Chapter 10: SECURITIES MARKETS

1. Chapter 10: SECURITIES MARKETS Trading Financial Resources

2. SECURITIES MARKETS Funds Primary Securities Market Debt & Equity Corporations Investors Stocks & Bonds Securities • Additional Funds Support: • Expansion of facilities • Research and Product Development • Adoption of New Technologies • Other strategic initiatives Returns to Investors: Dividends, Interest, Capital Gains Long term financing

3. COMMON STOCK: Characteristics • Voting Rights – every share has the right to vote for the board of directors etc. and duly called meetings. • Right to Dividends – a proportionate share of dividends when they are declared by the board. There is no “right” to have them declared however. • Capital Gains – If the company performs well the shares should rise in value, and the shareholder will be able to sell their shares for more. • Preemptive Rights – If new shares are issued by the corporation, current shareholders have the right to purchase a proportionate amount. • Right to Residual Claim on Assets – common shares have the ultimate claim for what is left after creditors and preferred shareholders have been paid.

4. PREFERRED STOCK: Characteristics • Preference of Claim on Assets if corporation is dissolved, before common shareholders but after creditors • Preference on Payment of Dividends – P/S dividends must be paid in full before any dividends can be paid to common shareholders. • Cumulative Feature – some P/S have a feature that ensures any dividends not paid in past years must be paid before C/S can be paid anything. • No Voting Rights – P/S generally does not have any voting rights. • Conversion – some P/S has the right to convert to a certain amount of common shares.

5. THAT’S SOME CLASSY STOCK! • Some corporations issue more than one class of common stock. • Google has two classes of common stock. • Class A stock is actively traded • Class B shares are not traded and are all held by a small group of investors, including Google’s chief executive officer and co-founders • Class A stock has 1 vote, but each share of Class B stock has 10 votes.

6. BONDS: Characteristics • Long-term debt issued by a corporation or government • May be sold on an exchange • Pays interest annually or semiannually • Coupon Rate – the rate at which cash interest is paid. • Has a Maturity Date when the principal amount of the bond must be repaid. • Par Value – usually $1,000 but bonds are issued at a discount or a premium, depending on how the coupon rate relates to the market rate • Callable bonds have provisions for early redemption • Convertible bonds allow bonds to be transferred into shares of common stock

7. JUNK BONDS • Junk bonds are bonds that are rated Ba or lower in Moody’s classification • Junk bonds offer a higher rate of interest. • Ford Motor Company and General Motors have had bond issues that were in the junk bond category. • Junk bonds are often tactfully referred to as “high yield bonds.”

8. The primary market is when the shares are issued for the first time, and the funds come to the corporation Public Offering Initial Public Offering (IPO) Select an Investment Dealer/bank to underwrite File a prospectus Shares are issued Private Placement Quicker, simpler, less expensive Investment bank assistance No prospectus required TRADING SECURITIES: THE PRIMARY MARKET

9. Investment Dealers/Banks • Financial Intermediary that assists firm with IPO • Planning • Marketing • Assessment • Determining how to structure the IPO is key role of Investment Dealers/Banks

10. THE COLORFUL LANGUAGE OF THE STOCK MARKET Red Herring: a preliminary Prospectus that contains a disclaimer printed in bold red ink stating that it does not represent an offer to sell the securities. Green Shoe Option: an arrangement allowing an investment bank to issue more shares during a public offering than originally authorized. Pink Sheet Stocks: stocks in very small companies that are publicly traded. In the past, the prices of these stocks were printed on pinks sheets of paper. Black Tuesday: October 29,1929, stock prices crashed, ushering in a prolonged slump in the performance of stock prices.

11. TRADING SECURITIES: THE SECONDARY MARKET • Security Exchanges • Toronto Stock Exchange – more established companies • TSX Venture Exchange – companies in the early stages • New York Stock Exchange - The largest securities exchange in the United States, referred to as NYSE • NASDAQ - A major stock exchange that handles trades through a computerized network • Over the Counter Market

12. Provincial and Territorial Regulations Many countries have national regulatory bodies Each province and territory in Canada has its own securities act. Most of the stocks are on the TSX in Ontario, so that province has the most influence on regulations. There has been attempts to centralize the regulations, as no other advanced country does not have a centralized authority. Self-Regulatory Organizations Canadian Securities Administrators improve, coordinate and harmonize regulations for capital markets Several other organizations relate to specific parts of the market (i.e. Investment Dealers Association of Canada) REGULATIONS OF SECURITIES MARKETS: ESTABLISHING CONFIDENCE

13. PERSONAL INVESTING QUESTIONS: • What are your short-term and long-term goals? • How much are you able to invest? • How concerned are you about the tax implications? • How much tolerance do you have for risk?

14. FULL SERVICE VS DISCOUNT BROKERS • Individuals must use a broker to trade stocks on the organized exchanges and OTC market • Full Service Brokers • Provide a range of services like research, advice and tax planning • Discount Brokers • Basic buy/sell capabilities • The competition between brokers is intense and both attempt to offer more services.

15. BUYING SECURITIES Limit Orders – Place limits on the price at which orders are executed Market Orders – buy or sell a security at the current market price

16. STRATEGIES FOR INVESTING IN SECURITIES • Investing for Income – dividends that are regular, interest payments • Market Timing – quick gains, buy low, sell high. • Value Investing – finding shares that the market has undervalued, compared to their real worth. • Investing for Growth – finding companies that have more growth • Buying and Holding – buying good companies, diversify and wait for the market to go up.

17. MUTUAL FUNDS • Diversification – large group of stocks without having to buy individual shares. • Professional Management – every stock is thoroughly investigated and carefully chosen. • Variety – different funds that can match what you want to accomplish • Liquidity – can be easier to withdraw funds, but there are exceptions.

18. OTHER SECURITIES-RELATED INVESTMENTS: ETFS • Exchange Traded Funds are a hybrid investment • Combines characteristics of a stock with characteristics that are similar to a mutual fund • Represents ownership in a “market basket” of securities from the stock exchange. • The return on the exchange is the same as your return.

19. KEEPING TABS ON THE MARKET: STOCK INDICES Stock Index – tracks how the prices of a specific set of stocks have changed. Standard and Poor’s 500 – tracks 500 stocks and weighs the total market value of each stock. Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors. S&P/TSX Composite Index – used to measure the performance of the Toronto Stock Exchange