Chapter 19: Securities &
Stocks and bonds, which represent a secured asset based claim on the part of investors,
which are bought and sold. Stockholders have claims on the company assets, while
bondholders just have a financial claim.
•Primary Market (sale/purchase of newly issued stocks from firms or the gov’t)
oAlso called private placements
oNeed help from Investment Bankers to issue bonds, such as RBC
•Secondary Market (sale/purchase of previously issued stocks/bonds)
•Investment Bankers (specialists who advise the company on the
timing/financial terms for the new issue, underwrite(buying) the new securities,
create the distribution network that moves the new securities through groups of
other banks and brokers into the hands of individuals.
Market Value – current price of a share the secondary securities market; the real value
Buy Low, Sell High – capital gain
Book Value – the value that shows up on YOUR books/the actual price, not market = total
stockholder’s equity divided by the number of shares of stocks (outstanding)
Par Value – the arbitrary value of a stock set by the board of directors and stated on stock
certificates – used by accountants but not investors
Market Capitalization – the dollar value/market value of stocks listed on a stock
exchange (number of company shares outstanding x the value of each share)
Callable Shares – when the firm can buy back the preferred shares for a call price
EX. Share Purchase:
In 2008, Smyth buys a share for $10, and one year later it is worth $10.75. Just before he
sells his share, the company pays out a dividend of 0.50 per share.
His total holding return is 12.5% because:
Capital Gain Yield = 7.5%
Dividend Yield = 5%
Initial Public Offering (IPO)
Find the investment banking side of a large company – talk to the stock market, arrange a
date, and offer the initial stock offering at a certain Date. E.g. 2006, Tim Hortons).
Investment Bankers figure out the price of every share depending on the amount of
shares being offered to the public. Investment bankers sell shares to special/preferred
shares to…high-wealth investment companies, even BEFORE it is released to the
Tim Hortons’ Market value increased from $20 to $30 in a day. The people who
bought it before the public market made millions of dollars that day.
Unless the company buy back all the stock, there’s only ONE initial public offering.
Investment Traits of Common Stocks
-risky securities, dividends may not be paid in unprofitable years, have high growth
BLUE CHIP STOCK – telecommunications, railway, government organizations, banks –
-Less risky, but limited growth due to a fixed dividend. No voting rights, but dividends must
be paid as a percentage of par value
-Cumulative Preferred Stock – dividends not paid in the past must be added up to be paid
in the future
-Brokers make fees to represent you on the stock market – he receives buy/sell orders from
those who are not members of the exchange and executes the order.
oDiscount Broker – Cheaper because brokers receive fees, not commission, do
not offer investment advice or consultations. It’s convenient, and people prefer
BMO InvestorLine, ETRade Canada, and QTrade Investor as the top three
oFull Service Broker – offer clients suggestions on investments, and since they
are also investment bankers they can sell IPOs to clients.
The Toronto Stock Exchange is a private for-profit company
Toronto is good for mining companies
Over-The Counter Market – organizations of securities dealers formed to trade stock
outside the formal institutional setting of organized stock exchanges – no trading floor,
just people with an inventory of securities that are not listed under the major exchanges.
Trading volume is small. Nearly all secondary trading in BONDS occur here.
NASDAQ – National Association of Securities Dealers Automated Quotation – online stock
market, worth $2.2 billion
Reading the Market
Market Indices to summarize the trends in the stock market and specific industries
-Dow Jones Industrial Average (30 companies)
-S&P/TSX Composite (about 300 corporations)
-Index Investing – invest stocks in companies in the same companies under Dow Jones /
very cheap and diversifies.
-Right now, we’re in a bull market
Market Order – an order to a broker to buy/sell a certain security at the current market
Limit Buy Order – an order to buy a certain security only if its price is less than or equal
to a given limit
Limit Sell Order - an order to sell a certain security only if its price is more than or equal
to a given limit
Stop Order – an order to sell a security if its price falls to a certain level or below
Round Lot – the purchase or sale of stock in units of 100 shares
Odd Lots – the purchase/sale of stock in units NOT of 100 shares
Margin Trading – buy stocks on margin/putting down a portion of the stock value. You
gain more if your stock goes up, but lose more when it goes down. For example, if you
borrow $50,000 to pay for a $100,000 stock, at 10% interest. After one year, if shares rise
to $115,000, you pay back $55,000 (principal + interest), and have $60,000 remaining.
That’s an extra $10,000 of what you invested, and a 20% gain. If you invested $100,000
to start, your gain would be 15%. (IN absolute terms you are earning more).
Short Sale – selling borrowed shares of stock in the expectation that their price will fall
before they must be replaced, so that replacement shares can be bought for less than the
price of the original sold.
Blue Sky Laws – laws regulating how firms must back up securities
Prospectus – detailed registration statement about a new stock
Ponzi Scheme – promising investors high returns at the beginning, and then taking all
Since Program Trading (the automatic trading of a large group of stocks) can get out of
control, there are circuit breakers, where the NYSE closes for an hour (cools off) when
the Dow Jones falls more than 1000 pts, for investors to reconsider.
1)What’s the holding period return on a share bought at $20 and sold for $21.50
and had dividens paid out of $1.50 and $1.00? (* Period is time between buy and
Capital Gain is $1.50, Dividends is $2.50, and total return is $4.00
$4/$20 = 20%
Stocks and bonds, which represent a secured asset based claim on the part of investors, which are bought and sold. Dominion securities: secondary market (sale/purchase of previously issued stocks/bonds) Market value current price of a share the secondary securities market; the real value. Book value the value that shows up on your books/the actual price, not market = total stockholder"s equity divided by the number of shares of stocks (outstanding) Par value the arbitrary value of a stock set by the board of directors and stated on stock certificates used by accountants but not investors. Market capitalization the dollar value/market value of stocks listed on a stock exchange (number of company shares outstanding x the value of each share) Callable shares when the firm can buy back the preferred shares for a call price. In 2008, smyth buys a share for , and one year later it is worth . 75.