1. INVESTMENTS: Analysis and Management Second Canadian Edition INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones

2. Chapter 4 Securities Markets

3. Distinguish between primary and secondary markets. Describe how the equity markets are organized and how they operate. Explain what we mean by the third and fourth markets. State the major stock market indicators. Describe, briefly, the bond and derivatives markets. Discuss the factors behind rapid change in the securities markets Learning Objectives

4. Help firms and governments raise cash by selling securities Channel funds from savers to borrowers Provide a place where investors can act on their beliefs Help allocate cash to where it is most productive Help lower the cost of exchange Importance of Financial Markets

5. New securities are issued in a primary market  Initial public offering (IPO) versus “seasoned” new issue IPO – Common stock shares of a company being sold for the first time Issue facilitated by investment dealers  Specialists in advice, design, and sales  Intermediaries between issuer and investor Primary Markets

6. Client advice includes type and features of security, offer price, and timing of sale Underwriting services: Risk of selling to investors assumed from issuer Coordinate marketing by helping issuer register securities, issue prospectus, and sell securities Investment Dealers

7. The issuing company sell the securities to the financing group which consists of one or two firms The financial group sells the securities to the marketing group at a “draw down” price The securities are distributed for sale to the public Underwriting Process

8. Prompt Offering Qualification (POP) System allows senior reporting issuers to sell new securities over time via “short form” prospectuses  Reduces issuance cost Listing process Global security issues A private placement means new securities are sold to a small group of institutional investors  Registration not required Issuance of Securities

9. Markets where investors trade previously issued securities Auction markets involve bidding in a specific physical location  Brokers represent investors for a fee  Others trade for their own account Negotiated markets consist of decentralized dealer network Secondary Markets

10. Toronto Stock Exchange (TSX) is a secondary auction market for equity securities  Largest Canadian stock market  Listing requirements for traded firms TSX Venture Exchange is Canada’s “junior” stock market New York Stock Exchange (NYSE) is the largest secondary market in the world Stock Exchanges

11. Formal organizations approved and regulated by the SEC (or the provincial securities commissions such as the OSC in Canada) Members  Can only trade listed stocks  Must buy a seat on the exchange Listing requirements  minimum capitalization, shareholder equity, average closing share price, etc. Stock Exchanges

12. General Exchange Initial Listing Requirements (specifics may vary) StandardNYSETSX Nasdaq (NM) Nasdaq (Sm. Cap) Distributiona) 2,000 round lot holders b) 1.1m public shares a) 300 board lot holders b) 1m public shares a) 400 round lot owners b) 1.1m a) 300 round lot owners b) 1m Market Value (public shares) $100m$4m Cdn.$75m (or Total Assets or Total Sales > $75m) $50m (or Stock Equity >$5m or Net Income >$0.75m)

13. StandardNYSETSX Nasdaq (NM) Nasdaq (Sm. Cap) Before-Tax Earnings from Continuing Operations $6.5 m over past 3 years:$2.5m last year + ($2m/ $2m), OR $4.5m last year and pos. all 3 years For Senior Industrial Companies: $300,000 CDN last year $1m last year (or in 2 of last 3 years) $0.75m Net Income (or $5m Equity or $50m Mkt. Value) Cash Flow$25m Operating Cash Flow over last 3 years Pre-Tax CF $0.7m last year and prior 2-year average ($0.5m) N/A General Exchange Initial Listing Requirements (cont’d)

14. New York Stock Exchange (NYSE) Centralized continuous auction market Exchange participants  single specialist  commission brokers  independent floor brokers  registered traders SuperDot Major roles of NYSE specialist  Dealer  Agent  Catalyst  Auctioneer Commissions  deregulated in 1975

15. Network of dealers standing ready to either buy or sell securities at specified prices  Dealers profit from spread between buy and sell prices  Handle unlisted securities Canadian OTC stocks are trading on the TSX Venture Exchange US OTC Market: NASDAQ Over-the-Counter (OTC) Markets

16. Trading unlisted stocks Listing requirements Nasdaq stock market Nasdaq market tiers  Nasdaq National Market (3,600 co.’s)  Small Capitalization Market (850 co.’s) Nasdaq market makers Other OTC markets (8,000 co.’s)  OTC Bulletin Board  Pink Sheets

17. Third Market: Over-the-counter transactions in securities listed on organized exchanges Fourth market: Trading network among investors interested in buying and selling large blocks of stock  Brokers, dealers bypassed so costs are low  Electronic or telephone network Third and Fourth Markets

18. After-Hours Trading: Electronic Communications Networks (ECNs) allow investors to trade after exchange hours (4 to 8 P.M. EST, and sometimes early in the morning) In-House Trading: this new trend has significant implications for the NYSE Trading

19. Toronto Stock Exchange is the eighth-largest stock exchange in the world  Many different equity markets exist Emerging markets  Generally less regulation and standardization of trading activity  Risks: Illiquidity, lack of information, political uncertainty International Equity Markets

20. Provide a composite report of market behavior on a given day S&P/TSX Composite Index  Market value weighted  In 2004, comprised of 223 companies representing almost 70 per cent of the market capitalization S&P/TSX 60 Index  Designed to mimic the performance of the S&P/TSX composite Index Equity Market Indicators

21. Dow Jones Industrial Average (DJIA)  Composed of 30 “blue-chip” stocks  Price weighted S&P 500 Composite Index  Composed of 500 “large” firm stocks  Market value weighted Nikkei 225 Average  Price weighted index of 225 actively-traded stocks on the Tokyo Stock Exchange Equity Market Indicators

22. Secondary bond market is primarily an over- the-counter network of dealers  Government of Canada bonds actively trade in dealer markets  Corporate bonds are not as actively traded as government issues Bond Markets

23. Growth of institutional trading  Block trading of stocks (transactions of at least 10,000 shares) Affects market structure and operation  Negotiated, not fixed, commissions Globalization of securities markets  24-hour trading  Instinet Market Developments

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