Chapter 9: Understanding Securities and Investments
Primary and Secondary Markets for Securities:
Securities: stocks and bases (which represent a secured-asset-based claim on the part of investors) that can be
bought and sold.
Primary securities market: the sale and purchase of newly issued stocks and bonds by firms or governments.
Investment bankers: any financial institution engaged in purchasing and reselling new stocks and bonds.
Secondary securities market: the sale and purchase of previously issued stocks and bonds.
Private placements: allows the business who uses them to keep their plans confidential.
Most new stocks and some bonds are sold to the wider public market.
To bring a new security to market, the issuing corporation must obtain approval from a provincial securities
It also needs the services of an investment banker.
Such well-known firms as RBC Dominion Securities and TD Securities provide three types of investment
They advise the company on the timing and financial terms for the new issue.
By underwriting (buying) the new securities, investment bankers bear some of the risk of issuing the
They create the distribution network that moves the new securities through groups of other banks and
brokers into the hands of individual investors.
Market shares: the current price of one share of a stock in the secondary securities market; the real value of a
Market value reflects buyer’s willingness to invest in a company.
The market price of a share can be influenced by both objective factors (e.g. a company’s profits), and by
Subjective factors include:
rumours (unverified information such as a claim that a company has made a big gold strike)
investor relations (playing up the positive aspects of a company’s financial condition to financial
analysts and financial institutions)
stockbroker recommendations (a recommendation to buy a stock may increase demand for the stock
and cause its price to increase, while a recommendation to sell may decrease its demand and cause the
price to fall)
Book values: value of a common stock expressed as total’s owner equity divided by the number of shares of
Book value is used as a comparison indicator because for successful companies, the market value is usually
greater that its book value. Thus, when market price falls to near book value, some investors buy the stock on the principle that it is under-
priced and will increase in the future.
Investment Traits of Common Shares:
Common shares are among the riskiest of all securities.
Uncertainties about the stock market itself, for instance, can quickly change a given stock’s value.
Furthermore, when companies have unprofitable years, they often cannot pay dividends.
At the same time, however, common shares offer high growth potential.
Naturally, the prospects for growth in various industries change from time to time, but the blue-chip stocks of
well-established, financially sound firms such as IBM and Imperial Oil have historically provided investors
with steady income through consistent dividend payouts as well as long-term capital gains.
Blue-chip stocks: stocks of well-established, financially sound firms.
Market-capitalization: the dollar value (market value) of stocks listed on a stock exchange.
Preferred shares are usually issued with a stated value (example can be $100).
Dividends paid on preferred shares are usually expressed as a percentage of the stated value.
For example, if a preferred share with a $100 stated value pays a 6% dividend, shareholders would receive an
annual dividend of $6 on each share.
Some preferred shares are callable.
The issuing firm can require the preferred shareholders to surrender their shares in exchange for a cash
The amount of this cash payment, known as the call price, is specified in the agreement between the preferred
shareholders and the firm.
Investment Traits of Preferred Shares:
Cumulative Preferred Shares: preferred on which dividends not paid in the past must be paid up before the
firm may pay dividends to common shareholders.
Because of its preference on dividends, preferred share’s income is less risky than the common shares of the
Moreover most preferred shares are cumulative.
Typically the firm cannot pay any dividends to its common shareholders until it has made up all late payments
to preferred shareholders.
Even the income from cumulative preferred shares is not as certain as the corporate bonds of the same
The company cannot pay dividends if it does not make a profit.
The purchase price of the preferred shares can also fluctuate, leading to a capital gain or loss for the
The growth potential of preferred shares is limited due to its fixed dividend.
Most of the secondary market for stocks is handled by organized stock exchanges. In addition to stock markets, a so-called “dealer”, or the over-the-counter market handles the exchange of some
Stock exchange: a voluntary organization of individuals formed to provide an institutional setting where
members can buy and sell stock for themselves and their clients in accordance with the exchange’s rules.
Trading floor: the floor is equipped with a vast array of electronic communications equipment for conveying
buy and sell orders, or confirming completed orders. A variety of news services furnish important up-