MGTA02H3 Study Guide - Rbc Dominion Securities, Stock Exchange, Investment Banking
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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
Private placements: allows the business who uses them to keep their plans
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 commission.
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 banking services:
They advise the company on the timing and financial terms for the new
By underwriting (buying) the new securities, investment bankers bear some
of the risk of issuing the new security.
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 share.
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.
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 stock.
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
Furthermore, when companies have unprofitable years, they often cannot pay
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
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
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 payment.
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 same company.
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 company.
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 shareholders.
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 stocks.
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-to-the-minute information about
world events as well as business developments. Any changes in these factors may
be swiftly reflected in share prices.
Broker: an individual licensed to buy and sell securities for customers in the
secondary market; may also provide other financial services.
Discount brokers offer well-informed individual investors a fast, low-cost way to
participate in the market. Discount brokerage services are low cost because sales
personnel receive fees or salaries, not commissions. Unlike many full-service
brokers, they do not offer investment advice or person-to-person sales
consultations. They do, however, offer automated online services, such as stock
research, industry analysis and screening for specific types of stocks.
Online trading owes its popularity to convenient access to the Internet, fast no-
nonsense transactions and the opportunity for self-directed investors to manage
their own portfolios while paying low fees for trading.
Full-service brokers can offer clients consulting advice in personal financial
planning, estate planning, and tax strategies, along with a wider range of investment
products. Financial advisers also do more than deliver information. They deliver
interpretations of and suggestions on investment s that clients might overlook when
trying to sift through an avalanche of online financial data.
Canadian Stock Exchanges:
Over-the-counter (OTC) market: organization of securities dealers formed to
trade stock outside the formal institutional setting of the organized stock exchanges.
National Association of Securities Dealers Automated Quotation (NASDAQ): a
stock market implemented by NASD that operates by broadcasting trading
information on an intranet to more than 350,000 terminals worldwide.
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. Investment bankers: any financial institution engaged in purchasing and reselling bonds by firms or governments. new stocks and bonds. Secondary securities market: the sale and purchase of previously issued stocks. Private placements: allows the business who uses them to keep their plans and bonds. 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 commission. 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 banking services: They advise the company on the timing and financial terms for the new issue.