Chapter Eight

Stock Markets

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserv

 Overview of Stock Markets


 Primary
Primarystock
stockmarkets
marketsallow
allowsuppliers
suppliersof
offunds
fundsto
toraise
raiseequity
equity
capital
capital
 Secondary

Secondarystock
stockmarkets
marketsare arethe
themost
mostclosely
closelywatched
watchedandand
reported
reportedof
ofall
allfinancial
financialmarkets
markets
 Stockholders

Stockholdersarearethe
thelegal
legalowners
ownersofofaacorporation
corporation

 have
haveaaright
rightto
toshare
shareininthe
thefirm’s
firm’sprofits
profits(e.g.,
(e.g.,through
throughdividends)
dividends)

 are
areresidual
residualclaimants
claimants

 have
havelimited
limitedliability
liability

 have
havevoting
votingrights
rights(e.g.,
(e.g.,to
toelect
electboard
boardof ofdirectors)
directors)

McGraw-Hill/Irwin 8-2
 Common Stock


 Common
Commonstock stockisisthe
thefundamental
fundamentalownership
ownershipclaim claimin inaa
public
publicor
orprivate
privatecorporation
corporation
 Dividends

Dividendsare arediscretionary
discretionaryand andarearethus
thusnot
notguaranteed
guaranteed
 Common

Commonstockholders
stockholdershavehavethethelowest
lowestpriority
priorityclaim
claimin inthe
the
event
eventofofbankruptcy
bankruptcy(i.e.,
(i.e.,aa residual
residualclaim)
claim)
 Limited

Limitedliability
liabilityimplies
impliesthat
thatcommon
commonstockholders
stockholderscan canlose
lose
no
nomore
morethan
thantheir
theiroriginal
originalinvestment
investment
 Common

Commonstockholders
stockholderscontrol
controlthethefirm’s
firm’sactivities
activitiesindirectly
indirectlybyby
exercising
exercisingtheir
theirvoting
votingrights
rightsin inthe
theelection
electionofofthe
theboard
boardof of
directors
directors

McGraw-Hill/Irwin 8-3
 Common Stock Voting Rights


 Dual-class
Dual-classfirms
firmshave
havetwo
twoclasses
classesofofcommon
commonshares
shares
outstanding,
outstanding,with
withdifferent
differentvoting
votingrights
rightsassigned
assignedto
toeach
each
class
class
 With

Withcumulative
cumulativevoting,
voting,the
thenumber
numberof ofvotes
votesassigned
assignedtoto
each
eachstockholder
stockholderequals
equalsthe
thenumber
numberof ofshares
sharesheld
heldmultiplied
multiplied
by
bythe
thenumber
numberofofdirectors
directorstotobe
beelected
elected
 the
 thenumber
numberof ofshares
sharesneeded
neededtotoelect
electppdirectors,
directors,NNpp,,is:
is:
NNp ==[(p
[(pxx##of
ofshares
sharesoutstanding)/(#
outstanding)/(#of
ofdirectors
directorsto
tobebeelected
elected++
p
1)]
1)]+1
+1

 AAproxy
proxyvote
voteallows
allowsstockholders
stockholdersto
tovote
voteby
byabsentee
absenteeballot
ballot
(e.g.,
(e.g.,by
byinternet
internetor
orby
bymail)
mail)

McGraw-Hill/Irwin 8-4
 Peak to Trough Aggregate U.S.
Stock Value & Recent Value

Mkt Value U.S. Stock ($Trill.)

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$0.00
2007 peak 2009 March 2010 2013

McGraw-Hill/Irwin 8-5
 Stock Returns


 The
Thereturns
returnson
onaastock
stockover
overone
oneperiod
period(R
(Rt)t)can
canbe
bedivided
divided
into
intocapital
capitalgains
gainsand
anddividend
dividendreturns:
returns:

Pt  Pt  1 Dt
Rt  
Pt  1 Pt  1
PPt ==stock
stockprice
priceat
attime
timett
t
DDt ==dividends
dividendspaid
paidover
overtime
timett––11to
tott
t
(P
(Pt t––PPt t––11))//PPt t––11==capital
capitalgain
gainover
overtime
timett––11to
tott
DDt //PPt – 1 ==return
returnfrom fromdividends
dividendspaid
paidover
overtime
timett––11to
tott
t t–1

McGraw-Hill/Irwin 8-6
 Stock Returns


 Suppose
Supposean aninvestor
investorbuys
buys10
10shares
sharesof ofstock
stockpriced
pricedatat$55.10
$55.10
and
andsells
sellsthe
thestock
stockone
oneyear
yearlater
laterfor
for$56.30
$56.30after
aftercollecting
collectingaa
$0.30
$0.30dividend
dividendperpershare.
share. What
Whatwaswasthe
theinvestor’s
investor’spre-tax
pre-tax
holding
holdingperiod
periodreturn?
return?

$56.30  $55.10 $0.30

HPR    2.18%  .54%  2.72%
$55.10 $55.10

McGraw-Hill/Irwin 8-7
 Stock Returns


 IfIfdividend
dividendincome
incomeisistaxed
taxedat
ataa28%
28%rate
rateand
andcapital
capitalgains
gainsare
are
taxed
taxedat at20%,
20%,what
whatwas
wasthe
theinvestor’s
investor’safter-tax
after-taxholding
holdingperiod
period
return?
return?

HPR A  T 2.18%(1  20%)   0.54%(1  28%)  2.13%

McGraw-Hill/Irwin 8-8
 Preferred Stock

 Preferred

Preferred stock
stock isis aa hybrid
hybrid security
security that
that has
has
characteristics
characteristics of
of both
both bonds
bonds and
and common
common stock
stock
 Generally

Generally has
has fixed
fixed dividends
dividends that
that are
are paid
paid
quarterly
quarterly
 Generally

Generally does
does not
not have
have voting
voting rights
rights unless
unless
dividend
dividend payments
payments areare missed
missed
 Nonparticipating

Nonparticipating versus
versus participating
participating
 Cumulative

Cumulative versus
versus noncumulative
noncumulative

McGraw-Hill/Irwin 8-9
 Primary Stock Markets


 Primary
Primarymarkets
marketsare
aremarkets
marketsininwhich
whichcorporations
corporationsraise
raise
funds
fundsthrough
throughnew
newissues
issuesof
ofstock,
stock,most
mostof ofthe
thetime
timethrough
through
investment
investmentbanks
banks
 Investment

Investmentbanks
banksact
actas
asdistribution
distributionagents
agentsin in best
bestefforts
efforts
underwriting
underwriting
 Investment

Investmentbanks
banksact
actas
asprincipals
principalsinin firm
firmcommitment
commitment
underwriting
underwriting
gross
grossproceeds
proceeds––net
netproceeds
proceeds==underwriter’s
underwriter’sspread
spread

 AAsyndicate
syndicateisisaagroup
groupofofinvestment
investmentbanks
banksworking
workingin in
concert
concertto
toissue
issuestock;
stock;the
thelead
leadunderwriter
underwriterisisthe
the originating
originating
house
house

McGraw-Hill/Irwin 8-10
 Primary Stock Markets


 An
Aninitial
initialpublic
publicoffering
offering(IPO)
(IPO)isisthe
thefirst
firstpublic
publicissue
issueof
of
financial
financialinstruments
instrumentsbybyaafirm
firm
A

Aseasoned
seasonedoffering
offeringisisthe
thesale
saleof
ofadditional
additionalsecurities
securitiesby
byaa
firm
firmwhose
whosesecurities
securitiesare
arealready
alreadypublicly
publiclytraded
traded

 preemptive
preemptiverights
rightsgive
giveexisting
existingstockholders
stockholdersthe
theability
abilityto
to
maintain
maintaintheir
theirproportional
proportionalownership
ownership

 AAred
redherring
herringprospectus
prospectusisisaapreliminary
preliminaryversion
versionof
ofthe
the
prospectus
prospectusthat
thatdescribes
describesaanew
newsecurity
securityissue
issue
 Shelf

Shelfregistration
registrationallows
allowsfirms
firmstotooffer
offermultiple
multipleissues
issuesofof
stock
stockover
overaatwo-year
two-yearperiod
periodwith
withonly
onlyone
oneregistration
registration
statement
statement

McGraw-Hill/Irwin 8-11
 Secondary Stock Markets

 Secondary

Secondary stock
stock markets
markets are
are the
the markets
markets in
in
which
which stocks,
stocks, once
once issued,
issued, are
are traded
traded among
among
investors
investors
 The

The U.S.
U.S. has
has several
several major
major stock
stock markets
markets

 the
theNew
NewYork
YorkStock
StockExchange
ExchangeEuronext
Euronext
(NYSE/Euronext)
(NYSE/Euronext)
 The
TheNYSE/Euronext
NYSE/EuronextExchange
Exchangewas
waspurchased
purchasedby
byICE
ICEinin
2013.
2013.
 the

theNational
NationalAssociation
AssociationofofSecurities
SecuritiesDealers
Dealers
Automated
AutomatedQuotation
Quotation(NASDAQ)
(NASDAQ)
 Bats/Direct

Bats/DirectEdge
Edge(former
(formerECNs)
ECNs)

McGraw-Hill/Irwin 8-12
 NYSE Euronext


 Trading
Tradingoccurs
occursat
ataaspecific
specificplace
placeon
onthe
thefloor
floorof
ofthe
the
exchange
exchangecalled
calledaa trading
tradingpost
post


 Each
Eachstock
stockhas
hasaaspecial
specialmarket
marketmaker
makercalled
calledaa specialist
specialist
or
orDesignated
DesignatedMarket
MarketMaker
Maker(DMM)
(DMM)that
thatmaintains
maintains
liquidity
liquidityfor
forthe
thestock
stockat
atall
alltimes
times

McGraw-Hill/Irwin 8-13
 NYSE Euronext


 Three
Threetypes
typesof
oftransactions
transactionsoccur
occurat
attrading
tradingposts
posts

 aamarket
marketorder
orderisisan
anorder
orderto totransact
transactat
atthe
thebest
bestprice
priceavailable
available
when
whenthetheorder
orderreaches
reachesthe thetrading
tradingpost
post

 aalimit
limitorder
orderisisan
anorder
orderto totransact
transactat
ataaspecified
specifiedprice
price

 specialists
specialiststransact
transactfor
fortheir
theirown
ownaccount
account


 Program
Programtrading
tradingisisthe
thesimultaneous
simultaneousbuying
buyingandandselling
sellingof
ofaa
portfolio
portfolioof
ofatatleast
least15
15different
differentstocks
stocksvalued
valuedatatmore
morethan
than$1
$1
million
millionusing
usingcomputer
computerprograms
programsto toinitiate
initiatethe
thetrades
trades


 Circuit
Circuitbreakers
breakersgive
giveinvestors
investorstime
timeto
tomake
makeinformed
informed
choices
choicesduring
duringperiods
periodsofofhigh
highmarket
marketvolatility
volatility

McGraw-Hill/Irwin 8-14
 Circuit Breakers

Drop in DJIA* Impact

1,450 point drop before 2:00 pm Trading halted for one hour
1,450 point drop 2:00-2:30 pm Trading halted for 30 minutes
1,450 point drop after 2:30 pm No halt
2,900 point drop before 1:00 pm Trading halted for two hours
2,900 point drop 1:00-2:00 pm Trading halted for one hour
2,900 point drop after 2:30 pm Trading halted for the rest of the day
4,350 point drop anytime Trading halted for the rest of the day
Source: Text
* the point drops are approximately 10%, 20% and 30% respectively.

McGraw-Hill/Irwin 8-15
 Trading on NYSE Euronext
and AMEX

Order
Order Order
Order Order
Order
Investor
Investor Shares
Shares
Broker
Broker Shares
Shares
Comm.
Comm. SharesShares
Market
Market
or
or Maker
Makeroror
Cash
Cash Cash
Cash Floor
Floor
Cash
Cash Other
OtherFloor
Floor
Broker
Broker Broker
Broker

McGraw-Hill/Irwin 8-16
 Stock Market Quotes

 Name

Name  Volume

Volume
 Symbol

Symbol  52 Wk High

52 Wk High
 Open

Open  52

52 Wk
Wk Low
Low
 High

High  Div

Div
 Low

Low  Yield

Yield
 Close

Close  P/E

P/E
 Net

Net Chg
Chg  YTD

YTD % % Chg
Chg
%

% Chg
Chg

McGraw-Hill/Irwin 8-17
 Exchange Traded Funds (ETFs)

 Pioneered

Pioneered by
by the
the former
formerAMEX
AMEX (now
(now NYSE/AMEX)
NYSE/AMEX)

 ETFs
ETFsare
areindex
indexfunds
fundsthat
thatare
arelisted
listedon
onan
anexchange
exchangeand
and
can
canbe
betraded
tradedintraday
intradayand
andshorted
shorted


 Prices
Pricesmay
maynot
notexactly
exactlymatch
matchan
anindex
index

McGraw-Hill/Irwin 8-18
 NASDAQ and OTC Markets


 NASDAQ
NASDAQwas wasthe
theworld’s
world’sfirst
firstelectronic
electronicmarket
marketandandhas
has
no
nophysical
physicaltrading
tradingfloor
floor
 Provides

Providescontinuous
continuoustrading
tradingforforthe
themost
mostactive
activestocks
stockstraded
traded
over-the-counter (OTC)
over-the-counter (OTC)
 Primarily

Primarilyaadealer
dealermarket
marketwhere
wheremany,
many,often
oftenmore
morethan
than20,
20,
dealers
dealersact
actas
asmarket
marketmakers
makers
A

Asmall
smallorder
orderexecution
executionsystem
system(SOES)
(SOES)provides
provides
automatic
automaticorder
orderexecution
executionfor fororders
ordersofofless
lessthan
thanororequal
equalto
to
1,000
1,000shares
shares
 The

TheNASD
NASDmaintains
maintainsan anelectronic
electronic“OTC
“OTCbulletin
bulletinboard”
board”and
and
“pink
“pinksheets”
sheets”forforsmall
smallfirms
firmsthat
thatare
arenot
notpart
partof
ofthe
the
NASDAQ
NASDAQ

McGraw-Hill/Irwin 8-19
 Secondary Stock Markets


 Choice
Choiceof
ofmarket
marketlistings
listings

 NYSE
NYSEhas hasextensive
extensivelisting
listingrequirements
requirements(e.g.,
(e.g.,firm
firmmarket
marketvalue
value
and
andtrading
tradingvolume)
volume)

 NASDAQ
NASDAQrequirements
requirementsare arecheaper
cheaperand
andcan
canbebemetmetby
bysmaller
smaller
firms
firmswith
withless
lessactive
activetrading
trading

 Electronic
Electroniccommunication
communicationnetworks
networks(ECNs)
(ECNs)

 normal
normaltrading
tradingoccurs
occursbetween
between9:30
9:30a.m.
a.m.and
and4:00
4:00p.m.
p.m.eastern
eastern
standard
standardtime
time

 extended-hours
extended-hourstrading
tradingoccurs
occursthrough
throughcomputerized
computerized
alternative
alternativetrading
tradingsystems
systems(ATSs)
(ATSs)a.k.a.
a.k.a.ECNs
ECNs

 BATS
BATS(Better
(BetterAlternative
AlternativeTrading
TradingSystem)
System)hashasnow
nowbecome
becomeanan
exchange;
exchange;

McGraw-Hill/Irwin 8-20
 Secondary Stock Markets


 Online
Onlinetrading
tradingvia
viathe
theinternet
internetisisbecoming
becomingincreasingly
increasingly
popular
popularwith
withboth
bothindividual
individualand
andprofessional
professionalinvestors
investors

McGraw-Hill/Irwin 8-21
 Flash Trading


 On
OnMay
May6,
6,2010,
2010,the
thefinancial
financialmarkets
marketsexperienced
experiencedthe
the‘flash
‘flash
crash.’
crash.’

 Markets
Marketsfell
fellabout
about5%
5%ininaavery
verybrief
brieftime,
time,only
onlyto
tojust
justas
asquickly
quickly
recover
recovermost
mostof ofthe
theloss.
loss.

 Even
Evennow
nowaadefinitive
definitivecause
causeisisnot
notknown,
known,but
butsupposedly
supposedly
trades
tradesof
of$4.1
$4.1billion
billionS&P500
S&P500futures
futurescontracts
contractsbybyaaKansas
Kansas
City
Citybased
basedmutual
mutualfund,
fund,Asset
AssetStrategy
StrategyFund,
Fund,triggered
triggeredthe
the
crash
crash

McGraw-Hill/Irwin 8-22
 Flash Trading


 In
Inflash
flashtrading,
trading,traders
tradersare
areallowed
allowedto tosee
seeincoming
incomingbuybuyor
or
sell
sellorders
ordersmilliseconds
millisecondsearlier
earlierthan
thangeneral
generalmarket
markettraders
traders
 Flash

Flashtraders
tradersthen
thenuse
usecomputerized
computerizedstatistical
statisticalanalysis
analysistoto
generate
generatehigh
highfrequency
frequencytrading
tradingstrategies
strategiesthat
thatare
areexecuted
executed
by
bycomputer
computeras aswell
well

 Pro:
Pro:Flash
Flashtrading
tradingcreates
createsmore
moreliquidity
liquidityand
andthe
thepossibility
possibilityof
of
price
priceimprovement
improvement

 Con:
Con:
 Creates
Createsaadisadvantage
disadvantageforforregular
regulartraders
tradersand
andinvestors
investorswho
who
are
arenot
notallowed
allowedto toview
viewincoming
incomingorders
orders
 High
Highvolume
volumeof oftrading
tradinggenerated
generatedby bymultiple
multiplecomputers
computerscancan
lead
leadto
toevents
eventslike
likethe
theso
socalled
calledflash
flashcrash
crash

McGraw-Hill/Irwin 8-23
 Flash Trading


 As
Asaaresult
resultofofthe
theflash
flashcrash
crashthe
theSEC
SECimposed
imposedcircuit
circuitbreaker
breaker
rules
rulesfor
forindividual
individualstocks
stocks

 Trading
Tradingisishalted
haltedififthe
theprice
pricebreaks
breaksthe
theprice
priceband
bandcalculated
calculated
as
as price band = (Reference Price) ± [(Reference price)××
price band = (Reference Price) ± [(Reference price)
(Percentage
(Percentageparameter)]
parameter)]

McGraw-Hill/Irwin 8-24
 Naked Access and Dark Pools


 Naked
Nakedaccess
accessoccurs
occurswhen
whenbrokers
brokersand
andexchanges
exchanges
allow
allowsome
sometraders
tradersto
toengage
engageininhigh
highfrequency
frequencytrades
trades
anonymously
anonymouslyusing
usingthe
thebroker’s
broker’saccess
accesscode
code


 Dark
DarkPools
Poolsare
aretrades
tradesthat
thatoccur
occurononalternative
alternativetrading
trading
platforms
platforms(such
(suchasaselectronic
electroniccommunication
communicationnetworks)
networks)
that
thatdo
donot
notreport
reportthe
thedetails
detailsof
ofthe
thetrade
tradeon
onorder
orderbooks
books

 An
Anestimated
estimated15%
15%ofofdaily
dailytrading
tradingnow
nowoccurs
occursthrough
throughdark
darkpools
pools

 SEC
SECisisconsidering
consideringrequiring
requiringgreater
greaterdisclosure
disclosureofofdark
dark
pool
pooltrading
tradingand
andrequiring
requiringhigh
highfrequency
frequencytraders
tradersto
to
register
registeras
asbroker/dealers
broker/dealers

McGraw-Hill/Irwin 8-25
 Stock Market Indexes


 AAstock
stockmarket
marketindex
indexisisthe
thecomposite
compositevalue
valueof
ofaagroup
groupof
of
secondary
secondarymarket-traded
market-tradedstocks
stocks
 Price-weighted

Price-weightedindex
index

 the
theDow
DowJones
JonesIndustrial
IndustrialAverage
Average(DJIA),
(DJIA),composed
composedofof30
30
companies,
companies,isisthe
themost
mostwidely
widelyknow
knowstock
stockmarket
marketindex
index

 Value-weighted
Value-weightedindexes
indexes

 NYSE
NYSEComposite
Composite

 Standard
Standard&&Poor’s
Poor’s500
500

 NASDAQ
NASDAQComposite
Composite

 Wilshire
Wilshire5000
5000

McGraw-Hill/Irwin 8-26
 Stock Markets

 Households & mutual funds are the largest U.S.

holders of corporate stock

McGraw-Hill/Irwin 8-27
 Stock Market Holdings and the
Aftermath of the Crisis
Modified Text TABLE 8–4 Holders of Corporate Stock (in billions of dollars)
% of % of
Sector 2007 Total 2013 Total Change
Household sector $9,975.00 37.8% $11,242.80 39.53% 1.70%
State & local govt. 111.40 0.4% 68.50 0.24% -0.18%
Rest of world 2822.00 10.7% 3445.80 12.12% 1.41%
Federal Government 0.00 0.0% 38.60 0.14% 0.14%
Monetary Authority 0.00 0.0% 0.00 0.00% 0.00%
Depository Institution 68.60 0.3% 96.80 0.34% 0.08%
Life insurance companies 1505.10 5.7% 1654.90 5.82% 0.11%
Property-casualty insurers 248.50 0.9% 273.40 0.96% 0.02%
Private pensions 2829.00 10.7% 2283.30 8.03% -2.70%
Public pensions 2210.50 8.4% 2360.90 8.30% -0.08%
Mutual funds 5701.30 21.6% 5557.80 19.54% -2.08%
Closed-end funds 153.60 0.6% 107.30 0.38% -0.21%
ETFs 521.90 2.0% 1195.90 4.21% 2.23%
Brokers & Dealers 220.60 0.8% 112.40 0.40% -0.44%
Finance Companies 0.00 0.0% 0.00 0.00% 0.00%
$26,367.50 100.0% $28,438.40 100.0%

McGraw-Hill/Irwin 8-28
 Stock Markets

 Does

Does the
the stock
stock market
market forecast
forecast the
the economy?
economy?
Leading Economic Indicators
Average weekly hours of manufacturing production workers
Average weekly initial claims for unemployment insurance
Manufactures’ new orders for consumer goods and materials
Vendor performance, slower deliveries diffusion index
Manufactures’ new orders for nondefense capital goods
Building permits for new private housing units
Stock prices
Money supply (M2)
Interest rate spread of 10 year Treasury over federal funds rate
Index of consumer expectations

McGraw-Hill/Irwin 8-29
 Stock Markets

 Market

Market efficiency
efficiency refers
refers to
to the
the extent
extent and
and speed
speed
with
with which
which financial
financial security
security prices
prices reflect
reflect
unexpected
unexpected news
news events
events

 weak
weakform formmarket
marketefficiency
efficiency
 IfIfan
aninvestor
investorcan
canuse
usehistorical
historicalnews,
news,or orhistorical
historicalprice
price
and
andvolume
volumeinformation,
information,to toconsistently
consistentlypredict
predictfuture
future
stock
stockprice
pricechanges
changesthen thenthe
themarkets
marketsarearenot
notweak
weakformform
efficient
efficient
 semistrong

semistrongform formmarket
marketefficiency
efficiency
 IfIfone
onecancanuse
useany
anypublicly
publiclyavailable
availableinformation,
information,including
including
forecasts
forecastsbased
basedon onpublicly
publiclyavailable
availableinformation,
information,to to
consistently
consistentlypredict
predictfuture
futurestock
stockprice
pricechanges
changesthen
thenthethe
markets
marketsare arenot
notsemistrong
semistrongform formefficient
efficient

McGraw-Hill/Irwin 8-30
 Stock Markets

 Market

Market efficiency
efficiency refers
refers to
to the
the extent
extent and
and speed
speed
with
with which
which financial
financial security
security prices
prices reflect
reflect
unexpected
unexpected news
news events
events

 strong
strongform
formmarket
marketefficiency
efficiency
 IfIfone
onecan
canuse
useany
anyinformation,
information,including
including‘inside’
‘inside’
information
informationto
toconsistently
consistentlypredict
predictfuture
futurestock
stockprice
price
changes
changesthen
thenthe
themarkets
marketsare
arenot
notstrong
strongform
formefficient
efficient

McGraw-Hill/Irwin 8-31
 Stock Market Regulations


 The
TheSecurities
Securitiesand
andExchange
ExchangeCommission
Commission(SEC)
(SEC) isisthe
the
primary
primaryregulator
regulatorof
ofstock
stockmarkets
markets

 Promote
Promotefull
fulland
andfair
fairdisclosure
disclosureof
ofinformation
informationon
onsecurities
securitiesand
and
ensure
ensurefair
fairtreatment
treatmentofofinvestors
investors

 Enforce
EnforceSecurities
SecuritiesAct
Actofof1933/Securities
1933/SecuritiesExchange
ExchangeActActof
of1934
1934

 Prosecute
ProsecuteInside
InsideTrading
Trading

 Galleon
GalleonFund,
Fund,Raj
RajRajaranam
Rajaranam

 SAC
SACCapital
CapitalAdvisors
AdvisorsLP
LP


 SEC
SECfailed
failedto
touncover
uncoverMadoff
Madofffraud;
fraud;significant
significantturnover
turnoverof
of
personnel
personnelsince
since

 SEC
SEChas
hasfailed
failedto
toimplement
implementmany
manyof ofthe
thechanges
changesrequired
requiredby
by
the
theDodd-Frank
Dodd-Frankbill bill

McGraw-Hill/Irwin 8-32
 Stock Market Regulations


 The
TheFinancial
FinancialIndustry
IndustryRegulatory
RegulatoryAuthority
Authority (FINRA)
(FINRA)isis
the
theregulator
regulatorfor
forall
allU.S.
U.S.securities
securitiesfirms.
firms.
 FINRA

FINRAoversees
overseesregistering
registeringand
andeducating
educatingbrokers
brokersandand
dealers,
dealers,examining
examiningsecurities
securitiesfirms,
firms,promulgating
promulgatingrules,
rules,
enforcing
enforcingfederal
federalsecurities
securitieslaws,
laws,and
andconducting
conductingdispute
dispute
arbitration
arbitration

McGraw-Hill/Irwin 8-33
 International Aspects of Stock
Markets

 U.S.
U.S.stock
stockmarkets
marketsarearethe
theworld’s
world’slargest
largest
 European

Europeanmarkets
marketshave
haveincreased
increasedtheir theirshare
shareofofthe
theglobal
global
market
marketwith
withthe
theadvent
adventof ofaacommon
commoncurrency,
currency,the
theEuro,
Euro,but
but
hurt
hurtby
bythe
theEuro
Euroarea
areacrisis
crisis
 Growth

Growthhashasrecently
recentlystrengthened
strengthenedin inthe
theU.K.,
U.K.,Canada,
Canada,
Japan,
Japan,and
andPacific
PacificBasin
Basincountries
countries
 International

Internationalstock
stockmarkets
marketsallow
allowinvestors
investorsto todiversify
diversifyby by
holding
holdingstocks
stocksissued
issuedbybycorporations
corporationsin inforeign
foreigncountries
countries
 International

Internationaldiversification
diversificationcan
canincrease
increaseriskriskdue
dueto to
incomplete
incompleteinformation
informationabout
aboutforeign
foreignstocks
stocksasaswell
wellasas
foreign
foreignexchange
exchangeand andpolitical
politicalrisk
risk

McGraw-Hill/Irwin 8-34
 American Depository Receipts
(ADRs)
 An

AnADR
ADRisisaacertificate
certificatethat
that represents
representsownership
ownershipof
of aa
foreign
foreignstock
stock
 Created

Createdby byaaU.S.
U.S. bank,
bank, after
after acquiring
acquiringstock
stockin
inforeign
foreign
corporations
corporationsin intheir
their domestic
domestic currencies
currencies
 The

Thebank
bankthen
thenissues
issuesdollar
dollarADRs
ADRsbacked
backedby bythe
theshares
shares
of
of the
theforeign
foreignstock,
stock, investors
investorsearnearnreturns
returnsininU.S.
U.S.
dollars
dollars
 There

Therearearecurrently
currentlyover
over1,200
1,200ADRsADRsof of foreign
foreign
corporations
corporationsavailable
availableto toU.S.
U.S. investors
investorsrepresenting
representing
asset
asset values
valuesof of over
over $2.79
$2.79trillion
trillionin
in2012
2012

McGraw-Hill/Irwin 8-35
 American Depository Receipts
(ADRs)
There
Thereare
are33types
typesof ofADRs:
ADRs:
 Level

Level11ADRs
ADRstrade
tradeOTC
OTCand andare
arenot
notrequired
requiredtotomeet
meet
U.S.GAAP
U.S.GAAPnor norissue
issueannual
annualreports
reports
 Level

Level22ADRs
ADRstrade
tradeon
onthe
theexchanges
exchangesand andmust
mustmeet
meet
exchange
exchangerequirements
requirementsandandadhere
adhereto toU.S.
U.S.reporting
reporting
standards
standards
 Level

Level33ADRs
ADRsmeetmeetthe
thesame
samereporting
reportingstandards
standardsasasLevel
Level22
and
andmust
mustregister
registerwith
withthe
theSEC
SECand
andfile
filethe
theequivalent
equivalentof of10K
10K
forms.
forms.These
Thesefirms
firmsare
areallowed
allowedtotoraise
raisepublic
publiccapital
capitalin
inthe
the
U.S.
U.S.

McGraw-Hill/Irwin 8-36
 Foreign Exchange Risk

Changes in currency values can significantly impact

returns on foreign investments

McGraw-Hill/Irwin 8-37