Investments: Analysis and Management, 12th Edition

chapter 4

Securities Markets and Market Indices

As you prepare to invest your inheritance, you realize that like most people you have certainly heard of the New York Stock Exchange as well as NASDAQ because their activities are reported daily, but you really don't know how they work. Why should you care where the stocks you buy and sell trade? Having heard of the bubble in the NASDAQ market that burst in 2000, causing investors spectacular losses, you also wonder if you should even consider NASDAQ stocks. And someone has mentioned that Electronic Communications Networks (ECNs) may be the future of investing, but you do not know what these are. Even more basic, despite listening to the national news each night and hearing how the Dow Jones Index and NASDAQ Index closed for the day, you clearly realize that this doesn't tell you much. Does a 75-point gain in the Dow in one day constitute a great day, or could it be less significant in today's world than in the past? Even more confusing, in 2011 the stock market was up 5.5 percent for the year, although it was also unchanged—how is this possible? Finally, what about bonds—where do they trade, and how will you handle their purchase and sale?

Chapter 4 outlines the structure of the markets where investors buy and sell securities. Although primary markets, including the role of investment bankers, are considered, the emphasis is on secondary markets where most investors are active. We focus in particular on equity markets because most ...