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Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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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:
oThey advise company on timing and financial terms for new issue
oUnderwriting (buying) new securities (bankers some risk of issuing new security)
oCreate 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 company’s 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
oCan be influence by objective factors (company’s profits) and subjective factors (rumours, investor
relations and stockbroker recommendations)
Book value: value of a common stock expressed as total stockholder’s equity divided by the number of shares of
stock
oMarket 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
oThe 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
oComputer by multiplying the number of a company’s 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
oCumulative 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 exchange’s rules
oTo 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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Discount brokers: brokers that offer well-informed individual investors a fast, low-cost way to participate in the
market (work on salary, not commission; do not offer sales advice or consultation)
Online trading: convenient because of fast, no-nonsense transactions and allows investors to manage their own
portfolios while paying low fees
Full-service brokers: important for people who are busy and want to invest successfully (according to Joseph
Grano, UBS Financial Group)
Canadian stock exchanges: Toronto Stock Exchange (TSE), Canadian Venture Exchange (CDNX)
oToronto Stock Exchange: 100 members,
oAn agreement in 1999 created the Canadian Venture Exchange from Vancouver and Alberta stock
markets; shifted all derivative trading to the Montreal stock exchange and consolidated all senior
equity trading at the TSE
oCDNX no focuses on junior companies
Foreign Stock Exchanges:
oNew York Stock Exchange (NYSE): founded in 1792 at corner of Wall and Broad Streets; largest
U.S. stock exchange, 1.24 billion shares ($42.3 billion) change hands every day; responsible for
41% of all shares traded; facing competition with electronic market because electronic market
doesn’t require special dealers to control trading on each stock, and because electronic market is
convenient in location
oThe American Stock Exchange (AMEX): second largest floor-based exchange, also located in New
York City; accounts for 2% of all U.S. exchanges
oThere are other regional stock exchanges in Chicago, Philadelphia, Boston, Cincinnati, Los
Angeles, San Francisco, Spokane and Washington
oOther Foreign Stock Exchanges: London stock exchange has more stocks listed than NYSE;
exchanges in London, Tokyo and other cities are in the trillions; however in market value, U.S.
exchanges are larger
Over-the-counter (OTC) market: organization of securities dealers formed to trade stock outside the formal
institutional setting of the organized stock exchanges (no trading floor; consists of many people in different
locations who hold an inventory of securities that are not listed in major exchanges; independent dealers buy and
sell at own risk; small exchange compared to others)
National Association of Securities Dealers Automated Quotation (Nasdaq): a stock market implemented by
NASD that operated by broadcasting trading information on an intranet to more than 350 000 terminals
worldwide (OTC system; and worlds first electronic stock market) , in 2001 Nasdaq set a record for the most
shares traded on one day, 3 billion
oNASD created Nasdaq in 1971 but became a separate organization in 2001 so that it could focus
solely on securities regulation
oNASD: worlds largest private-sector securities-regulation organization (5500 member firms)
Steps toward a global stock market: Nasdaq’s electronic telecommunications system has an infrastructure that
could loud to a global stock market
oNasdaq is taking the following steps to become a worldwide, 24 hour-a-day trading system:
launched Nasdaq Japan Market in 2000 (captured 30% of new public stock offerings in 2001);
Nasdaq Europe in 2001 which offers European traders access to stocks of listed U.S. and Asian
companies; opened offices in Shanghai and Bangladore in 2001; agreed to a deal with Quebec to
launch Nasdaq Canada; deal with Hong Kong stock exchange to trade stocks in both exchanges;
deals with Australian and South Korean stock markets
Bonds
Bond: a written promise that the borrower will pay the lender, at a state future date, the principle plus a stated
rate of interest
oBonds differ among themselves in terms of maturity, tax state, and level of risk versus potential
yield
oSeveral services rate the quality of bonds from different issuers (Standard & Poor’s, Moody’s and
Canadian Bond Rating Service)
Government Bonds
Government bond: bond issued by the federal government
oamong the safest investments available; longer maturities are riskier because they are exposed to
more political, social and economic changes (but Canada backs all federal bonds)
Municipal bonds: bonds issued by provincial or local government
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Description
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) www.notesolution.com
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