Textbook Notes (280,000)
CA (160,000)
UTSC (20,000)
MGT (800)
MGTA02H3 (400)
Chapter 11

Chapter 11- Understanding Shares and Other Investments


Department
Management (MGT)
Course Code
MGTA02H3
Professor
Bill Mc Conkey
Chapter
11

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Chapter 11- Understanding Shares and Other Investments
1- Explain the differences between primary and secondary securities markets
SECURITIES MARKETS
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 a stake in the business that issued hem
Stockholders have claims on some of a corporation’s assets and a say in how
the company is run because each share represents part ownership
Bonds represent financial claims for money owed to holders by a company
Securities markets- the markets in which stocks and bonds are sold
Primary and Secondary Markets for Securities
Primary securities market- the sale and purchase of newly issued stocks and bonds by
firms or governments
Sold to one buyer or a small group of buyers
Represent a small portion of securities traded
Private placements- allow the businesses that use new securities to keep their plan
confidential
Investment Banking
Investment banker- any financial institution engaged in purchasing and reselling new
stocks and bonds
Serve as financial specialists in issuing new securities
Provide 3 types of investment banking services:
oAdvise the company on the timing and financial terms for the new issue
oBy buying the new securities, investment bankers bear some of the risk
of issuing the new security
oCreate the 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
2- Discuss the value of common shares and preferred shares to shareholders and
describe the secondary market for each type of security
STOCKS
Has become easier to buy and sell stocks because of the availability of
different types of stocks and markets have established for conveniently buying
and selling them
Common Shares
Buy common shares in the hope that the shares will increase in value, which
can get a capital gain, and/or provide dividend income
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Market Value
Market value- the current price of one share of a stock in the secondary securities
market
The real value of a share
Reflects buyers’ willingness to invest in a company
Can be influenced by objective factors and subjective factors which includes:
oRumours- unverified info
oInvestor relations- playing up the positive aspects of a company’s
financial condition to financial analysts and financial institutions
oStockbroker recommendations- a recommendation to buy a stock may
increase demand for the stock and cause its price to 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 owners’ equity divided by the
number of shares of stock
Used as a comparison indicator because for successful companies, the market
value is usually greater than its book value
Investment Traits of Common Shares
The riskiest of all securities
Uncertainties about the market can quickly change a given stock’s value
When companies have unprofitable years, they often cannot pay dividends
(shareholders income and share price can drop)
Offer high growth potential
Market Capitalization
Market capitalization- the dollar value (market value) of stocks listed on a stock
exchange
Market capitalization = # of outstanding shares x value of each share
Preferred Shares
Usually issued with a stated value
Dividends are usually expressed as a percentage of the stated value
Some are callable
Amount of the cash payment (call price)
Investment Traits of Preferred Shares
Less riskier than the common shares
Are cumulative
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
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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 according to the exchange’s rules
To become a member, someone must purchase one of a limited number of
memberships (seats) on the exchange
Members/representatives are allowed to trade on the exchange
The Trading Floor
Trading floor- the actual physical locations where trading is allowed
Equipped with a vast range of electronic communications equipment for
conveying buy and sell orders or confirming completed trades
A variety of news services furnish important up-to-the-minute info about world
events and business developments
Brokers
Broker- an individual licensed to buy and sell securities for customers in the secondary
market
May also provide other financial services
Earns a commission from the order placer
Discount Brokers
Can be purchased at discount or full-service prices
Offer well-informed individual investors a fast, low-cost way to participate in
the market
Receive fees or salaries, not commissions
Do not offer investment advice or person-to-person consultations
Offer automated online services (Ex: stock research, industry analysis, etc)
Online Trading
Convenient access to the internet
Fast no-nonsense transactions
Opportunity for self-directed investors to manage their own portfolios while
paying low fees for trading
Full-Service Brokers
Can offer consulting advice in personal financial planning, estate planning, and
tax strategies
Provide a wide range of investment products
Can sell IPO shares to its clients
Offer insight of and suggestions on investments that clients might overlook
when trying to go through a lot of online financial data
Canadian Stock Exchanges
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