Test 2 - Investments - Securities Market



Primary Market


New issues of securities (Stocks, bonds, T-Bills, ETF, closed funds etc) sold to the public


IPO:  the first public sale of a company’s security


Examples of IPO’s to be reviewed during class

Visa, Tim Horton’s, Groupon and Facebook



Comments re IPO’s 

  1.  The timing and the offer price are important considerations in any IPO


  1. Issue of new shares should be when markets are reasonably strong
  • Bull vs Bear Market
  1. Historically IPO
  2. ’s do not do well over long term.


  1. Institutional Investors have advantage over individual brokers. 


IPO’s in Canada


Amount ($ billions)



























Seasoned new issues

Public listed corporations issuing new shares (increasing share capital)



Examples of Recent issues




Distribution Process:  Chart Text

1.  Issuer (corporation issuing the shares-)Visa, Facebook


2.  Originating Investment Banker/Underwriting syndicate

The underwriters buy the issue from the corporation and then assume the risk of selling the shares


Example: 10000000 shares offer price $5 per share, Underwriter pay corporation 50M.


Underwriters for Tim H.:  RBC Canada, and Goldman Sachs

Underwriter for Visa & Facebook: J.P Morgan



  • Corp engage investment bankers by negotiation or bidding
  • Advise such as:
    • Price to set
    • Timing of issue




  • Underwriters have conflict of interest in recommending price. 
    • Eg. 1995 Dealers purchased Netscape @ $28 It closed at 58.25
    • Dealers made108% in 1 day


3.  Selling group

  • Brokerage firms as well as original underwriters, banks and other casual dealers sell to the public
  • Accept responsibility for selling the issue



Other types of Placements 


Private placements (part of 4th market) 

  • no formal prospectus
  • Reduced dealer fees
  • higher interest costs-higher risk




POP System (Prompt Offering System)

  • Can issue new shares with a short prospectus
  • Limited to



Preliminary prospectus (red herring)--statement in red that it is not finalized

  • Presented to the securities commission


  • Contains: (Audited Financial statements last five years, budgets, company history, what they plan to do with the capita)



  • Does not include: Price of shares to be issued



Finalized & approved by stock exchange


Blue skied—ready for sale to the public



Two methods for underwriting:

a)    Bought deal

  • Underwriters buy issue at lower price and resell to public. Assume full risk

a)      Cannot back out


b)    Best-efforts

  • Do not actually buy (acts as middle man) receive % commission on sale
  • Issuing company is small and speculative



Secondary Markets—Auction Market

  • Sale of already issued securities among private investors



  • Security exchanges are centralized institutions.


Top 10 Exchanges in World (2011)

Based on market capitalization


New York Stock Exchange


Tokyo Stock Exchange





A European stock exchange + NYSE (completely electronic)


London stock exchange


Shanghai Stock exchange


Hong Kong


Toronto Stock exchange (3rd largest in north America) hs the highest listing of oil, gas and mining companies


BM & FBovespa (Brasil) Bolas DE Val ores, Mercado & Futures de São Paulo


Bombay Stock Exchange (India)

Stock Exchanges in Canada

TMX (X-T) group made up of:



Montreal Exchange (MSE)—Derivatives


Stake in BOX (Boston Options Exchange)



  • Trades on TSX/Venture Board
  • January 2011- Netscape Energy (clean technology) – first Korean company to tradeonTSX-V


Note:  OTC-Over the counter market trades on NEX Board (separate from above)



TMX Pg 102 Table 4-3 (Requirements for listing) Power points 13 & 14 (cleary)

  • Requirements quite stringent




Toronto stock exchange (TSX Venture)

  • Emerging markets


  • Requirements less stringent than TSX



Major US Exchanges

The New York Stock Exchange (NYSE)




American Stock Exchange (AMEX)




NASDAQ OMX–2nd largest exchange in U.S. (public corporation-NDAQ)

Ø  National Association of Securities Dealers Automated Quotation system—founded in 1971

Ø  Largest electronic screen-based equity securities trading market in the United States.







  • Ø controls and operates





Powers of Securities Exchanges

  • Delay opening
  • Halt trading
  • Suspend trading
  • Delist or cancel security if:
  6. Company failed to comply with terms of listing agreement
  • Below minimum level of net assets

The Over?the?Counter Markets-OTC (3rd market)

Negotiated Market—DEALER MARKET

  • Ø Unlisted shares -- No formal exchange
  • trade on the NEX board separate from the TSX Venture board
OTC-Canada: TSX Venture






OTC-U/S—NASD Bulletin Board

Ø  OTC displayed on NASD Bulletin Board (OTCBB) over the counter bulletin board


  • Accessibility to the OTCBB through all of NASDAQ’s computer system


  • Companies listed on the OTCBB are not a part of the Nasdaq Exchange.


Fourth Market

  • transactions among large institutions
  • no intermediaries


Instinet (part of 4th market)

  • electronic trading network
  • allows institutions to trade among themselves 





Stock Market Indicators 

S&P/TSX 300

  • 300 largest securities regardless of industry group
  • It is a market value weighted index e.g. more weight to large highly valued stocks
  • Calculated total market value of the 300 stocks today and yesterday to find change in index.
  • For example : opening index8700 closing index 850,index decrease of 200 points/
  • 2.3% (decrease) 200/8700
    • % change is more important  than absolute change.



S&P/TSX 60

  • S&P/TSE 60  (largest companies from TSX 300) see text  list of companies
  • Market based


TSX Venture



Capped indices


  • It limits the value of very large companies in order that they do not dominate the index.


  • It allows for a more fair evaluation.


  • New index January 2010 S&P/TSX clean technology index (TSX has more than 125 companies listed on the TSX)












The Dow Jones Industrial Averages

  • 30 large blue chip corporations listed on the New York Stock Exchange
  • price weighted average—totals the prices of all the indiviual stocks within the index to get the value (higher price shares dominated)
  • Computed since 1896
  • Originally



Standard & Poor’s Indexes (NYSE)

  • (S&P index 500 companies)
  • Market Based Index
  • Much broader measure than Dow



NASDAQ Indexes





Other (very partial) Averages and Indexes

  • Nikkei (Tokyo stock Exchange index
  • FTSE (Footsie) London index
  • EAFE Index (Europe, Australia and Far East)
  • MSCI World Index (23 developed countries) Morgan Stanley
  • Bond Market Indicators
  • Bond Yields
  • Dow Jones Bond Averages
  • NYSE Bond Diary



Market Developments

Influence of institutional trading

  • Block trading of stocks (transactions of at least 10,000 shares)
    • Affects market structure and operation
    • Negotiated

Globalization of securities markets

  • 24-hour trading
  • Instinet


Effects of foreign investment on Return

Problems to be handed out in class





  1. Primary
  • Ipo ( prospectus, expensive)
  •  Seasoned
  • Private placement
  •  Prompt offering
  1. Secondary
    1. Investor to investor auction
    2. OTC
      1. Dealer market investor negotiated
      2. Fourth
        1. Large institutions
StudyUp Author: James Bagshaw
Business Administration, Accounting and Management Technology
Major: Business Administration

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