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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Management Chapter 19: Understanding Securities and Investments Securities Market Securities: stocks and bonds (which represent a secured-asset-based claim on the part of investors) that can be bought and sold Holders of stocks and bonds have stake in the business (stock represents ownership) Primary and Secondary Markets for Securities Primary securities markets: the sale and purchase of newly issued stocks and bonds by firms or governments Private placements: stocks sold to one buyer or small group of buyers (keeps plans confidential) Investment banker: any financial institution engaged in purchasing and reselling new stocks and bonds Three types of investment banking services: o They advise company on timing and financial terms for new issue o Underwriting (buying) new securities (bankers some risk of issuing new security) o Create distribution network that moves new securities to customers (through banks and brokers) Secondary securities market: the sale and purchase of previously issued stocks and bonds (handled by organizations such as Toronto Stock Exchange) Stock Common Stock Stocks are bough in hopes that they will increase in value (capital gain or dividend income) Par value: the arbitrary value of a stock set by the issuing companys board of directors and stated on stock certificates; used by accountants but of little significance to investors (cannot be distributed as dividends) Market value: the current price of one share of a stock in the secondary securities market; the real value of a stock o Can be influence by objective factors (companys profits) and subjective factors (rumours, investor relations and stockbroker recommendations) Book value: value of a common stock expressed as total stockholders equity divided by the number of shares of stock o Market value is usually higher than book value so some investors buy stock when the market price falls near the book value on the principle that its underpriced and its value should increase Investment traits of common stock: risky; uncertainty can quickly change value; when company is doing bad it cannot pay dividends Blue-chip stock: stocks of well-established, financially sound firms o The value of high-tech stocks fluctuate more than the value of traditional stocks (and although traditional blue-chip stocks have more earnings per share, stockholders like to invest in high-tech stocks) Market capitalization: the dollar value (market value) of stocks listed on a stock exchange o Computer by multiplying the number of a companys outstanding shares by the value of each share Preferred Stock Preferred stock is usually issued with a stated par value (ex. $100) and dividends are expressed as a percentage the of par value Callable preferred stock: shares that may be surrendered in exchange for cash payment if issuing firm requires (payment = call price) Investment traits of preferred stock: less risky than common stock; cumulative o Cumulative preferred stock: preferred stock on which dividends not paid in the past must first be paid up before the firm may pay dividends to common shareholders Stock Exchanges 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 exchanges rules o To become a member an individual must purchase one of a limited number of seats (all orders to buy or sell must flow through members; legal monopoly) Trading floor: equipped with a vast array of electronic communications equipment for conveying buy and sell orders or confirming completed trades (only place where trade is allowed to happen) Brokers: an individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services (and earns commission)
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