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Chapter 9

Chapter 9 Notes

Management (MGT)
Course Code
Kelin Emmett

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Management Chapter 9: 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
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
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
Secondary securities market: the sale and purchase of previously issued stocks and bonds (handled
by organizations such as Toronto Stock Exchange)
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
Market value: the current price of one share of a stock in the secondary securities market; the real
value of a stock. Also can be referred to as the actual value of one share
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 companys outstanding shares by the value of
each share
Common shares are extremely risky. However, the buyer opens themselves to growth potential of
the stock
Preferred Stock

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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. The disadvantage is
that the growth potential for preferred shares are limited since there is only a fixed dividend.
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
exchanges 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)
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. The biggest one in Canada
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. The most valued and the most shared traded overall
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)
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