Financial Resource

well above the fixed offering price)
If you are considering buying a new issue, one protective step you can take is to read the prospectus The prospectus is a legal document describing the company and offering the securities to the public. Unless the of-fering is a very small one, it can’t be made without passing through a registration process with the SEC. The SEC can’t vouch for the value of the offering, but it does act to make sure that essential facts about the com-pany and the offering are disclosed in the prospectus.
This requirement of full disclosure was part of the securities laws of the 1930s and has been a great boon to investors and to the securities markets. It works because both the underwriters and the offering com-panies know that if any material information is omitted or misstated in the prospectus, the way is open to law-suits from investors who have bought the securities.
In a typical new offering, the final prospectus isn’t ready until the day the securities are offered. But be-fore that date you can get a “preliminary prospectus” or “red herring”—so na¬med because it carries red letter-ing warning that the prospectus hasn’t yet been cleared by the SEC as meeting disclosure require¬ments
The red herring will not contain the offering price or the final underwriting arrangements But it will give you a description of the company’s business, and financial statements showing just what the company’s growth and profitability have been over the last several years It will also tell you something about the man-agement. If the management group is taking the occasion to sell any large percentage of its stock to the public, be particularly wary.
It is a very different case when an established public company is selling additional stock to raise new capital. Here the company and the stock have track records that you can study, and it’s not so difficult to make an estimate of what might be a reasonable price for the stock The offering price has to be close to the current market price, and the underwriters’ profit margin will generally be smaller But you still need to be careful. While the SEC has strict rules against promoting any new offering, the securities industry often manages to create an aura of enthusiasm about a company when an offering is on the way On the other hand, the knowl-edge that a large offering is coming may depress the market price of a stock, and there are times when the of-fering price turns out to have been a bargain
New bond offerings are a different animal altogether. The bond markets are highly professional, and there is nothing glamorous about a new bond offering. Everyone knows that a new A-rated corporate
bond will be very similar to all the old A-rated bonds. In fact, to sell the new issue effectively, it is usu-ally priced at a slightly higher “effective yield” than the current market for comparable older bonds—either at a slightly higher interest rate, or a slightly lower dollar price, or both. So for a bond buyer, new issues often of-fer a slight price advantage.
What is true of corporate bonds applies also to U.S. government and municipal issues. When the Treas-ury comes to market with a new issue of bonds or notes (a very frequent occurrence), the new issue is priced very close to the market for outstanding (existing) Treasury securities, but the new issue usually carries a slight price concession that makes it a good buy. The same is true of bonds and notes brought to market by state and local governments; if you are a buyer of municipals, these new offerings may provide you with mod-est price concessions. If the quality is what you want, there’s no reason you shouldn’t buy them—even if your broker makes a little extra money on the deal.
8. MUTUAL FUNDS. A DIFFERENT APPROACH

Up until now, we have described the ways in which securities are bought directly, and we have dis-cussed how you can make such investments through a brokerage account.
But a brokerage account is not the only way to invest. For many investors, a brokerage has disadvan-tages–the difficulty of selecting an individual broker, the commission costs (especially on small transactions), and the need to be involved in decisions that many would prefer to leave to professionals. For people who feel this way, there is an excellent alternative available—mutual funds.
It isn’t easy to manage a small investment account effectively. A mutual fund gets around this problem by pooling the money of many investors so that it can be managed efficiently and economically as a single large unit. The best-known type of mutual fund is probably the money market fund, where the pool is invested for complete safety in the shortest-term income-producing investments. Another large group of mutual funds invest in common stocks, and still others invest in long-term bonds, tax-exempt securities, and more special-ized types of investments.
The mutual fund principle has been so successful that the funds now manage over 0 billion of inves-tors’ money—not including over 0 billion in the money market funds.
8.1 Advantages of Mutual Funds
Mutual funds have several advantages. The first is professional management. Decisions as to which se-curities to buy, when to buy and when to sell are made for you by professionals. The size of the pool makes it possible to pay for the highest quality management, and

Pages: 1 2 3 4 5 6 7

Tags: are, Board, capital, Change, Chg, close, commodities, common stock, deal, define: an individual on the exchange floor who supervises trading in a stock, detail, dividend, economy, endless fascination, entire world, european stock markets, exchange rate, finance, financial commitments, future, General, inflation, information, john logan "floor broker", market, mid 1980s, mutual fund, mutual funds, nature, nerve center, nesses, net, new ways, new york stock, new york stock exchange, number, nyse, price earnings, relation, right, sense, shell new sec rules, shell offshore jobs, shell oil future, show, stock, stock market averages, stocks3, table, time, total offshore jobs, value, year, Yid, york stock exchange