rsm100chapter19.docx

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Department
Rotman Commerce
Course
RSM100Y1
Professor
John Oesch
Semester
Fall

Description
Chapter 19 Securities: stocks and bonds (which represent a secured, or asset-based claims on the part of investors) that can be bought and sold o Holders of stocks and bonds have a stake in the business that issued them o Stocks represent part-ownership while bonds represent strictly financial claims for money owed to bondholders by a company o Companies sell bonds to raise long term funds Securities markets: markets in which stocks and bonds are sold Primary securities markets: handles the buying and selling of new stocks and bonds by firms or governments o New securities represent only a small portion of securities traded Private placements: allows the businesses that exchange new securities to keep their plans confidential (i.e. financial info) To bring a new security to the market, the issuing corporation must obtain approval from a provincial securities commission and also needs the services of an investment banker Investment banker: any financial institution engaged in purchasing and reselling new stocks and bonds Well known investment banking firms include RBC Dominion Securities and TD Securities (provides 3 services) o They advise the company on the timing and financial terms for the new issue o By underwriting (buying) the new securities, investment bankers bear some of the risk of issuing the new security o They create distribution network that moves the new securities through groups of other banks and brokers into the hands of individual investors Secondary securities market: the sale and purchase of previously issued stocks and bonds o Handled by organizations like TSX Stock values are expressed in 3 different ways o Par value: arbitrary face value of a stock set by the issuing companys board of directors and stated on stock certificates used by accountants but is of little significance to investors Each company must preserve the par value and it cannot be distributed as dividends o Market value: the current price of a share on the stock market; the real value of a stock Market value reflects buyers willingness to invest in a company Market price of a stock can be influenced by objective factors (i.e. companys profits) and subjective factors, like rumours, investor relations (playing up the positive aspect of a companys financial condition to financial analysts and financial institutions), and stockbroker recommendations (a recommendation to buy a stock may increase demand for the stock) o Book value: value of a common stock expressed as total stockholders equity divided by the number of shares of stock Book value is used as a comparison indicator because for successful companies, market value is usually greater than the book value; thus when market price falls close to book value, some investors buy stock on the belief that it is underpriced and will increase in value in the future Common stocks are among the riskiest of all securities due to uncertainties about the stock market and their values can change quickly o Yet, they can offer high growth potential Blue-chip stock: stocks from well-established, financially sound firm o Traditional guidelines that assigned blue-chip status to a stock (i.e. history of dividend payouts, steady growth, etc) had changed with the proliferation of internet and start-up dot-coms Market capitalization: the aggregate market value of a companys stock o It is computed by multiplying the number of a companys outstanding shares times value of each shareo Almost all of the companies in the top 10 are either financial institutions or natural resource companies Preferred stock: stock that pays dividends that are expressed as a percentage of par value o Some preferred stock is callablethe issuing firm can require the preferred shareholders to surrender their shares in exchange for a cash payment The amount of this cash payment is know as call price, and it is specified in the agreement between the preferred shareholders and the firm Because preferred stock pays dividends, it is less risky than common stock Cumulative preferred stock: preferred stock on which any dividend payments the firm misses must be paid later, as soon as the firm is able Typically, the firm cannot pay any dividends to its common shareholders until it has made up all late payments to preferred shareholders The income from cumulative preferred stock is not as certain as the corporate bonds because the company cannot pay dividends if it does not make a profit Stock exchange: an organization of individuals formed to provide an institutional setting in which shares of stock can be bough and sold Most exchanges are non-profit corporations established to serve their members To become a member, an individual must purchase one of a limited number of memberships called seats, on the exchange o Only members are allowed to trade on the exchange o Because all orders to buy or sell must flow through members, they have a legal monopoly Trading floor: a physical location where specialists match buy and sell orders they receive from brokers o For TSX, trading floor no longer exists as they are replaced with alternative trading systems (ATSs) which use computers match buy and sell orders Broker: an individual licensed to buy and sell securities for customers in the secondary market may also provide other financial services o Discount brokers offer well-informed individual investors a fast, low-cost way to
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