BusAd 551 Corporate Financial Decisions

1
Cleary / Jones Investments Analysis and
Management
CHAPTER FOUR Securities Markets
2
Learning Objectives

• To distinguish between primary and secondary
  markets
• To describe how the equity markets are organized
  and how they operate
• To explain what we mean by the third and fourth
  markets

3
Learning Objectives

• To state the major stock market indicators
• To briefly describe the bond and derivatives
  markets
• To discuss the factors behind rapid change in the
  securities markets

4
The Role of Financial Markets

• 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

5
Primary Markets

• New securities are issued in a primary market
• Initial public offering (IPO) versus seasoned
  new issue
• Issue facilitated by investment dealers
• Specialists in advice, design, and sales
• Intermediaries between issuer and investor

6
Investment Dealers

• 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

7
Issuance of Securities

• Prompt Offering Qualification (POP) System allows
  senior reporting issuers to sell new securities
  over time via short form prospectuses
• Reduces issuance cost
• A private placement means new securities are sold
  to a small group of institutional investors
• Registration not required

8
Secondary Markets

• 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

9
Stock Exchanges

• Toronto Stock Exchange is a secondary auction
  market for equity securities
• Largest Canadian stock market
• Listing requirements for traded firms
• Canadian Venture Exchange is Canadas new
  junior stock market
• New York Stock Exchange is the largest secondary
  market in the world

10
Over-the-Counter Markets

• 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 Over-the-Counter Automated Trading
  System (COATS)
• NASDAQ

11
Third and Fourth Markets

• 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

12
International Equity Markets

• 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

13
Equity Market Indicators

• Provide a composite report of market behaviour on
  a given day
• TSE 300 Composite Index
• Market value weighted
• Divided into 14 major industry groups
• SP / TSE 60
• Designed to give index funds sufficient
  diversification

14
Equity Market Indicators

• Dow Jones Industrial Average
• Composed of 30 blue-chip stocks
• Price weighted
• SP 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

15
Bond Markets

• 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

16
Market Developments

• 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