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BUSI 1110 Chapter 15 Slides

VIEWS: 12 PAGES: 10

  • pg 1
									                                                                                  3/14/2012




                                         CHAPTER 15



Money, Banking, and
Securities Markets



Copyright © 2012 – Pearson Canada Inc.




                              Learning Objectives
     1.        Define money and identify the different forms it takes in
               Canada’s money supply.
     2.        Describe the different kinds of financial institutions that make
               up the Canadian financial system and explain the services
               they offer.
     3.        Explain the functions of the Bank of Canada and describe the
               tools it uses to control the money supply.
     4.        Discuss the value of common stock and preferred stock to
               shareholders and describe the secondary market for each type
               of security.
     5.        Describe the investment opportunities offered by mutual funds
               and commodities.
     6.        Explain the process by which securities are bought and sold.

Copyright © 2012 – Pearson Canada Inc.                                     15-2




                                           Money
                                                      Any object
                                                  generally accepted
     • Characteristics:                             as payment for
             –    Portable:                        goods & services
                   • lightweight and easy to handle
             –    Divisible:
                   • easily broken down to match the value of goods
             –    Durable:
                   • must not spoil or easily wear out
             –    Stable:
                   • must be stable enough to hold its value over
                     time, apart from minor fluctuations
Copyright © 2012 – Pearson Canada Inc.                                     15-3




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                                Functions of Money
• Medium of exchange
    – a single medium of exchange for goods and
     services instead of barter
• Store of value
    – can be used for future purchases
• Unit of account
    – allows measurement of the relative value of
     goods and services

  Copyright © 2012 – Pearson Canada Inc.                        15-4




                                  The Money Supply
The value of money depends on its supply
      – as supply , value
      – as supply , value
• Narrow definition is called M-1
      – Currency
      – Demand deposits
• Wider definition is called M-2
      –    M1, plus:
      –    Savings
      –    Term deposits
      –    Money market m-funds
  Copyright © 2012 – Pearson Canada Inc.                        15-5




                               Financial Institutions
• Traditionally consisted of four financial pillars
    – Chartered banks (Sched. I, II)
    – Alternate banks (trust companies, credit unions,
          Caisses Populaires)
    – Life insurance companies and specialized lending
          and saving intermediaries
                                               Differences
    – Investment dealers                     are now blurred
                                           due to changes in
                                           financial industry
                                               regulations
  Copyright © 2012 – Pearson Canada Inc.                        15-6




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             Banks as Creators of Money




  Copyright © 2012 – Pearson Canada Inc.                           15-7




                 Other Changes in Banking
• Changes in Customer Demands
    – Shift from their historical role as intermediaries between
      borrowers and depositors
    – Diversification into other financial products
       • Investment banking
       • Corporate and government securities
• Deregulation
    – money markets, commercial paper
• International Banking
    – trying to merge to afford technology investment
    – cooperation between banks, e.g. cheque clearing



  Copyright © 2012 – Pearson Canada Inc.                           15-8




                              The Bank of Canada
• The central bank of Canada
             • Managed by a Board of Governors
    – Regulates operations of chartered banks
    – Manages the money supply by
             • Buying/selling securities
             • Changing the bank rate
• Bank rate = rate at which chartered banks
  can borrow from Bank of Canada

  Copyright © 2012 – Pearson Canada Inc.                           15-9




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        Monetary Policy Actions of the Bank
                   of Canada




 Copyright © 2012 – Pearson Canada Inc.                     15-10




                 Pillar #2: Alternate Banks
• Trust companies
   – safeguard funds and estates entrusted to it
   – serves as a trustee, transfer agent, & registrar for
     corporations
   – accept deposits
• Credit unions /Caisses Populaires
     – cooperative savings and lending institution formed by
       a group of individuals with common interests
     – offer savings accounts, loans, mortgages to members
     – invest its own funds in corporate & government
       securities
 Copyright © 2012 – Pearson Canada Inc.                     15-11




       Pillar #3: Specialized Lending
        and Savings Intermediaries
      • Life insurance firms
      • Factoring companies
      • Financial corporations
              – sales finance company
              – consumer finance company

      • Venture capital firms
      • Pension funds
 Copyright © 2012 – Pearson Canada Inc.                     15-12




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          Pillar #4: Investment Dealers

    Underwriters                                 Stock brokers
 • Distribute new                             • Facilitate
   stock and bond                               trading of stock
   issues                                       and bond on
   (underwriting)                               exchanges
                                                (brokerage)


  Copyright © 2012 – Pearson Canada Inc.                                   15-13




                       Other Sources of Funds
• Government financial institutions and granting
  agencies
    – Business Development Bank of Canada (BDC)
    – Canada Mortgage and Housing Corporation (CMHC)
    – Export Development Corporation
• Canada and its provinces borrow from
  international sources of funds, including other
  nations
• The Canadian Capital Market (international
  funds)
  Copyright © 2012 – Pearson Canada Inc.                                   15-14




                                           Securities
                                          Stocks and bonds
                           (which represent a secured-asset-based claim)
                                    that can be bought and sold
       • Primary securities market
               – sale and purchase of newly issued stocks or bonds offered
                 by firms and governments
                  • May be private placements
       • Secondary securities market
               – sale & purchase of previously issued stocks & bonds
       • Investment bankers
               – financial specialists who issue new securities


  Copyright © 2012 – Pearson Canada Inc.                                   15-15




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                                          Common Stock
      • Par value
              – an arbitrary value set by the issuing company’s board of
                directors and stated on stock certificates
      • Market value
              – current price of a share the secondary securities market
                 • depends on objective and subjective factors
                               – company’s profits, rumours, investor relations,
                                 recommendations
      • Market Capitalization
              – market value of a firm’s stock listed on a stock exchange
              – fluctuates daily
      • Book value
              – shareholders’ equity divided by the number of shares of
                common stock outstanding
              – used as a comparison indicator

 Copyright © 2012 – Pearson Canada Inc.                                            15-16




                                          Preferred Stock
• Issued with a stated par value
• Dividends paid based on a percentage of
  par value
• Some preferred stock is callable
   – the firm can require surrender of shares for a
     specified call price.




 Copyright © 2012 – Pearson Canada Inc.                                            15-17




                                    Stock Exchanges
      • Organization of individuals formed to provide
        an institutional setting in which stock can be
        bought and sold
      • Broker:
              – Individuals licensed to buy and sell securities for
                customers in the secondary market
              – Full-service brokerage
              – Discount brokerage
              – Online trading

 Copyright © 2012 – Pearson Canada Inc.                                            15-18




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              Canadian Stock Exchanges
• Toronto Stock Exchange (TSX)
   – largest exchange in Canada (100 members)
   – firms must pay a fee to list their stocks on the
     exchange.
• Canadian Venture Exchange (CDNX)
   – focuses on junior companies
• Montreal Stock Exchange (NEX)
   – handles all derivative trading

 Copyright © 2012 – Pearson Canada Inc.                             15-19




                The Over-the-Counter Market (OTC)

      • Many securities are not listed on a
        stock exchange
      • OTC markets consist of numerous
        dealers who trade among themselves
        for smaller firms and those not listed on
        exchanges



 Copyright © 2012 – Pearson Canada Inc.                             15-20




                                          Bonds
  • Government Bonds
  • Backed by government guarantee
  • typically sold in large blocks to institutional investors
          – Pension funds, banks, insurance companies and private
            investors.
  • Corporate bonds
  • Backed by guarantee of a specific company (eg. Air Canada)
  • Features:
          –    Secured or unsecured (debenture)
          –    Bearer or registered
          –    Callable
          –    Serial
          –    convertable


 Copyright © 2012 – Pearson Canada Inc.                             15-21




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                                         Mutual Funds
   A company pools the resources of many investors and uses
      funds to purchase various types of financial securities
                          (a portfolio)

         – Different funds have different goals
           (stability, growth, etc.) and different levels
           of risk
         – Investments are professionally managed
                 • No-load fund
                          – investors are not charged a sales commission when
                            they buy into or sell out of a fund
                 • Load funds charge between 2% and 8%
Copyright © 2012 – Pearson Canada Inc.                                             15-22




                                         Hedge Funds
                                       Private pools of money
                                  that try to give positive returns,
                               regardless of stock market performance

                     • often use short-selling
                              – betting that a stock will go down
                     • or leveraging
                              – borrowing money against principal
             – sold to wealthy, knowledgeable investors
             – also sold as “principal-protected notes”
                              – original principal, but not extra return, is guaranteed

Copyright © 2012 – Pearson Canada Inc.                                             15-23




                                         Commodities
     • Commodities are undifferentiated products
             – food items (coffee beans, pork bellies), oil, minerals
     • Futures contract
             – agreement to purchase specific amounts of a commodity at
               a certain price on a set date in the future
             – risky investment with many variables
     • Commodities market
             – a market in which futures contracts are traded
     • Investors can buy on “margin,” with a minimal
       amount as a down payment



Copyright © 2012 – Pearson Canada Inc.                                             15-24




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                                          Options
• Call option
   – the purchased right to buy a particular stock
     at a certain price until a specified date
• Put option
   – the purchased right to sell a particular stock at
     a certain price until a specified date
• Traded on several stock exchanges
• Daily prices of put and call options
  appear in the financial press
• Often given to executives as motivators
 Copyright © 2012 – Pearson Canada Inc.                                      15-25




                               Reading the Market
• Market indexes summarize trends in the stock
  market and specific industries
   –    Dow Jones Industrial Average (DJIA)
   –    Standard & Poor’s Composite Index (S&P 500)
   –    S&P/TSX index
   –    NASDAQ Composite
• Bear market:
   – a period of falling stock prices
• Bull market:
   – a period of rising stock prices
 Copyright © 2012 – Pearson Canada Inc.                                      15-26




                 Buying and Selling Stocks
      • Market order
              – order to buy/sell a security at the current market price
      • Limit order
              – an order to buy a security but only if its price exceeds a
                certain level
                 • limit buy order - if less than or equal to limit
                 • limit sell order - if greater than or equal to limit
      • Stop order
              – order to sell a security if its price falls below a level
      • Round lot (board lot)
              – the purchase or sale of shares in units of 100
      • Odd lot
              – the purchase or sale of shares in units of other than 100

 Copyright © 2012 – Pearson Canada Inc.                                      15-27




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               Margin Trading/ Short Sale
• Margin: Investor borrows money rom
  broker to buy stock:
   – The broker charges interest (more than bank
     rates)
   – Investors can pay off the financing when they
     sell the stock, hopefully at a profit
• Short Selling: Investor “borrows” stock
  from broker and immediately sells it:
   – Investor purchases stock later (hopefully at a
     lower price) and returns it to the broker
 Copyright © 2012 – Pearson Canada Inc.                                   15-28




                         Securities Regulations
      • Brokers are licensed and securities are registered
              – exchanges exercise self regulation
      • Prospectus
              – a detailed registration statement about a new stock
              – filed with provincial security exchanges (in Canada) or
                Securities and Exchange Commission (SEC in US)
              – provided to potential investors
      • Insider trading
              – illegal activity of using special (inside) knowledge about a firm
                to make a profit
      • Blue-sky law
              – laws regulating how firms back up securities


 Copyright © 2012 – Pearson Canada Inc.                                   15-29




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