Securities Markets Dealer

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Securities Markets Dealer Powered By Docstoc
					     Securities Markets

Chapter 12
           4 topics in chapter 12

1.   Securities markets
2.   How securities are traded?
3.   Dealing with investment dealers
4.   Sources of investment information
        1. Securities Markets


• A securities market is where financial
  securities, such as common stocks and bonds,
  are traded.
• The market may be a physical place such as a
  building on Bay Street in Toronto or an
  electronic connection between securities
  dealers from across the globe.
• Securities markets consist of primary and
  secondary markets.
             Primary markets

• A primary market is one in which new
  securities are traded.

• There are two types of new offerings, initial
  public offerings and seasoned new issues.
1. An initial public offering (IPO) involves
   selling a company’s shares for the first
   time.
           IPO for Lululemon


• In July of 2007 Lululemon’s IPO was priced at
  $18 US

• The company offered 18.2 million shares

• Share prices shot up to 29.72 on the TSX.
• Lululemon used some of the cash from the
  IPO to open 25 stores in 2007 and up to 35 in
  2008 in the US and Canada.

• Current stock price for Lululemon (lll.to)
2. Seasoned new issues are stock offering by
  companies that already have common shares
  traded in the marketplace.
      The role of underwriters and
           investment dealers

• Stocks and bonds are generally sold in primary
  markets through an investment dealer serving
  as an underwriter.
• An underwriter is an investment dealer who
  purchases and then resells a new security
  issues.
• The largest investment dealers in Canada are
  The BMO Nesbitt Burns Group, TD Securities,
  CIBC World Markets Inc., Scotia Capital Inc.,
  and RBC Dominion Securities Ltd.
          Secondary markets
• Securities that have been previously issued
  and bought are traded in the secondary
  markets.

• The largest secondary market in Canada and
  the third largest in North America (NYSE,
  NASDAQ) is the Toronto Stock Exchange (TSX).
• 95% of all equity trading in Canada occurs
  through the TSX.
 A firm must meet strict requirements to be
       listed on the TSX, which include:


• Earnings before taxes (EBT) for the most
  recent year must be at least $200,000

• Pretax cash flow in the preceding year of the
  filing must be at least $500,00

• Net tangible assets must be at least $2 million
• The market value of publicly held stock must
  be at least $4 million

• There must be at least one million publicly
  held common shares

• There must be at least 300 public
  shareholders
• If a firm does not maintain the requirements,
  it is delisted.
• The TSX and TSX Venture together represent
  approximately 3700 companies

• They comprise about 9.7% of all listings
  worldwide.
• An over-the-counter (OTC) market is a linkup
  of dealers, with no listing or membership
  requirements.
• A bid price is the price an individual is willing
  to pay for a security

• An ask price is the price at which an individual
  is willing to sell a security
      Secondary bond markets


• The trading of bonds most often occurs
  through dealers in the OTC market rather than
  on the organized exchanges.
        International markets

• The world bond market is valued at more than
  $25 trillion.

• Dual listings are common.
 Regulation of securities markets

• The objective of regulation is to protect the
  investor and to provide a level playing field for
  all investors.

• There are two levels of regulation, provincial
  securities commissions and self-regulation by
  the exchanges.
    2. How Securities are Traded


• In discussing different trading mechanisms,
  we refer to securities as shares or stock, since
  they are the most frequently traded security.
• When placing an order, you must be clear
  about the order size and the period for which
  the order will remain outstanding.
• Order size: Common stocks are sold in either
  round lots or odd lots.

• A round lot is a group or lot of 100 shares of
  common stock.

• An odd lot is an order involving between 1 and
  99 shares of common stock.
  There are alternative periods for which the
  order will remain outstanding:

• day orders

• open orders

• fill-or-kill orders
                Types of Orders




• There are several types of orders:
                market orders



– An order to buy/sell a set number of shares
  immediately at the best price available

– The order can be executed within minutes
                   limit orders




• An order that specifies a securities trade is to
  be made only at a certain price or better
                   stop orders



• An order to sell a security if the price drops
  below a specified level or to buy if the price
  rises above a specified level

• Used to protect profits
• Reduces risk of investing

• Set the stop-loss order price so that you
  safeguard against only a major fluctuation
                    Example
• Suppose you purchased a stock at $50 and it
  rises to $100, you want to protect your profit
  of $50 per share because you never know
  when a stock price may drop.

• You put in stop order to sell if it falls below
  $75, for instance.

• Or choose another value..$85, $70?
                  Short selling

• Involves borrowing shares from your dealer
  and selling them with an obligation to replace
  the shares later along with any lost dividends.

• A way to profit from falling stock prices

• You sell the borrowed stock, then buy when
  the price falls, repay dealer his/her stocks and
  profit from different in price.
• Goal is to sell high and buy low

• Margin requirement is a condition; the
  percentage that an investor must have on
  deposit with a dealer when selling short

• Extremely risky!!!
                 Example
Expect price of lululemon to fall
• Borrow 100 shares from a broker when price is
  $15/share
• Sell shares immediately (+$1500)
• Share prices fall to $12/share
• Buy back 100 shares (-$1200) and return
  shares to dealer
• Profit= $1500 – 1200 = $300 less commission
   3. Dealing with Investment Dealers


• Many financial planners are investment
  dealers.

• An investment dealer is someone who is
  licensed to buy or sell shares for others.
    Types of investment dealers:

• Full-service investment dealer
  – Paid by commission based on sales volume
  – Provides advice and direction
  – Executes trades
  – CIBC World Markets Inc., RBC Dominion Securities
    Ltd., Scotia Capital Inc.
         Discount investment dealer



• Executes trades without providing advice

• Lower commissions

• TD Waterhouse, Bank of Montreal Investor
  Line, Royal Bank Action Direct Inc.
        Online Discount Dealers
• Typically discount dealers

• Allows you to execute trades over the Internet

• Lower costs

• Investing information is made available, i.e.
  analyst’s recommendations and earnings reports
 Cash versus margin accounts:


• Cash accounts are “securities trading
  accounts in which the traders pay in full for
  their security purchases”
• Margin accounts are “securities trading
  accounts in which the traders borrow a
  portion of the purchase price from their
  dealer”.
  – Pay interest & service fee
• The margin is the limit set on the percentage
  of the security purchase that must be paid by
  the investor.

• It is set by the Investment Dealers Association.
• It is advantageous to purchase on margin
  when the return on the stocks is greater than
  the cost of borrowing.
• A maintenance margin is put in place to
  protect the investment dealer.

• It specifies a minimum percentage margin of
  collateral that you must maintain, often the
  initial margin.
• Margin accounts are only suitable for
  experienced investors.
                  Example:
• Assume a margin rate of 50%
• You purchases 300 shares of Abitibi Inc. at $56
  /share

• Total cost= $16800 (300 x $56)
• Less amount borrowed = $8400
• Your contribution = $8400
• What would happen to your investment if the
  price of Abitibi rose to $58 /share

• Total value= $17400
• Less loan = $8400
• Profit = $9000
• What would happen to your investment if the
  price of Abitibi dropped to $6/share

• Total value= $1800
• Less loan = $8400
• Loss = $6600
               Joint accounts
• When buying securities with a spouse, the
  joint account can be set up in different ways:

  – Joint tenancy with the right of survivorship:
    surviving owner receives full ownership of assets
    in the account when the joint owner dies.

  – Tenancy in common: the deceased’s portion of
    the account goes to the heirs.
Relationship with the investment dealer


• Keep in mind that an investment dealer’s
  income is proportional to the number of
  trades they do.

• It is advised that you take the advice given by
  the investment dealer and investigate it.
   The costs of trading securities


• Costs can vary dramatically from dealer to
  dealer.
• Example: the purchase of 500 shares of a
  stock can range from $500 with a full service
  dealer to $19 with a discount dealer.

• There is a lot of variability among full service
  dealers and among discount dealers, shop
  around.
• When purchasing fixed income securities such
  as treasury bills, the cost difference may be
  little to none.
                 Day trading




• A day trader is one who trades with a very short
  time horizon (less than a day), usually over the
  Internet.

• Risky!
 4. Sources of Investment Information



• Corporate sources
   Annual reports are a free, easily available and
    good source. Look for facts and trends in sales,
    profits and dividends.

   Lululemon investor information
      Investment dealer reports


• Provided by full service and some discount
  investment dealers

• Cover the direction of the economy

• Information on individual companies, analyzing
  their prospects.
                    Press
• Globe & Mail, Financial Post in Canada; Wall
  Street Journal in U.S.
• Financial magazines: Forbes, Fortune, etc.
• Personal finance magazines: Money, Smart
  Money, etc.
• The Economist
• Public library is a good source
• Information on the market and individual
  stocks: Moody’s Investors Service, Standard &
  Poor’s, and Value Line.
            Internet Sources

• Corporate information

• Many sites, yahoo finance

• Beware about source of site, no one controls
  who can post information.

				
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