Transcript Investments: Analysis and Management, Second Canadian Edition

How Securities Are Traded Chpt. 5
Practice: p. 148,rev Q #8,10,13; prb#1;
p. 52 Q#4,5,13,17,18,24,27
Learning Objectives
• Explain the role of brokerage firms and
stockbrokers.
• Explain how shares in public companies are
“traded”
• Know different types of buy and sell orders
• Be able to calculate the P&L with commission
when going long (= buy low…sell high!)
STOCK p.43-49
• publicly owned firms issue divide their ___________
many shares _______________
• a share is a promise by a company to the owner for a
______________________________
• shares allow the owner to __________________ of the
company through the election of directors
• shares can be bought or sold on ________________
(TSX, TSX Canadian Venture Ex., NYSE, Nasdaq) or
over the counter

IN THIS CONTEST, ONLY STOCKS TRADED
ON THE TSX and DERIVATIVES ON THE MX
CAN BE TRADED
STOCK p.43-49
Common Stock:
Preferred Stock:
FACTORS EFFECTING STOCK PRICE
supply and demand
profit and dividend outlook
general economic conditions
capital market conditions
speculators
industry & company outlook
fashion in stocks
management
world events
Fees and Costs p. 122-129
• only licensed individuals associated with companies that
have a seat (member) on the stock exchange can buy
and sell securities
• you pay a ____________ every time you ____and ____
a security ______________

____________ offers significantly ____________ rates to
individual investors
•
In 1992 E*TRADE became the first brokerage service to offer
on-line trading
(SEE COMMISSIONS IN YOUR CONTEST RULES; ex: p. 125 of text)
Stock commissions charged for both
buying and selling in the WLU contest:
• less than $1 per share - commissions are $20
plus 0.005 per share
• more than $1, less than or equal to $3 commissions are $20 plus 0.01 per share
• more than $3, less than or equal to $10 commissions are $20 plus 0.02 per share
• more than $10 - commissions are $20 plus 0.03
per share
Brokerage Operations p. 122-129
• Brokerage firms earn commissions on trades,
profit from securities sold from inventory, and
administrative account fees
• Full-service brokers
• Discount brokers
Brokerage Account Types
• Cash account:
• Margin account:
STOCKS: Trading Terms p. 129-132
• board lot:
• day orders:
• market order:
• limit order:
• stop order:

stop sell  stop buy -
Orders in OTC Markets
• Dealers are ready to either buy or sell


Bid price is the highest offer price to buy
Ask price is the lowest price willing to sell
•


Ask price - Bid price >0 (dealer spread)
Dealer “makes a market” in the security
More than one dealer for each security in overthe-counter markets
Clearing Procedures
• Settlement dates for stocks are three
business days after the trade date

Legal ownership transferred and financial
arrangements settled with brokerage firm
• Transfer of securities and funds between
exchange members facilitated by a
clearinghouse: The Canadian Depository for
Securities (CDS)
Margin Accounts
• Exchanges set minimum required deposits of
cash or securities
• Investor pays part of investment cost,
borrows remainder from broker

Margin is the percent of total value that cannot
be borrowed from broker
• Margin call occurs when the actual margin
declines below the margin requirement
Short Sales
• Investor borrows stock from a third party
• Borrowed security sold in open market, to be
repurchased later at an expected price lower
than sale price



Investor liable for declared dividends
Short sale proceeds held by broker
Investor responsible for borrowed shares
Canadian Regulatory Environment
• Self-Regulatory Organizations (SROs) regulate
their own activities
• Canadian Investor Protection Fund (CIPF) was
established to protect investors
• Investment Dealers Association of Canada (IDA)
is the national trade association for the
investment industry
• Canadian Securities Institute (CSI) is the national
education body of the Canadian securities
industry