How Securities Are Bought and Sold
Learning objectives:
Understand how securities are bought and sold in the primary and secondary markets
Distinguish between a securities exchange and an over-the-counter market
Be aware of how the New York Stock Exchange functions
Study and Learn the Words:
| English | English equivalents | Romanian | Russian |
| stock (n) | pachet de acţiuni | пакет акций | |
| bond (n) | bon (de tezaur), obligaţiune | облигации, боны | |
| stockbroker (n) | agent de bursă | брокер | |
| primary market | piaţa primară | первичный рынок | |
| secondary market | piaţa secundară | вторичный рынок | |
| securities (n) | hîrtii de valoare | ценные бумаги | |
| to be satisfied that… | to be convinced that… | ||
| mutual fund | societate de investiţii cu capital variabil | инвестиционная компания открытого типа | |
| gross proceeds | venit brut | валовый доход | |
| commission (n) | comision, remiză | комиссионное вознаграждение | |
| securities exchange | bursa de valori, piaţa a efectelor de schimb | фондовая биржа | |
| to handle | to trade in sth | ||
| over-the-counter market | piaţa neoficială a efectelor de schimb, piaţa extrabursieră | рынок незарегистрированных ценных бумаг | |
| to be listed | to be quoted=to be given a market price | a fi cotat | котироваться (на бирже) |
| tangible assets | active materiale | материальные активы | |
| earnings (n) | the profit that a company makes | ||
| to subscribe | to apply to buy shares in a company | a subscrie pentru un număr de acţiuni | подписаться на покупку акций |
| subscriber (n) | abonat | абонент, подписчик | |
| perception (n) | the ability to understand sth | ||
| stringent (adj) | strict and that must be obeyed | ||
| to sell off | a vinde totul cu reducere | распродавать со скидкой | |
| to precipitate | to make sth, esp. sth bad, happen sooner that it should | ||
| to redeem | a răscumpăra | выкупать | |
| CEO (Chief Executive Officer) | top manager of a company |
To purchase a sweater, you simply walk into a store that sells sweaters, choose one, and pay for it. To purchase stocks, bonds, and many other investments, you have to work through a representative— your stockbroker. In turn, your broker must buy or sell for you in either the primary or secondary market.
The Primary Market
The primary market is a market in which an investor purchases financial securities (via an investment bank or other representative) from the issuer of those securities. An investment banking firm is an organization that assists corporations in raising funds, usually by helping sell new security issues.
For a large corporation, the decision to sell securities is often complicated, time-consuming, and expensive. There are basically two methods. First, a large corporation may use an investment banking firm to sell and distribute the new security issue. This method is used by most large corporations that need a lot of financing. If this method is used, analysts for the investment bank examine the corporation's financial condition to determine whether the new issue is financially sound and how difficult it will be to sell the issue. If the analysts for the investment banking firm are satisfied that the new security issue is a good risk, the bank will buy the securities and then resell them to the bank's customers—commercial banks, insurance companies, pension funds, mutual funds, and the general public. The investment banking firm generally charges 2 to 12 percent of the gross proceeds received by the corporation issuing the securities. The size of the commission depends on the quality and financial health of the corporation issuing the new securities and the size of the new security issue. The commission allows the investment bank to make a profit while guaranteeing that the corporation will receive the needed financing.
The second method used by a corporation trying to obtain financing through the primary market is to sell directly to current stockholders. Usually, promotional materials describing the new security issue are mailed to current stockholders. These stockholders may then purchase securities directly from the corporation. Why would a corporation try to sell its own securities? The most obvious reason for doing so is to avoid the investment bank's commission. Of course, a corporation's ability to sell a new security issue without the aid of an investment banking firm is tied directly to the public's perception of the corporation's financial health.
The Secondary Market
After securities are originally sold through the primary market, they are traded through a secondary market. The secondary market is a market for existing financial securities that are currently traded between investors. Usually, secondary-market transactions are completed through a securities exchange or the over-the-counter market.
Securities ExchangesA securities exchange is a marketplace where member brokers meet to buy and sell securities. The securities sold at a particular exchange must first be listed, or accepted for trading, at that exchange. Generally, securities issued by nationwide corporations are traded at either the New York Stock Exchange or the American Stock Exchange. The securities of regional corporations are traded at smaller regional exchanges. These are located in Chicago, San Francisco, Philadelphia, Boston, and several other cities. The securities of very large corporations may be traded at more than one of these exchanges. Securities of American firms that do business abroad may also be listed on foreign securities exchanges—in Tokyo, London, or Paris, for example.
The largest and best-known securities exchange in the United States is the New York Stock Exchange (NYSE). It handles about 70 percent of all stock bought and sold through organized exchanges in the United States. The NYSE lists approximately 2,250 securities issued by more than 1,500 corporations, with a total market value of $3 trillion. The actual trading floor of the NYSE, where listed securities are bought and sold, is approximately the size of a football field. A glass-enclosed visitors' gallery enables people to watch the proceedings below, and on a busy day the floor of the NYSE can best be described as organized confusion. Yet, the system does work and enables brokers to trade an average of more than 160 million shares per day.
The origin of the NYSE can be traced to May 17, 1792 when the Buttonwood Agreement was signed by 24 stockbrokers outside of 68 Wall Street in New York. On March 8, 1817 the organization drafted a constitution and renamed itself the “New York Stock & Exchange Board”. This name was shortened to its current form in 1863.
The Exchange was closed after the beginning of World War I (July 1914), but it was re-opened on November 28 of that year in order to help the war effort by trading bonds.
On September 16, 1920 a bomb exploded outside the NYSE building on Wall Street in a terrorist attack, killing 33 people and injuring more than 400. The perpetrators were never found. The NYSE building and some buildings nearby still have marks in the façade caused by the bombing.
The Black Thursday crash of the Exchange on October 24, 1929 and the sell-off panic which started on Black Tuesday, October 29, precipitated the Great Depression.
On October 1, 1934 the exchange was registered as a national securities exchange with the US Securities and Exchange Commission, with a president and a 33 member board.
The frequently seen electronic display boards mounted on the walls of the exchange were first installed in 1966 along with radio pagers. A highly technical wireless data system increasing the speed in which trades were executed was introduced in 1996. This allows for trading to be done with hand-held laptop – these are computers carried by the floor traders.
Today the exchange opens at 9:30 AM and closes at 4:00 PM.
Before a corporation's stock is approved for listing on the New York Stock Exchange, the firm must meet five criteria:
1) annual earnings before taxes are $2.5 million
2) shares of stock held publicly – 1 million
3) market value of publicly held stock - $9 million
4) number of stockholders owning at least 100 shares is 2.000
5) value of tangible assets - $18.000.000
When companies first list on the NYSE, often the company’s CEO or other official is invited to ring the opening bell in the Trading Floor. Ringing the bell, which signals the start and close of the trading day, is part of the NYSE’s rich heritage and is considered an honour.
The American Stock Exchange handles about 10 percent of U.S. stock transactions, and regional exchanges account for the remainder. These exchanges have generally less stringent listing requirements than the NYSE.
The Over-the-Counter MarketThe over-the-counter (OTC) market is a network of stockbrokers who buy and sell the securities of corporations that are not listed on a securities exchange. Usually each broker specializes, or makes a market, in the securities of one or more specific firms. The securities of these firms are traded through its specialists, who are generally aware of their prices and of investors who are willing to buy or sell them. Most OTC trading is conducted by telephone. Currently, more than 5,300 stocks are traded over the counter. Since 1971, the brokers and dealers operating in the OTC market have used a computerized quotation system call NASDAQ—the letters stand for the National Association of Securities Dealers Automated Quotation system. NASDAQ displays current price quotations on terminals in subscribers’ offices.
I. VOCABULARY PRACTICE
A) Find synonyms (1-6) and antonyms (7-12) in the text to the following words and phrases:
1. shares 7. simple
2. to help 8. to forbid
3. profit 9. to purchase
4. to collect money 10. time-saving
5. to be connected with sth 11. to delay
6. notebook 12. cheap
B) Find in the text the English equivalents for the following:
1. piaţa primară a hîrtiilor de valoare/первичный рынок ценных бумаг;
2. emisiunea a noilor acţiuni/эмиссия новых акций;
3. a fi sigur din punct de vedere financiar/быть надежным с финансовой точки зрения;
4. a face un profit/получать прибыль;
5. materialele publicitare sunt trimise prin poştă acţionarilor/рекламные материалы посылаются акционерам по почте;
6. a urmări desfăşurarea evenimentelor ce au loc jos/наблюдать за происходящим внизу;
7. a corespunde criteriilor/соответствовать критериям;
8. a fi la curent cu preţurile lor/быть в курсе их цен.
C) Match the words with their definitions:
| 1. bonds | a) a person or an organization that applies to buy shares in a company |
| 2. securities | b) a person whose business is buying and selling a particular product |
| 3. analyst | c) a statement of the current value of stocks |
| 4. broker | d) a company that offers a service to people by investing their money in various different businesses |
| 5. mutual fund | e) a type of security – issued either by a company or by government – bearing a fixed interest every year, which is redeemed after a stated period |
| 6. commission | f) a person who can advise investors and buy and sell shares for them |
| 7. investor | g) the general term for all stocks, shares and bonds |
| 8. subscriber | h) an amount of money that is charged for providing a particular service |
| 9. quotation | i) a person whose job involves examining facts in order to give an opinion of them and to forecast the possible result |
| 10. dealer | j) a person who buys shares in a company in the hope of making a profit |
II. COMPREHENSION
A) Answer the following questions:
1. Whose services must one use in order to buy securities?
2. What types of securities markets do you know? Give the definition of a primary market.
3. What is an investment banking firm?
4. What are the two methods used by large corporations when they decide to sell a new security issue? Why do some corporations choose the second method?
5. What is a secondary market?
6. What is a securities exchange? What is the necessary condition for the securities to be sold at a particular exchange?
7. What is the largest and best-known securities exchange in the USA? Describe it. What do you know about its history?
8. What are the criteria that a corporation must meet in order to sell its stock on the NYSE?
9. Indicate how much percent of U.S. stock transactions do the following exchanges handle?
the NYSE _______
the American Stock Exchange _______
regional exchanges ________
10. What is an over-the-counter market?
B) Mark the statements with TRUE or FALSE:
1. One can purchase securities without using the services of a stockbroker.
2. A new security issue can be sold only in the primary market.
3. Most large corporations that need a lot of financing sell their securities directly to current stockholders in order to avoid commission.
4. The customers of the investment banking firm are mutual funds, commercial banks, insurance companies, pension funds and different natural persons.
5. The investment banking firm buys the corporation’s securities only if they are financially sound.
6. The investment banking firm charges 2 to 20% of the corporation’s gross proceeds.
7. The securities of regional corporations are traded at either the NYSE or the American Stock Exchange.
8. An American company that does business in France can trade its securities both at the NYSE and at the securities exchange in Paris.
9. Brokers trade an average of more than 160 million shares per day at the American Stock Exchange.
10. Today more shares are traded “over the counter” than at a securities exchange.
III. DISCUSSION
Discuss the following questions:
1. It is thought that the best way to invest your money is to buy securities. Do you agree or disagree with it?
2. The job of a financial analyst is to evaluate the financial standing of a corporation and to forecast whether its shares are a good risk or not. To your mind, is it easy or difficult to do this job? What qualities must a good analyst possess?
3. Your corporation has issued new securities. In what market are you going to sell them? What decision would you take: to sell these securities through an investment banking firm or directly to your current shareholders? Substantiate your answer.
4. You are a shareholder and you want to sell your shares. In what market are you going to sell them?
5. In your opinion, what do the Americans prefer: to buy shares at a securities exchange or in the over-the-counter market? Give your reasons.
IV. FOCUS ON LANGUAGE
Business idioms
Fill in the gaps with a suitable prepositional phrase from the list below:
On closer inspection, on order, on holiday, on approval, on condition, on paper, on schedule, on behalf of, on display, on the phone, on the spot, on business, on loan, on request.
1. You will find our new product ________________ at our showroom.
2. We have a sales engineer __________________ who can fix the fault this week.
3. The goods arrived ____________________.
4. We have had the goods ________________ for 3 months, but they haven’t arrived yet.
5. We accepted delivery of the goods as undamaged, but _____________________ we found that 5 of the components are unusable.
6. I spoke to him ______________ last week about this.
7. We can have the goods for 4 weeks ____________________. We can return them or pay for them.
8. He traveled to England _______________ but managed to do a little sightseeing while he was there.
9. I’m afraid Mr Smith is _________________ till the end of the month – can I help you?
10. We can offer you the job ________________ that you start work on the first of the next month.
11. The candidate doesn’t look very good _____________________ but she is very impressive in person.
12. You can’t keep it permanently, but you may have it __________________ till the end of the month.
13. She signed the letter _____________________ her boss.
14. Let us not waste time and act __________________.
The Role of the Stockbroker
Learning objectives: