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CHAPTER 3

CHAPTER 3. Stocks. What are we going to learn in this chapter ?. Stocks. What does a stock represent ? What does it mean i f you are a stockholder ? How do you gain wealth when you own a stock ? Common Stock s. Stocks. I ncome S tocks B lue - chip S tocks G rowth S tocks

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CHAPTER 3

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  1. CHAPTER 3 Stocks

  2. Whatarewegoingtolearn in thischapter?

  3. Stocks • Whatdoes a stockrepresent? • Whatdoes it mean if you are a stockholder? • How do yougainwealthwhenyouown a stock? • CommonStocks

  4. Stocks • Income Stocks • Blue-chip Stocks • Growth Stocks • CyclicalStocks • DefensiveStocks

  5. HowStocksWork • STEP ONE Koray decides to invest in the stock market. Berna decides to sell 300 shares of Fenerbahce stock to help pay for a new car, eventhoughshe has a richhusband. • STEP TWO Koray has been thinking of investing in the Fenerbahce. He calls his broker, who is a member of the Borsa Istanbul, to get a quote on Fenerbahce. Berna checks theprices at Borsa Istanbul online.

  6. HowStocksWork • STEP THREE Koray’s broker and Berna find out the current quote and price for Fenerbahce from an electronic data system that continually updates information directly from the Floor of the Borsa Istanbul.

  7. HowStocksWork • STEP FOUR Taking into account what he already knows about Fenerbahce, Koray instructs his broker to purchase 300 shares of Fenerbahce at the current market price. Berna logs into her online brokerage account, which is linked to a brokerage firm that is a member of the Borsa Istanbul, and places an order to sell her 300 shares at the current market price.

  8. HowStocksWork • STEP FIVE Both orders are sent electronically to the Borsa Istanbul Trading Floor. • STEP SIX A Designated Market Maker (DMM) uses enhanced technology to bring together buyers and sellers, improve prices and serve as a point of accountability.

  9. HowStocksWork • STEP SEVEN Borsa Istanbultrading engine automatically executes any market or limit order that is marketable against the exchange quote up to 1 million shares. This is called auto-execution. • STEP EIGHT Both orders are represented as auction market orders in order to have the opportunity for price improvement. The DMM oversees all orders to make sure the transactions are executed fairly and in an orderly manner.

  10. HowStocksWork • STEP NINE After the transaction is executed, notices are sent to the firms originating the orders and to the consolidated tape so that a written record is made of every transaction. • STEP TEN The transaction is reported by computers and appears on the consolidated tape displays across the country and around the world

  11. HowStocksWork • STEP ELEVEN The transaction is processed electronically, crediting Koray’s brokerage firm and debiting the account of Berna’s brokerage firm. Koray’s broker calls him and tells him at what price he bought 300 shares of XYZ. In a couple of days, Koray receives a written confirmation. Berna receives confirmation from her brokerage firm electronically on her computer within seconds. These confirmations describe the tradeanditsdetails.

  12. HowStocksWork • STEP TWELVE Koray settles his account within three business days after the transaction by submitting payment to his brokerage firm for the 300 shares of Fenerbahce, plus any applicable commissions. Berna’s trade is also settled in three business days. Her account will be credited with the proceeds of the sale of stock, minus any applicable commissions.

  13. How do youthinkstockpricesaredetermined?

  14. WhatDrivesStockPrices • Financial health of a company • Whosestockswouldyouconsiderforpurchase? • Likelihoodtolosemoney • Announcements • Historicalbehavior • Future prospects • Mergers & Acquisitions

  15. WhatDrivesStockPrices • Industry • EventhoughHP’sdesktopsalesaregood, wouldyouinvest in it? Why? Why not? • Cyclicalindustries • Whenwouldyouconsiderbuyingshares of Altınbaş?

  16. WhatDrivesStockPrices • EconomicTrends • A veryprofitablefirm in Greece: buy orsell? • Whichsignalswouldyouconsider? • Consumer Price Index (CPI) • Shrinkingeconomy

  17. WhatDrivesStockPrices • Worldnews • FED Announcements • EgyptandTemSa • Chinaimprovinginvestmentconditions • Brazil’sratingbeingimproved

  18. HowtoRead a StockTable • 52 WeekHighandLow • Stock • Dividends • Yield % • P/E

  19. HowtoRead a StockTable • Sales 1000s • High • Low • Last • Change

  20. Whywouldinvestors buy stocks?

  21. HowFirmsIssueStocks • Primary market • Secondary market • Initial public offering • Seasoned equity offering

  22. HowFirmsIssueStocks • InvestmentBanking • Public offerings • Underwriters • Howmanyunderwriter/s? • Underwritingsyndicate

  23. HowFirmsIssueStocks • Advisory role • Preliminary registration statement • Red herring • Prospectus • Publicannouncement • Firm commitment

  24. HowFirmsIssueStocks

  25. HowFirmsIssueStocks • PrivatePlacements • Whybother? • Anydisadvantages?

  26. HowFirmsIssueStocks • InitialPublicOfferings • Investment bankers • Exchange approval • Prospectus • Roadshow • Bookbuilding • Revisions

  27. HowFirmsIssueStocks • Why do investors truthfully reveal their interest in an offering to the investment banker? • Might they be better off expressing little interest, in the hope that this will drive downthe offering price? • Interestexpressed • Allocation size • Optimism • Bookbuilding • Underpricing

  28. HowFirmsIssueStocks

  29. OrderTypes • Market Orders • Price-Contingent Orders • Stop Orders

  30. Stock Market Indexes

  31. Stock Market Indexes • Price-weighted index • Portfolio • Index • The portfolio and the index have…….

  32. Stock Market Indexes • Market-valueweightedindex • Total market value • S&P500

  33. Stock Market Indexes • Equallyweightedindex • Rebalancing

  34. END OF CHAPTER

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