1. Copyright © 2011 by Nelson Education Ltd. 1 Chapter 10:SECURITIES MARKETS Trading Financial Resources

2. Copyright © 2011 by Nelson Education Ltd. 2 2 LOOKING AHEAD Copyright © 2011 by Nelson Education Ltd. LO1 Describe the three basic types of securities issued by corporations LO2 Explain how securities are issued in the primary market and traded on secondary markets LO3 Discuss how the government and private organizations regulate securities markets LO4 Compare several strategies investors use to invest in securities LO5 Explain the investor appeal of mutual funds and exchange traded funds LO6 Describe how investors can track the performance of their investments What are the different types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments?

3. Copyright © 2011 by Nelson Education Ltd. 3 WHAT IS A MARKET AND WHO IS IN IT? What do you currently know about the stock market? What type of people do you imagine invest in stocks and bonds? L01

4. Copyright © 2011 by Nelson Education Ltd. 4 SECURITIES MARKETS Stocks & Bonds Primary Securities Market Investors Corporations Funds Securities Debt & Equity Long term financing Additional Funds Support:  Expansion of facilities  Research and Product Development  Adoption of New Technologies  Other strategic initiatives Returns to Investors: Dividends, Interest, Capital Gains L01

5. Copyright © 2011 by Nelson Education Ltd. 5 COMMON STOCK: A SHARE OF CORPORATE OWNERSHIP Voting Rights Right to Dividends Capital Gains Preemptive Rights Right to Residual Claim on Assets The basic form of ownership is a corporation L01

6. Copyright © 2011 by Nelson Education Ltd. 6 PREFERRED STOCK Stock that gives its holder preference over common stockholders. –No Voting Rights –Claim on Assets –Payment of Dividends –Cumulative Feature L01

7. Copyright © 2011 by Nelson Education Ltd. 7 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. L01

8. Copyright © 2011 by Nelson Education Ltd. 8 BONDS: A FORMAL IOU Long-term debt issued by a corporation or government –Maturity Date –Par Value –Coupon Rate L01

9. Copyright © 2011 by Nelson Education Ltd. 9 CHARACTERISTICS OF BONDS Most bonds are secured with a pledge of specific assets Methods of retiring bonds: –Serial bonds have unique maturity dates and help spread out repayments –Companies may establish sinking fund to assist in repayment Callable bonds have provisions for early redemption Convertible bonds allow bonds to be transferred into shares of common stock L01

10. Copyright © 2011 by Nelson Education Ltd. 10 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.” L01

11. Copyright © 2011 by Nelson Education Ltd. 11 TRADING SECURITIES: THE PRIMARY MARKET Public Offering –Initial Public Offering (IPO) –Select an Investment bank –Prepare paperwork –Arrange for financing –Carry out the offer Private Placement –Quicker, simpler, less expensive –Investment bank assistance –No prospectus required –Only available to accredited investors L02

12. Copyright © 2011 by Nelson Education Ltd. 12 INVESTMENT BANKS Financial Intermediary Assists firm with IPO –Planning –Marketing –Assessment Determining how to structure the IPO is key role of Investment Banks L02

13. Copyright © 2011 by Nelson Education Ltd. 13 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. L02

14. Copyright © 2011 by Nelson Education Ltd. 14 TRADING SECURITIES: THE SECONDARY MARKET Security Exchanges –Toronto Stock Exchange –TSX Venture Exchange –New York Stock Exchange –NASDAQ Over the Counter Market Electronic Communication Networks L02

15. Copyright © 2011 by Nelson Education Ltd. 15 TMX Group Owns and operates: –Toronto Stock Exchange For more established companies –TSX Venture Exchange For early-stage companies L02

16. Copyright © 2011 by Nelson Education Ltd. 16 NEW YORK STOCK EXCHANGE The largest securities exchange in the United States. It is typically referred to as NYSE. L02

17. Copyright © 2011 by Nelson Education Ltd. 17 NASDAQ A major stock exchange that handles trades through a computerized network L02

18. Copyright © 2011 by Nelson Education Ltd. 18 COMPARING THE EXCHANGES L02

19. Copyright © 2011 by Nelson Education Ltd. 19 REGULATIONS OF SECURITIES MARKETS: ESTABLISHING CONFIDENCE Provincial and Territorial Regulations –Many countries have national regulatory bodies –Each province and territory in Canada has its own security act 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) L03

20. Copyright © 2011 by Nelson Education Ltd. 20 PERSONAL INVESTING 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? L04

21. Copyright © 2011 by Nelson Education Ltd. 21 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. L04

22. Copyright © 2011 by Nelson Education Ltd. 22 BUYING SECURITIES Market Orders – buy or sell a security at the current market price Limit Orders – Place limits on the price at which orders are executed L04

23. Copyright © 2011 by Nelson Education Ltd. 23 STRATEGIES FOR INVESTING IN SECURITIES Investing for Income Market Timing Value Investing Investing for Growth Buying and Holding L04

24. Copyright © 2011 by Nelson Education Ltd. 24 INVESTING FOR YOUR FUTURE Why might it be more important for individuals and families today to develop investment plans? Why is diversification important? L04

25. Copyright © 2011 by Nelson Education Ltd. 25 OTHER SECURITIES-RELATED INVESTMENTS: MUTUAL FUNDS Diversification Relatively Low Cost Professional Management Variety Liquidity L05

26. Copyright © 2011 by Nelson Education Ltd. 26 OTHER SECURITIES-RELATED INVESTMENTS: ETFS ETFs 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 L05

27. Copyright © 2011 by Nelson Education Ltd. 27 KEEPING TABS ON THE MARKET: STOCK INDICES Stock Index – tracks how the prices of a specific set of stocks have changed. Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors. Standard and Poor’s 500 – tracks 500 stocks and weighs the total market value of each stock. S&P/TSX Composite Index – used to measure the performance of the Toronto Stock Exchange L06

28. Copyright © 2011 by Nelson Education Ltd. 28 STOCK QUOTES ONLINE L06

29. Copyright © 2011 by Nelson Education Ltd. 29 PLAN YOUR INVESTMENT STRATEGY Besides diversification, how can investors reduce their risk? What resources are available to investors to manage their investments? Would you personally consider hiring a broker? L06

30. Copyright © 2011 by Nelson Education Ltd. 30 LOOKING BACK Copyright © 2011 by Nelson Education Ltd. LO1 Describe the three basic types of securities issued by corporations LO2 Explain how securities are issued in the primary market and traded on secondary markets LO3 Discuss how the government and private organizations regulate securities markets LO4 Compare several strategies investors use to invest in securities LO5 Explain the investor appeal of mutual funds and exchange traded funds LO6 Describe how investors can track the performance of their investments What are the different types of securities issued by a corporation? How are securities issued in the primary market and traded in the secondary market? How do the government and private organizations regulate securities markets? What are the different types of investment strategies that investors follow? What are the appeals of mutual funds and exchange traded funds? How can investors track the performance of their investments?