Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 3, Part 1 – The Stock Market – Sept 27
Chapter Six Outline
The primary and secondary stock markets.
The New York Stock Exchange.
The Toronto Stock Exchange and TSX Venture Exchange.
Third and Fourth Market.
Stock Market Information.
The Stock Market
‘Big picture’ overview of:
o Who owns stocks.
o How a stock exchange works, and
o How to read and understand the stock market information reported in the financial
The Primary Stock Markets
The primary market is the market where investors purchase newly issued securities.
o Initial public offering (IPO) – An initial public offer occurs when a company
offers stock for sale to the public for the first time.
The Secondary Stock Markets
The secondary market is the market where investor’s trade previously issued securities.
An investor can trade:
o Directly with other investors.
o Indirectly through a broker who arranges transactions for others.
o Directly with a dealer who buys and sells securities from inventory.
The Primary Market for Common Stock
An IPO involves several steps. Company appoints investment banking firm to arrange
o Investment banker designs the stock issue and arranges for fixed commitment or
best effort underwriting. o Company prepares a prospectus (usually with outside help) and submits it to
securities and exchange commissions for approval.
o Investment banker circulates preliminary prospectus (red herring).
Upon obtaining approval, company finalizes prospectus.
Underwriters place announcements (tombstones) in newspapers and begin selling shares.
The Secondary Market
The bid price:
o The price dealers pay investors.
The ask price:
o The price dealers receive from investors.
The difference between the bid and ask prices is called the bidask spread, or simply
Most common stock trading is directed through an organized stock exchange or trading
Whether a stock exchange or trading network, the goal is to match investors wishing to
buy stocks with investors wishing to sell stocks.
The New York Stock Exchange
The New York Stock Exchange (NYSE), popularly known as the Big Board, celebrated
its bicentennial in 1992.
The NYSE has occupied its current building on Wall Street since the turn of the century.
The NYSE has 1,366 exchange members.
In 2003, stocks from about 2,800 companies were listed, with a collective market value
of about $15 trillion.
An initial listing fee, as well as annual listing fees, is charged based on the number of
In 2003, the average stock trading volume on the NYSE was just over 1 billion shares a
The Toronto Stock Exchange
The Toronto Stock Exchange started its operations in 1861 with 18 securities and 14
The initial members paid $250 to purchase a seat at that time. In 1901, the price of a
membership rose to $12,000 and trading volume became approximately 1 million shares
per year. To be listed on the Toronto Stock Exchange, technology companies must have at least
one million free shares with total market value of $4 million or $10 million. These shares
must be held by at least 300 public shareholders.
In 1999, the Canadian