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Learning Objectives Learning Objectives “The BIG picture”“The BIG picture”

P.115 Review Q#5,14,15,16; + handout

Capital MarketsCapital Markets: :

Sources =• • •

Users = • • •

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

Importance of Financial (Capital) MarketsImportance of Financial (Capital) Markets p.90 p.90

Securities: Debt vs. OwnershipSecurities: Debt vs. Ownership p.37-49p.37-49

OWNERSHIP DEBT

• Initial public offering (IPO)

• Secondary offering (“seasoned new issue)

• Issue facilitated by __________________ Underwriting: Specialists in advice, design,

and sales Intermediaries between issuer and investor

Primary Markets: Primary Markets: the sale of new the sale of new (stock)(stock) securities securities p.93p.93

• Markets where investors _______________ (trade) previously issued shares (TSX, NYSE, Nasdaq)

• _________ markets = bid and ask

• __________• __________ represent investors for a fee

www.tsx.com

Secondary Markets Secondary Markets p.97+p.97+

• ________________ by the SEC (USA) (or the provincial securities commissions OSC Ontario)

• _________________ for traded firms (minimum capitalization, shareholder equity, average closing share price, etc)

• _________________

• Toronto Stock Exchange (TSX, p. 99) Largest Canadian stock market 8th in world

• TSX Venture Exchange is Canada’s “junior” stock market• Montreal exchange (MX) = derivatives• New York Stock Exchange (NYSE)

largest secondary market in the world• 200 + stock exchanges throughout the world riskier!

Stock Exchanges Stock Exchanges p.97+p.97+

General Exchange Initial ListingGeneral Exchange Initial Listing

RequirementsRequirements (specifics may vary)(specifics may vary)

Standard NYSE TSXNasdaq

(NM)

Nasdaq

(Sm. Cap)

Distribution a) 2,000 round lot holders

b) 1.1m public shares

a) 300 board lot holders

b) 1m public shares

a) 400 round lot owners

b) 1.1m

a) 300 round lot owners

b) 1m

Market Value (public shares)

$100m $4m Cdn. $75m

(or Total Assets or Total Sales > $75m)

$50m

(or Stock Equity >$5m or Net Income >$0.75m)

Standard NYSE TSXNasdaq

(NM)

Nasdaq

(Sm. Cap)

Before-Tax Earnings from Continuing Operations

$6.5 m over past 3 years:$2.5m last year + ($2m/ $2m), OR

$4.5m last year and pos. all 3 years

For Senior Industrial Companies:

$300,000 CDN last year

$1m last year (or in 2 of last 3 years)

$0.75m Net Income

(or $5m Equity or $50m Mkt. Value)

Cash Flow $25m Operating Cash Flow over last 3 years

Pre-Tax CF $0.7m last year and prior 2-year average ($0.5m)

N/A N/A

General Exchange Initial Listing General Exchange Initial Listing RequirementsRequirements (cont’d)(cont’d)

• ________ of dealers standing ready to either buy or sell securities at specified prices “___________________” Handle _________ securities _____________ Canadian OTC stocks are trading on the TSX

Venture Exchange NEX system

• __________________ : Electronic Communications Networks (ECNs) allow investors to trade after exchange hours trades “clear” when the market opens

• ___________: Trading network among investors interested in buying and selling large blocks of stock _______________

Over-the-Counter (OTC) or Third MarketOver-the-Counter (OTC) or Third Market

• Primary Market: companies and governments sell bonds to institutional investors

• Secondary Market (retail) primarily an over-the-counter network of dealers Government of Canada bonds actively trade in dealer

markets Corporate bonds are not as actively traded

Bond (Debt) Markets Bond (Debt) Markets p.109p.109