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Securities Markets Dealer


									     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
           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 (
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
• 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

• 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
• 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
• An over-the-counter (OTC) market is a linkup
  of dealers, with no listing or membership
• 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
• 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!!!
Expect price of lululemon to fall
• Borrow 100 shares from a broker when price is
• 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

• 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
  – 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.
• Assume a margin rate of 50%
• You purchases 300 shares of Abitibi Inc. at $56

• 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
• 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
• 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

• 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.
• 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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