Textbook Notes (280,000)
CA (160,000)
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RSM100Y1 (400)
Chapter 19

Chapter 19 notes.docx


Department
Rotman Commerce
Course Code
RSM100Y1
Professor
Stojanovic Dragan
Chapter
19

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CHAPTER 19: UNDERSTANDING SECURITIES AND INVESTMENTS
SECURITIES MARKETS
Stocks and bonds are known as securities because they represent secured, or asset-based, claims on
the part of the investors
Stockholders have claims on some of a corporation’s assets because each share of stock represents
part ownership
Bonds represent strictly financial claims for money owed to bondholders by a company
Companies sell bonds to raise long-term funds
Markets in which stocks and bonds are sold are called securities markets
Primary and Secondary Markets for Securities:
Primary Securities Markets: the sale and purchase of newly issued stocks and bonds by firms or
government
New securities are sometimes sold to one buyer or a small group of buyer in private placements,
the business that use them keep their plans confidential
1. Investment Banking
Most new stocks and some bonds are sold to the wider public market
Investment Banker: any financial institution that purchases and resells new stocks and bonds
They provide three types of services:
Advise the company on the timing and financial terms for the new issue
By underwriting (buying) the new securities, investment bankers bear some of the risk of
the issuing of the new security
Create the distribution network that moves the new securities through groups of other
banks and brokers into the hands of individual investors
Market for existing stocks and bonds, the secondary securities market, is handled by organizations
such as the Toronto Stock Exchange
STOCKS
Common Stock:
Stock values are expressed in three different ways as par value, as market value, and as book value
1. Par Value
Is the face value of a share of stock; the arbitrary value of a stock set by the issuing company’s board
of directors and stated on stock certificates
Each company must preserve the par value money in its retained earnings

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Par value cannot be distributed as dividends
2. Market Value
Is a stock’s real value – current price of a share on the stock market (secondary securities market)
Reflect buyers’ willingness to invest in a company
Market price of a stock can be influenced by both objective factors (i.e. company’s profits) and
subjective factors like rumours, investor relations, and stockbroker recommendations
3. Book Value
Is the value of a common stock expressed as total stockholders’ equity divided by the number of
shares of stock
Is used as a comparison indicator because for successful companies, the market value is usually
greater than the book value
4. Investment Traits of Common Stock
Common stock are among the riskiest of all securities but offer high growth potential
5. What Is a Blue-Chip Stock?
Is stock that has been issued by a well-established, financially sound firm
Performance guidelines for assigning blue-chip stock history of dividend payouts, steady growth
in earnings per share, low price earnings ratio, etc
a) Market Capitalization
Is the dollar value (market value) of stocks listed on a stock exchange
Is computed by multiplying the number of a company’s outstanding shares times the value of each
share
Preferred Stock:
Is stock that pays dividends that are expressed as a percentage of par value
Some preferred stock is callable issuing firm can require the preferred shareholders to surrender
their shares in exchange for a cash payment, known as the call price
1. Investment Traits of Preferred Stock
Is less risky than common stock because of the dividends
Most preferred stock is cumulative
Cumulative 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
But they’re not as certain as corporate bonds since company can’t pay dividends if there’s no profit
Purchase price of preferred stock can also fluctuate and growth potential is limited due to its fixed
dividend
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Stock Exchange:
Most of secondary market for stocks is handled by organized stock exchanges
Is an organization of individuals formed to provide an institutional setting in which shares of stock
can be bought and sold
Most exchanges are non-profit corporations established to serve their members
To become a member, individual must purchase one of a limited number of memberships called
“seats” – on the exchange
Only members are allowed to trade on the exchange
Because all orders to buy or sell must flow through members, they have a legal monopoly
Memberships can be bought and sold like other assets
1. The Trading Floor
Each exchange regulates the places and times at which trading may occur
Used to be at an actual physical location but now computers are used to match buy and sell orders
2. Brokers
Receives buy and sell orders from those who are not members of the exchange and executes the
orders
In return, broker earns a commission from the order placer
Brokerage assistance can be purchased at either discount or full-service prices
a) Discount Brokers
Offer well-informed individual investors a fast, low-cost way to participate in the market
Their service costs less because sales personnel receive fees or salaries, not commission
They don’t generally offer investment advice or person-to-person sales consultations
They do automated online services, such as stock research, industry analysis, and screening for
specific types of stocks
Online traders must use a broker
b) Full-Service Brokers
Help both new, uninformed investors and experiences investors who don’t have time to keep up
with all the latest developments
Offer clients suggestions on investments that clients might overlook when trying to sift through an
avalanche of online financial data
Also provide real estate planning, tax strategies, and a wider range of investment products
3. Canadian Stock Exchanges
The Toronto Stock Exchange (TSX) is the largest stock exchange in Canada
4. Foreign Stock Exchanges
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