Professional Documents
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CH04
CH04
Securities Markets
Learning Objectives
• Listing Process:
- New share issues are usually traded over-the-
counter (OTC) and are considered for listing on an
exchange only after proof of satisfactory distribution
is available
Issuance of Securities
• Global Security Issues:
- The global perspective allows companies to raise
capital in amounts that would have been impossible
only a few years earlier because they were limited to
selling securities in their own domestic markets
- Many Canadian companies issue bonds in the US and
Europe.
- A number of Canadian companies are “interlisted” on
more than one stock market, primarily markets in the
US, such as Nasdaq or the NYSE.
- The motivation for Canadian firms to do so is to
increase its stock’s potential market and enhance its
visibility
Issuance of Securities
• Private Placements:
- A private placement means new security issues
are sold directly to a small group of institutional
investors, such as insurance companies and
pension funds, thus bypassing the open market
- Advantage: Registration not required (i.e., the firm
does not have to prepare a full prospectus)
- Disadvantage: higher interest costs because the
financial institutions usually require a higher
return than would be required for a public
subscription
Secondary Markets
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)
• Limitations may exist on the types of orders
that are placed and the size of orders
• In 2001, less than half of the on-line brokerage
firms allowed their customers this option
Trading
In-House Trading:
• Also called internal trading, is trading by fund
managers without the use of a broker or an
exchange
• This new trend has significant implications for the
NYSE (handles about 5% of its trading volume)
• For example, Fidelity Investments, one of the
largest mutual fund companies, operates an in-
house trading system for its own funds.
International Equity Markets
• S&P/TSX 60 Index
Designed to mimic the performance of the
S&P/TSX composite Index
Index has a base value of 100
Stocks represent 60 of the largest and most
actively traded stocks comprising the S&P/TSX
Composite Index
Equity Market Indicators (US)
• Dow Jones Industrial Average (DJIA)
Most widely quoted measure of NYSE stock
performance
Composed of 30 “blue-chip” stocks that trade on the
NYSE and Nasdaq
Price weighted (i.e., is affected more by changes in
higher priced stocks)
Is calculated by adding the prices of the 30 stocks
together and dividing by a divisor (less than 1,
0.1458 in 2003)
DJIA = ∑ P/n
Equity Market Indicators (US)
• S&P 500 Composite Index
Composed of 500 “large” firm stocks
Consists primarily of NYSE stocks
Market value weighted index that measures US
stock performance
Broader measure than the DJIA
• Nikkei 225 Average (Japan)
Price weighted index of 225 actively-traded stocks
on the Tokyo Stock Exchange
Bond Markets
Investors can purchase either new bonds being issued in
the primary market or existing bonds in the secondary
market
Secondary bond market is primarily an over-the-counter
(OTC) market
Government of Canada bonds actively trade in dealer
markets
Corporate bonds are not as actively traded as
government issues since about 40% of corporate bonds
are held by institutional investors
Government bonds comprise about 73% of the Canadian
bond market with Government of Canada bonds
representing the major component
Market Developments
Pit Qit
S & P / TSX (k )
Pib Qib
DJIAt Pit / n *
Price Weighted Indexes
Arithmetic average of current prices
Assumes you purchase an equal number
shares of each stock represented in the index
e.g., DJIA, Nikkei 225
• Problems:
Must adjust denominator downward for
splits
Stocks with higher prices have greater
influence
• PWI = [ of stock prices ] / [number of stocks
in index]
Value Weighted Indexes