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Name: Steven P Sanderson II

Date: 7/17/06
Class: Intro to Business BA11 5040
Professor: McNamara

This paper is in reaction to chapter 20 which deals with Securities Markets:


Financing and Investing Opportunities. Although common, the term 'the stock market' is
a somewhat abstract concept for the mechanism that enables the trading of company
stocks. It is also used to describe the totality of all stocks and sometimes other securities,
with the exception of bonds, commodities, and derivatives. The term is used especially to
apply within one country as, for example, in the phrase "the stock market was up today",
or in the term "stock market bubble". Bonds are still traditionally traded in an informal,
over-the-counter market known as the bond market. Commodities are traded in
commodities markets, and derivatives are traded in a variety of markets (but, like bonds,
mostly 'over-the-counter'). The size of the worldwide 'bond market' is estimated at $45
Trillion; the size of the 'stock market' is estimated as about half that. The world
derivatives market has been estimated at about $300 Trillion. The major U.S. Banks
alone are said to account for about $100 Trillion. The stock market is distinct from a
stock exchange, which is an entity (a corporation or mutual organization) in the business
of bringing buyers and sellers of stocks and securities together. For example, 'the stock
market' in the United States includes the trading of all securities listed on the NYSE, the
NASDAQ, the Amex, as well as on the many regional exchanges, the OTCBB, and Pink
Sheets. European examples of stock exchanges include the Paris Bourse (now part of
Euronext), the London Stock Exchange and the Deutsche Börse.

To understand any of this a few aspects must be explained. First the capital market
(securities markets) is the market for securities, where companies and the government
can raise long-term funds. The capital market includes the stock market and the bond
market. Financial regulators, such as the U.S. Securities and Exchange Commission and
the Financial Services Authority in the UK, oversee the markets, to ensure that investors
are protected against misselling. The capital markets consist of the primary market, where
new issues are distributed to investors, and the secondary market, where existing
securities are traded. The capital market can be contrasted with other financial markets
such as the money market which deals in short term liquid assets, and derivatives markets
which deals in derivative contracts. Both the private and the public sectors provide
market makers in the capital markets. As mentioned before there are a primary and
secondary market. The primary market is that part of the capital markets that deals with
the issuance of new securities. Companies, governments or public sector institutions can
obtain funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to investors is
called underwriting. In the case of a new stock issue, this sale is called an initial public
offering (IPO). Dealers earn a commission that is built into the price of the security
offering, though it can be found in the prospectus. The secondary market is the financial
market for trading of securities that have already been issued in an initial private or
public offering. Alternatively, secondary market can refer to the market for any kind of
used goods. The market that exists in a new security just after the new issue is often
referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange,
investors and speculators can easily trade on the exchange, as market makers provide bids
and offers in the new stock.

In the secondary market, securities are sold by and transferred from one investor
or speculator to another. It is therefore important that the secondary market be highly
liquid and transparent. Before electronic means of communications, the only way to
create this liquidity was for investors and speculators to meet at a fixed place regularly.
This is how stock exchanges originated.

Secondary markets are vital to an efficient and modern capital market. Fundamentally,
secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire
not to tie up his or her money for a long period of time, in case the investor needs it to
deal with unforeseen circumstances) with the capital user's preference to be able to use
the capital for an extended period of time. For example, a traditional loan allows the
borrower to pay back the loan, with interest, over a certain period. For the length of that
period of time, the bulk of the lender's investment is inaccessible to the lender, even in
cases of emergencies. Likewise, in an emergency, a partner in a traditional partnership is
only be able to access his or her original investment if he or she finds another investor
willing to buy out his or her interest in the partnership. With a securitized loan or equity
interest (such as bonds) or tradable stocks, the investor can relatively easily sell his or her
interest in the investment, particularly if the loan or ownership equity has been broken
into relatively small parts. This selling and buying of small parts of a larger loan or
ownership interest in a venture is called secondary market trading.

Under traditional lending and partnership arrangements, investors may be less likely to
put their money into long-term investments, and more likely to charge a higher interest
rate (or demand a greater share of the profits) if they do. With secondary markets,
however, investors know that they can recoup some of their investment quickly, if their
own circumstances change.

With all of this said we now need to know what the role of a stock exchange like the
NYSE is. The Stock Exchange provides companies with the facility to raise capital for
expansion through selling shares to the investing public. When people draw their savings
and invest in shares, it leads to a more rational allocation of resources because funds,
which could have been consumed, or kept in idle deposits with banks, are mobilized and
redirected to promote business activity with benefits for several economic sectors such as
agriculture, commerce and industry, resulting in a stronger economic growth and higher
productivity levels. Companies view acquisitions as an opportunity to expand product
lines, increase distribution channels, hedge against volatility, increase its market share, or
acquire other necessary business assets. A takeover bid or a merger agreement through
the stock market is the simplest and most common way to company growing by
acquisition or fusion. The Government and even local authorities like municipalities may
decide to borrow money in order to finance huge infrastructure projects such as sewerage
and water treatment works or housing estates by selling another category of securities
known as bonds. These bonds can be raised through the Stock Exchange whereby
members of the public buy them. When the Government or Municipal Council gets this
alternative source of funds, it no longer has the need to overtax the people in order to
finance development. At the stock exchange, share prices rise and fall depending, largely,
on market forces. Share prices tend to rise or remain stable when companies and the
economy in general show signs of stability and growth. An economic recession,
depression, or financial crisis could eventually lead to a stock market crash. Therefore the
movement of share prices and in general of the stock indexes can be an indicator of the
general trend in the economy.

The listing requirements are the set of conditions imposed by a given stock exchange
upon companies that want to be listed on that exchange. Such conditions sometimes
include minimum number of shares outstanding, minimum market capitalization, and
minimum annual income. Companies have to meet the requirements of the exchange in
order to have their stocks and shares listed and traded there, but requirements vary by
stock exchange:

• London Stock Exchange: The main market of the London Stock Exchange has
requirements for a minimum market capitalization (£700,000), three years of
audited financial statements, minimum public float (25 per cent) and sufficient
working capital for at least 12 months from the date of listing.

• NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have


issued at least 1.25 million shares of stock worth at least $70 million and must
have earned more than $11 million over the last three years.

• New York Stock Exchange: To be listed on the New York Stock Exchange
(NYSE), for example, a company must have issued at least a million shares of
stock worth $100 million and must have earned more than $10 million over the
last three years

Much of this information was taken from our text and an online source Wikipedia.org

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