Securities Trading – Securities Regulation

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  • Securities Trading
  • Open Market in Capital

Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares

  • Crucial term, two parts together constituting “open market in capital”

o Primary market: sale of securities to investors. The money flows through from investors to the company (have benefit of liquidity)

o Secondary market: investors exchange securities in return for payment from another invested (issuer not generally involved)

  • Permits continued marketability/ liquidity of shares: For investors to realize on their investment, they must be able to sell among themselves on various exchanges (g. TSX)
  • Simplifications for trading

o Brokers: Takes orders from buyers/sellers, locates buyers/sellers for clients and executes trades on behalf of clients.

o Stock exchange: Trading involves 1) communication between buyer and seller; 2) exchange upon agreement. A stock exchange facilitates both elements, saving the client time/money and increasing the likelihood that security will be sold (for sellers). Issuers want securities to be traded on exchange b/c it increases their securities’ value and therefore, the amount of capital they can raise

  1. Buyers can find sellers and sellers can find buyers (brokers meet in a specified place – either real or online)
  2. When asking and bid price correspond, there would be an offer, acceptance and consideration (money to be paid in return for shares). Payment would occur and the ownership would change hands (bearer form – less used to prevent theft; or registered form with the name of the owner on the certificate and on books of company with endorsements)

o Clearing agency: created to simplify transfers between brokers by tracking obligations and notifying brokers of their net obligation

o Broker inventories: reduce amount of issuances and re-issuances (instead of performing full transfer for every transaction, brokers would record in their books who the beneficial owners of securities were)

o Nominee owners: as brokers began to hold too many securities, nominee owners name and securities registered to them – bookkeeping entries keep track of who the beneficial owners are o Securities Depository corporations: represent a single nominee owner (and sometimes perform clearing role (e.g. Canadian Depository for Securities Ltd – CDS) o Computerized stock exchanges and trading: Increases transaction speed AND further facilitates communications.

  • Private Trades
  • Private trade: Trades without using brokers or a stock exchange – take place directly between the buyer and the seller
  • Upstairs market: involves trades by large, institutional investors buying or selling in large volumes
  • Over-the-Counter Trades: when issuers are unable to meet listing requirements of a formal stock exchange they may trade over-the-counter, with the assistance of a broker

o used for bonds/debentures too b/c 1) large denominations, 2) nature of investment – longer time horizons, 3) held in large Q by institutional investors

  • Other trades:

o Alternative trading systems: less restrictive listing requirements, and largely automated o Margin trading: Broker loans funds to clients to purchase securities

  • Restrictions exist regarding 1) the % that the client must pay and 2) to maintain a particular % if the value of the security changes.

o Short selling: Investor sells securities that he/she doesn’t own and takes on a contractual obligation to supply the shares in return for payment by the person purchasing the securities.

  • Broker can facilitate this trade by loaning the investor the securities.

NOTE: Major investors in Canadian Securities Market include banks, trust companies, credit unions/caisses populaire, life insurance companies, pension funds, investment funds (mutual funds/investment companies), and individuals (to a lesser extent).

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