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Chapter 19

CHAPTER 19-Securities and Investments


Department
Rotman Commerce
Course Code
RSM100Y1
Professor
Michael Szlachta
Chapter
19

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CHAPTER
19:
SECURITIES
AND INVESTMENTS
Securities
Markets
-
securities
= stocks and bonds
because
they
represent
a secured or asset based claim on the part of
investors
-
People
who hold stocks/bonds
have
a stake in the
business
that
issued
them
-
Each share
of stock
represents ownership
so
stockholders have claims
on some of a FRUSRUDWLRQV assets
- Bonds does not
issue ownership. They represent financial claims
for
money
owed to
holders
of a company.
Companies sell
bonds to
raise
long term funds
- Markets of
selling
stocks and bonds =
securities
markets
Primary and
secondary
markets for
securities
-
primary securities
market
handles
the
buying
and
selling
of
new stocks and bonds by firms or governments
-
sometimes
will
sell
new
securities
to one buyer or a
small
group of
buyers
=
private placements (sale
is
confidential)
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Investment
Banking
- a
financial institution
is
responsible
for
purchasing
and
reselling
new stocks and bonds
- they
advice
the company on the timing and
financial
terms for the new issue
-
They underwrite
= buy new
securities
so they bear some risk of
issuing
the security
-
Create distribution
network that
moves
the new
securities
through groups of other banks and brokers into
the hands of
individual
investors
-
The secondary securities
parket is the market for
selling existing
stocks and bonds
Stocks -
widespread ownership
of stocks
because
of
availability
of
different
types
Common Stock - stock that people buy hoping that the stock will
increase
in
value
to
result
in a
capital
gain
and/or provide
dividend
income
- 3 ways of
expressing
the
value
of common stock:
1) par
value
- the face
value
of stock. It is set by the
issuing
companys board of directors; its an arbitrary
value
2) Market
value
- the stocks
real value
in secondarys
security
market. It is the current price of a
share
on the
stock market. It
reflects
the buyers
willingness
to
invest
in a company
-
influenced
by rumours about the company,
investor relations (ie speaking positively
about your company to
other
financial analysts
and
institutions),
stockbroker
recommendations (if
your stock is
recommended
to
buy, it may
increase
in demand and
therefore
in price. If your stock is
recommended
to
sell,
it may decrease
in demand and price will drop)
3) Book
Value
-
division
of owners equity by the number of
shares
of stocks
- owners equity is the sum of a companys common stock par
value, retained earnings
and additional
capital
- Market
value
is
usually greater
than book
value
so
investors
will seek to buy when the market price is close
to the book
value because
that
means
that the stock is
underpriced
and will
increase
in the future
INVESTMENT TRAITS OF COMMON STOCK:
common stocks are
riskiest
of
all securities because
the stock
market is so
uncertain
so the stock
value
can change quickly
- if the company doesnt pay
dividends because
it had a tough
year,
this is
reflected
in its stock
- Common stock
offers
most growth potential
BLUE CHIP STOCKS:
stocks of well
established
and
financially
sound firms
MARKET CAPITALIZATION:
the market
value
of stocks that is listed on the stock exchange
- find the market
value
by: number of outstanding
shares
*
value
of each share
Preferred
Stock -
preferred
stock is
issued
with a stated par
value,
and it pays
dividends
as a % of the par
value
- some
preferred
stock is
callable meaning
that the
issuing
firm can
require
its pref
shareholders
to
give
up
their
shares
for a cash
payment. The
amount of this cash
payment
is the call price
Investment
Traits
of
Preferred
Stock -
less risky
than common stock
- pref stock is
cumulative meaning
that
dividends
that havent been paid in the must must be paid up front to
pref
shareholders
before it pays
dividends
to common shareholders
-
Company
can only pay
dividends
if it
makes
a profit
- Growth of pref stock is
limited because
of its fixed dividend
Stock
Exchanges
-
handles
most of the
secondary
market for stocks
- stock
exchange
=
organization
of
individuals
formed to prodivde an
institutional
settings in which stocks
can be bought and sold for
thmelseves
and their
clients,
within
certain
rules
- To become a member, a person must buy a seat on the
exchange,
which is a
membership. Only
members
or their
representatives
are
allowed
to trade on the
exchange,
so they
have
a monopoly over trading
-
Memberships
can be bought and sold
like
most assets
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