Module 3 Study Guide - UGBA 10 CHAPTER 16 SECURITIES AND...

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UGBA 10 CHAPTER 16 – SECURITIES AND INVESTMENTS 1. Describe the role of securities markets 2. Explain the difference between primary securities markets and secondary securities markets 3. Discuss the value to shareholders of common stock and preffered stock 4. Identify the major stock exchanges and stock markets 5. Distinguish among various types of bonds in terms of their issuers and safety 6. Describe the investment opportunities offered by mutual funds 7. Describe the risk-return relationship, and discuss the use of diversification and asset allocation for  investments 8. Explain the process by which securities are bought and sold 9. Explain how securities markets are regulated I. Introduction story on “Late Trading” – analogous to betting after a  game is over when you know  the outcome a. “late trading” trading in fund shares after the market closes is ILLEGAL.  When preferred  customers get to trade (buy or sell) at the pre-closing price. b. A great way to erase market risk and take profits that are inaccessible to honest investors c. Preferential trading arrangements for big-money clients can be draining off billions of  dollars from ordinary investors. d. Mutual funds trading is a risky, big-stakes industry featuring rapid buying and selling in  the financial marketplace II. SECURITIES MARKETS a. Securities   - stocks, bonds, and mutual funds that represent SECURED or financially  valuable claims by investors. i. Holders of securities  have a stake in the business that issued them.  ii. Stockholders  have claims on some of a corporation’s assets and a say in how  the company is run because each share of stock represents part ownership iii. Bonds  represent strictly FINANCIAL CLAIMS FOR MONEY owed to holders by  a company 1. Companies sell bonds to raise long-term funds iv. SECURITIES MARKETS –  markets in which stocks and bonds are sold v. Mutual funds  – investments by individuals who pool their money to buy stocks,  bonds and other assets. 1. Managed by financial professionals in the investment companies that  create, buy, and sell the funds. 2. They are NOT bought and sold on securities markets     b. Primary and secondary securities markets  i. Primary securities markets   - NEW stocks and bonds (but not mutual funds)  are traded by firms and governments 1
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1. Private placements  (securities sold to single buyers or small groups of  buyers) are desirable for the people issuing the stocks and bonds  because they allow issuers to keep their plans confidential a. Because private placements cannot be resold in the open  market, buyers usually demand higher rate of returns from the  issuers 2.
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