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MGTA02H3 (363)
Chapter 11

ch.11-Understanding Shares and Other Investments.pdf

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Management (MGT)
Chris Bovaird

MGTA04-Introduction to Management II Chapter 11-Understanding Shares and Other Investments (pg.193-206) Securities Market - Securities: Stocks and bonds (which represent a secured-asset-based claim on the part of the investors) that can be bought and sold. - Stockholders have claims on some of a corporation’s assets & a say in how the company is run because each share represents part ownership. - Bonds represent strictly financial claims for money owed to holders by a company. - Companies sell bonds to raise long term funds. - The market in which stocks and bonds are sold are called securities market. Primary and Secondary Markets for Securities - Primary Securities Markets: The sale and purchase of newly issued stocks and bonds by firms or government. - Private Placements allows the businesses that use them to keep their plans confidential. Investment Banking - Investment Banker: Any financial institution engaged in purchasing and reselling new stocks and bonds. - Investment Bankers serve as financial specialists in issuing new securities. - Well known firms as RBC Dominion Securities and TD Securities provide 3 types of investment banking services 1. They advise the company on the timing and financial terms for the new issue. 2. By underwriting (buying) the new securities, investment bankers bear some of the risk of issuing the new security. 3. They create the distribution network that moves the new securities through groups of other banks and brokers into the hands of individual investors. - New securities represent only a small portion of securities traded. - Secondary Securities Market: The sales and purchases of previously issued stocks and bonds. Stocks and Common Shares - Each year, financial managers, along with millions of individual investors buy and sell the stocks of thousands of companies. - Individuals and other companies buy a firm’s common shares in the hope that shares will increase in value, affording them a capital gain, and/or will provide dividend income. MGTA04-Introduction to Management II Market Value - Market Value: The current price of one share of stock in the secondary securities market; the real value of a share. - Market value reflects buyer’s willingness to invest in a company. - 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), and stockbroker recommendations (a recommendation to buy a stock may increase while a recommendation to sell can decrease demand and cause the price to fall). Book Value - Book Value: Value of a common stock expressed as total owner’s 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 than its book value. - When market price falls to near book value, some investors buy the stock on the principle that is underpriced and will increase in the future. Investment Traits of Common Shares - Common shares are among the riskiest of all securities. - 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. - Market Capitalization: The dollar value (market value) of stocks listed on a stock exchange. - It is computed by multiplying the number of a company’s outstanding shares times the value of each share. Preferred Shares - Preferred shares are usually issued with a stated value, such as $100. - Dividends paid on preferred shares are usually expressed as a percentage of the stated value. - Some preferred shares are callable. - The issuing firm can require the preferred shareholders to surrender their shares in exchange for a cash payment, known as the call price, is specified in the agreement between the preferred shareholders and the firm. MGTA04-Introduction to Management II Investment Traits of Preferred Shares - Cumulative Preferred Shares: Preferred shares on which dividends not paid in the past must first be paid up before the firm may pay dividends to common shareholders. - Typically, the firm cannot pay any dividends to its common shareholders until it has made up all late payments to preferred shareholders. - The purchase price of the preferred shares can also fluctuate, leading to a capital gain or loss for the shareholder. - The growth potential of preferred shares is limited due to its fixed dividend. Stock Exchanges - Stock Exchange: 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. - The exchange enforces certain rules to govern its member’s trading activities. - To become a member, an individual must purchase one of a limited number of memberships called “seats” on exchange. Trading Floor - Trading is allowed only at an actual physical location called the trading floor. - The floor is equipped with a vast array of electronic communications equipment for conveying buy and sell orders or confirming completed trades. Brokers - Broker: An individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services. - There are 3 types: Discount Brokers, Online Trading & Full Service Brokers. o Discount brokers offers services at a lower cost  Low brokerage fee due to personnel reaching fees or salaries, not commission.  They do not offer investment advice or person to person consultation  Does offer automated services, such as stock research, industry analysis, and screening for specific stocks.  E.g. Ameritrade online. o Online trading allows for convenient access and trading  Competition between brokers and online trading has driven commission fees downward. o Full service brokers can help in a financial world that is growing more complex  E.g. IPOs can’t usually be bought online or through phone call MGTA04-Introduction to Management II Canadian Stock Exchange - The first major stock exchange is the Toronto Stock Exchange (TSE) o Made up of 100 individuals members who hold seats o Companies must pay fees before listing a security on the stock exchange - Canadian venture exchange (CDNX) is a stock exchange created from combination of exchanges from Calgary, Vancouver, and Montreal o Did two other things:  Shifted all derivate trading to Montreal stock exchange  Merged (Consolidate) all senior equity trading (the stocks of big companies) at TSE. o Focuses more on junior companies. Foreign Stock Exchange - New York Stock Exchange (NYSE) o Trade around 38 billion worth of stock per day o 5
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