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Lecture

HLTH AGE 4Z06 chap 9

4 Pages
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Department
Health, Aging and Society
Course Code
HLTHAGE 4Z06
Professor
Ben

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Chapter 9 • Stocks/bonds called securities because they are asset-based/secured claims. • Primary securities markets: buying and selling of new stocks and bonds, new stock can be sold to a private group, this is known as private placement • Investment banking: purchasing and reselling new securities. Offer these 3 services: o Advise companies on the timing and terms of their new issue o Underwrite the new securities (buy them all) o Create a distribution network for the new securities • The secondary securities market (buy/selling previously issued securities) is handled by other organizations. Stocks • Common Shares: bought in hopes that they increase in value, riskiest of all securities o Market Value: current price and real price in the secondary securities market. Investor relations and stockbroker recommendations affect market value. o Book Value: dividing owner’s equity by the number of shares. Typically it is less than market value for successful companies. o Blue-chip stocks are stocks offered by well-established firms. o Market Capitalization: number of stocks times market value. • Preferred Shares: issued with stated value and dividends are paid based on this value. Some are ‘callable’ meaning they can be bought back for the ‘call price’ o Cumulative preferred shares: missed passed dividend payments must be paid to the holders before the company can issue dividends to common stock holders. o Purchase price can fluctuate, but dividends are fixed. Stock Exchanges • Stock Exchange: voluntary organization that handles the secondary exchange of securities, individuals purchase seats on the exchange. • Trading floor: a physical location in which trading occur, now mostly electronic • Broker: receive buy/sell orders and receive commissions o Discount brokers do not offer personal investment advice and are paid on salaries, so they are cheaper to use than full-service brokers. IPO stocks are only accessible through a full service broker. Online trading is an increasing trend. • Canadian Stock Exchanges: the Toronto Stock Exchange (TSX) and the Canadian Venture Exchange (CDNX). • Foreign Stock Exchanges: New York Stock Exchange (NYSE, most popular, requirements on earning power to be listed), American Stock Exchange (AMEX, less stringy requirements), regional stocks (established long before advanced telecommunications e.g. Chicago Stock Exchange). • Over-the-Counter (OTC) Market: trade stocks outside formal settings of organized stock exchanges, securities are kept like inventory in a retailer. ‘ • NASD: a body regulating the exchange of securities. • NASDAQ: virtual stock market, created from the automation of the OTC, operates via a global intranet. It is poised to be the preferred global stock market. Bonds • Bond: written promise of indebtedness to be paid at a future date, plus stated interest rate (in contrast, stock certificates represent ownership). • Government bonds are the safest investments issued by the federal government. There are also municipal bonds issued by local governments. • Corporate bonds are issued as a source of long-term funding o Registered bonds have the owner’s registered with the company, but bearer (coupon) bonds require bond-holder to clip coupons from the bond certificate to get payments. o With secured bonds, the issuer pledges collateral. Unsecured bonds (called debentures in the US) are typically used by financially strong corporations. Other Investments • Mutual funds: pools resources of many investors to purchase a mix of securities. o With load funds there is a charge to buy/sell as opposed to no-load funds. o Ethical funds: comprise of socially responsible investments • Stock option: purchased right to buy or sell a stock, often given to executives o Call option: buy it at a certain price until a particular future date o Put option: sell it at a certain price until a future date o Stock options are worthless if exercising them is not profitable (‘underwater option’). • Risk reduction: o Diversification involves using different kinds of investments in a portfolio (
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