MGTA04-Introduction to Management II
Chapter 11-Understanding Shares and Other Investments
- 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 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
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: 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: 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
- It is computed by multiplying the number of a company’s outstanding shares times the
value of each share.
- 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
- 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 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 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.
- 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
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
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