n Prospectus Road show Quiet period Lockup period
Shelf Registration n n Firm can file one registration statement for a relatively large block of stock and sell parts over a two-year period This can reduce red tape and costs, and because stock can be sold directly to institutional investors, can eliminate the underwriting fee
Private Placement n n n New issues can be sold in large lots to a small group of buyers. Allows start-up firms to show appeal by raising capital on their own. Additional shares later can be offered through an underwriter. Many debt issues are placed privately, usually to large buyers such as insurance companies.
Secondary Offering n If company already is public, it can sell more stock through a secondary offering. n n Causes dilution Major owners sell their shares. They get the funds so no dilution.
Wall Street n n Got its name from a wall of brush and mud built by early settlers to protect the city of New York from attacks (1609) Site of New Yorks first organized stock trading
New York Stock Exchange n n n In March 1792, Wall Street leaders met to establish an improved auction market In May 1792, 24 men signed an agreement to trade securities only among themselves, maintain fixed commission rates and avoid other auctions Considered the origination of NYSE
NYSE (cont.) n n n Until March 2006, was owned by 1,366 seat-holding members Highest price ever paid for a seat was $4 million Price was determined by auction.
NYSE Members n Floor brokers n n n House brokers Independent brokers Specialists n n n n n Manage auction process Execute orders for brokers Serve as catalysts Provide capital Stabilize prices
In The Day, Buy or Sell Order n n n Tell your broker or registered representative to buy or sell a stock at the current price, or market price. Called a market order. If you name the price to buy or sell, youre making a limit order. Tell your broker to buy or sell once the price hits a specific price, youre placing a stop order at a stop price.
Trading on the NYSE Floor n n n Trading occurs in the Big Room Numerous stations, each with a roughly figure-eight shape, with counters and screens above. Called trading posts. Each counter is a specialists post
NYSE Floor (cont.) n n n n Order comes to the booth that is rented by a brokerage house Floor broker takes order to appropriate specialists post Specialist keeps a list of unfilled orders. Processes orders as prices move. Specialists job is to maintain an orderly market in the stock (match buyers/sellers)
NYSE Floor (cont.) n n n n n Stocks or groups of stocks are traded at trading posts near the specialists positions. Floor brokers can use a specialist or trade between themselves, called trading in the crowd Terminals display the stocks activity. After every trade, a reporter records the stock symbol, price and initiating broker. Successful trades are confirmed.
NYSE Floor (Then & Now)
Round or Odd Lots n n Round lots: Buying or selling stock in multiples of 100 shares Odd lots: Buying or selling stock in other quantities
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