RSM 100Y – Chapter 19: Understanding Securities and Investment
Stocks and bonds are known as securities because they represent asset-based
claims, where stocks is a claim to ownership and bonds a claim to debt.
Newly issues shares through IPOs from the firm or government.
Trading between investors of previously issued shares
1. Advise the company on the timing and financial terms for the new
2. Underwrite the securities during IPOs for resale
3. Create distribution network that moves shares around places
No dividends, but voting power and ownership Riskiest security
Par Value: Face value of the share, rarely used in Canada
Market Value: The real value of a share, it’s the current price determined
by the market reflecting the buyer’s willingness to invest in a company.
Book Value = Owners Equity/Number of outstanding shares
Blue-Chip Stock: Stock of financially sound firms
Market value of a company’s stock listed on a stock exchange
Issued with par value, pays dividends, no voting power, less risk
Can be callable, where the firm forcibly recalls a stock for cash
This price is known as the call price and is predetermined
Can be cumulative which allows the shareholder to claim unpaid
dividends over the ownership of their stock Stock Exchanges
An institutional setting where stocks are bought and sold
Trading Floor: Trading is only allowed in this area, it is regulated as well
by time when the market opens and closes
People who work for the exchange to trade stocks on behalf of others
Offers investors a cheap way to invest in the stock market, but do
not give investment advice or sales consultation.
Allows people to trade from their own home, driving down broker
costs so people will be enticed to use their services
Useful for new and uninformed investors, or experienced investors
who do not have the time to trade, they provide all the services you
need to make sound investment decisions since they’re experts
Unlike other styles of brokers, one has access to IPOs.
Canadian Stock Exchanges: TSE, CDNX (Junior Companies)
Foreign Stock Exchanges: NYSE, AMEX, NIKKEI
Over-the-Counter Market (OTC) Bonds trade here
Very informal, no trading floor and instead trades unlisted securities
NASDAQ and NASD
Electronic stock market system, and the largest private securities regulator
Newer firms are listed here
Bonds (Trade on the OTC)
Essentially an IOU to the borrower to pay back the money they lent. The price of
borrowing of the company is paid as interest to the creditor.
CSBs, by far the safest security on the market, low interest generally, though
longer maturities carry higher interest rates.
Major source of long-term financing for Corporations, with maturities from 10 to
30 years in length, usually longer term bonds carry more risk and higher rates Registered Bonds:
Registers the name of the holder and mails out cheques to them for interest.
Require shareholders to clip coupons from certificates to claim payments.
Reduced risk by backing the lent money with assets to be liquidated.
Unsecured Bonds (Debentures)