Financial Markets

 

Chapter 2

 

 

Financial Markets Establish Prices by:

1.       High Volume

2.       Standardized Securities

3.       Concentration of Traders

 

The Markets Minimize Transaction Costs By:

 

1.       High volume markets

2.       Rules

3.       Standardization

4.       Lowered search costs

 

Organization of the Markets

1.       Primary vs. Secondary

2.       Money Markets vs. Capital Markets

3.       Organized vs. Over-the-Counter

 

Listing Requirements of NYSE

Profits > $2.5 million

Assets >  $40 million

Stock Valued at > $9 million

> 1,100,000 Shares outstanding

> 2,000 Stockholders

 

Stock Specialists and Dealers

 

Help the market establish prices by adjusting bid / ask prices to maintain constant inventory

 

 

Money Markets

 

For securities with an original maturity of less than one year

 

 

Money Market Rates

 

The Wall Street Journal  publishes daily a list of interest rates on many different financial instruments in its “Money Rates” column. (See “Today’s Contents” on page 1 of the Journal  for the location.)

 

 

 

 

The four interest rates in the “Money Rates” column that are discussed most often in the media are these:

 

1.       Prime rate: The base interest rate on corporate bank loans, an indicator of the cost of business borrowing from banks.

2.       Federal funds rate: the interest rate charged on overnight loans in the federal funds market, a sensitive indicator of the cost to banks of borrowing funds from other banks and the stance of monetary policy.

3.       Treasury bill rate: The interest rate on U.S. Treasury bills, an indicator of general interest-rate movements.

4.       Federal Home Loan Mortgage Corporation rates: Interest rates on “Freddie Mac”
guaranteed mortgages, an indicator of the cost of financing residential housing purchases.

 

Users of the Money Markets

1.       U.S. Treasury

2.       Federal Reserve

3.       Banks

4.       Money Market Mutual Funds

 

 

 

 

 

 

 

 

 

 


Money Market Instruments

1.       Treasury Bills

2.       Fed Funds

3.       Repurchase agreements

4.       NCO

5.       Commercial paper

6.       Bankers’ acceptance

 

 

 

 

 

 

 

 

 


Capital Markets

 

For securities with an original maturity greater than one year

 

 

Capital Market Instruments

 

1.       U.S. Treasury
2.       Notes and Bonds

3.       Stock

4.       Mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Types of Bonds

 

1.       Mortgage

2.       Debentures

3.       Variable Rate

4.       Government Vs. Corporate

 

Bond Features

1.       Sinking funds

2.       Covenants

3.       Call provision

4.       Conversion

 

 

 

 

 

 

 

 

 

 

 

 


Stock Represents Ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Dow Jones Industrial Average

 

An index that shows the performance of 30 large industrial firms.

 

The Thirty Firms That
Make Up the Dow Jones
Industrial Average

 

 


1.       AlliedSignal Inc.                                                

2.       Aluminum Co. of America.

3.       American Express Co.                    

4.       AT&T                                                              

5.       Boeing Co.                                                       

6.       Caterpillar Inc.  

7.       Chevron Corp.                                                    

8.       Coca-Cola Co.                                                      

9.       DuPont Co.

10.     Eastman Kodak Co

11.     Exxon Corp.

12.     General Electric Co.

13.     General Motors Corp.

14.     Goodyear Tire & Rubber Co.

15.     Hewlett-Packard

 

 

16.     IBM Co.     

17.     International Paper Co.   

18.     J.P. Morgan & Co.         

19.     Johnson and Johnson     

20.     McDonald’s Corp.         

21.     Merck & Co.        

22.     Minnesota Mining & Manufacturing Co.

23.     Philip Morris Co.  

24.     Procter & Gamble Co.

25.     Sears, Roebuck & Co.

26.     Travelers Group

27.     Union Carbide Corp.

28.     United Technologies Corp.

29.     Wal-Mart

30.     Walt Disney Co.


Stock Prices

 

Stock prices are published daily, and in the Wall Street Journal
they are reported in the sections “NYSE— Composite Transactions,” “Amex—Composite Transactions,” and “ Over-the-counter Markets.”

 

 

The New York Stock Exchange (NYSE) and American Stock Exchange (Amex) stock prices are quoted in the following format:

 

 

52 weeks                                                                                                                            Yld                                   Vol                                                                     Net

Hi                        Lo                      Stock                                 Sym               Div              %              PE                 100s                   Hi                      Lo               Close                   Chg

31                        24                      InAltum                              IAL                1.00             3.7             17                      52                  27 1/8                   27                 27 1/8                    -1/8                   

170 1/8                  89 1/8                  IBM                                    IBM                1.40               .9             15                45740                158 1/4                 155 3/4          157 1/4                  +7/8

27 1/2                    25 1/2                  IBM dep pf                                                 1.88             7.1                                 372      26 5/8                               26 3/8             26 5/8                    +1/4

19 1/8                    12 7/8                  InFam Entn B                       FAM                                                42                    328                  18                       17 5/8             18                        +1/8                  

4 1/4                      3 3/8                    IntFinBear wt                                                                                                    83                    3 1/2                     3 1/4               3 1/2                       

 

 

 

 

 

 

 

 

The following information is included in each column. International Business Machines (IBM) common stock is used as an example.

52 Weeks Hi                 Highest price of  a share in the past 52 weeks: 170 1/8

 

Yld %                            Yield for stock expres-sed as annual dividends divided by today’s closing price: 0.9%

PE                                 Price-earnings ratio; the stock price dividend by
the annual earnings per share: 15

Vol 100s                        Number of shares (in hundreds) traded that day; 4,574,000 shares

Hi                                   Highest price of  a share that day: 158 1/4

Lo                                  Lowest price of a share that day: 155 3/4

Close                             Closing price (last Price) that day: 157 1/4

Net Chg                         Change in the closing price from the previous day: +7/8

 

 

Price quoted for shares traded over-the-counter (through dealers rather than on an organization exchange) are sometimes quoted with the same information, but in many cases only the bid price (the price the dealer is willing to pay for the stock) and the asked price (the price the dealer is willing to sell the stock for) are quoted.