markets of canada

8/7/2019 markets of canada

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How do governments borrow?

The way they borrow is by issuing bonds. A bond is what people in the securitiesindustry call a debt instrument. A home mortgage is also a debt instrument. Debtinstruments are simply IOUs which describe the terms of a contract between a borrower

and a lender. Such terms usually include a promise of repayment in full by a certain timeand an outline of what the cost of borrowing will be.

Governments don't have to offer any security for their loans but the average person, oreven large corporate bond issuers, are expected to pledge some assets, such as a house, toensure the lender is protected if the borrower walks away. Governments get specialtreatment because they have the ability to raise taxes to cover their debt payments. That'spretty effective collateral!

Why don't governments sell something instead of borrowing?

Unfortunately, governments have limited assets that they can sell. Federal and provincialgovernments own land, but much of it is used for roads, airports or parks, or is notmarketable. They are able to sell forest, mineral and other rights, but factors likeenvironmental impact prevent governments from developing Canada's natural resourceswilly-nilly.

Some assets can be sold. Governments own businesses called crown corporations whichare unlike public companies and do not have to be profitable to survive. These crowncorporations often have responsibilities that serve the public interest, adding extra cost tothe business. Over time, the government may decide that the public interest couldcontinue to be served without the crown corporation. When this happens, the government

might sell the company and raise money this way. This is called privatization, and hasbeen done with companies like Air Canada and PetroCanada.

Despite this, governments rely most heavily on borrowing in the bond market to fundpublic programs.

Why does business need capital?

Large companies also have the option of borrowing through debt instruments like bonds.

What are the main differences between bonds and stocks?

When you buy a bond or another debt instrument, you are lending your money. Thatmeans you are a creditor, which is someone who is owed money. You must be paid backin full together with interest. If the company goes out of business, you have a good claimon any assets that may be left over.

As a shareowner, you own part of the company. You have the right to share in the profitsand the growth of the company. However, if the company goes under, your claim to


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what's left over falls behind any claims of creditors. This makes your investment a littleriskier, although that will depend on the particular stock you are thinking of buying.

Bonds and other debt instruments offer interest or some form offixed income, a termwhich means that you know how much you can expect as a fee for lending your money

and you know when you will be paid that income.

Stocks, on the other hand, don't have to pay any interest because you are not lendingmoney to the company. You may be paid a dividend, which, though a payment likeinterest, is actually a share of profits. Some kinds of shares always pay a dividend whileothers do not. Whether dividends are paid often depends on how well a company isdoing. With some stocks what you are counting on is that the company will grow in valueand that your share, as part-owner, will grow in value with it. When you sell it, you willthen make a profit or a capital gain.

How do I know whether to buy stocks or bonds?

Whether you buy a debt instrument or a share will depend on your needs as an investor.Do you want regular income? How much risk do you want to take on? How much moneycan you afford to invest?

By reading the other Investor Briefings, you will get a better idea of what products areavailable and how they might suit you. The next step, though, is to learn more about thesecurities industry and what it does. You will find this information in the InvestorBriefings No. 2, The Market System.

The Market System

What is the market system for securities?

The term market system is used to describe all the various services that together make itpossible to convert savings into productive investments. The system is the process thatallows governments and businesses to get hold of funds cost-effectively. It also helpsinvestors buy suitable investments at the best price and sell them when the right timecomes.

The system ensures there is no delay in the transfer of funds or securities from investorsto users of capital or to other investors. It is also structured with built-in protection so thatusers of the system are all treated fairly.

Who are the main players in the market?


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Brokers, often called Investment Dealers, are the key players. They take orders to buyand sell securities from Investors. They also assist Users of Capitalby finding investorswilling to buy their securities. Securities are bought and sold in a Marketby investmentfirm traders. The integrity of investment dealers and markets is monitored by IndustryOrganizations (Self-Regulatory Organizations) and by Government Regulators

(Securities Commissions). Separate organizations called Securities Clearing Houses orDepositories keep track of securities for dealers and ensure their accounts are settledquickly. Transfer agents orRegistrars keep a record of the owners of securities. If aninvestment dealer goes under, investors are protected from losses by an investorprotection fund. Industry staff are trained and accredited by an industry educationalinstitution to meet accepted standards. These are all the main players in the market.

How do investment dealers assist companies in raising money?

Investment dealers help a company that needs capital decide whether it's better to borrowthrough bonds or to sell ownership through equity or stock. They offer advice on factors

in the marketplace that might affect this decision. They can also give a company an ideaof what price and terms would be attractive to investors.

Once prices and terms are established, dealers may act as agents in finding markets forthese securities. Different firms may get together to locate investors. Sometimes aninvestment dealer or group of firms may buy all the securities themselves and resell themto investors. When this happens, they are said to be acting as principal. The process ofgetting new securities to market through the use of an investment dealer is calledunderwritingor the primary market.

How do dealers help governments borrow?

When the federal government decides to borrow by issuing bonds, it may consult withinvestment dealers and banks on how much it wants to borrow and on what terms. Thenthe government takes competitive tenders for the issue from a selected group of dealersand banks. These primary distributors tender a bid to buy some or all of the bonds at aprice they think is competitive. The dealers that are successful then find investors torepurchase the securities at a slightly higher price.

Provincial and municipal governments tend to borrow more like businesses by choosingan investment dealer to underwrite and sell their securities.

Are securities markets actual places?

Sometimes. You probably have heard about stock exchanges which are places wherestocks are traded, especially stocks which have already been issued and which are nowbeing bought and sold among investors (the secondary market). However, no market hasto be a physical place. A securities market is really any network connecting brokers anddealers who have orders. In all markets, information is exchanged regarding prices andamounts so that dealers who want to buy or sell a security can find it at the best price for


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the right size of order. Today, securities markets are becoming more and morecomputerized. Computers are ideal for gathering and organizing complex information.With modern communication networks this information can be relayed instantly. Newtechnology has already changed the way trading in stocks has traditionally been done ona trading floor with traders calling out orders to buy and sell. On some Canadian

exchanges, the computer is already the meeting place.

Who does the actual buying and selling?

Investment firm traders do. Once an order is taken from an investment advisor, it is sentto a firm's trading room. Often an investment firm has two trading rooms one for bondsand debt instruments and another for stocks. With stocks, investors' orders may be tradedby computer, over the phone, or on a stock exchange. If the order goes to the stockexchange, traders execute it there on your behalf.

Bonds are traded by phone in the trading room. Experienced traders are allowed to buy

and sell bonds and stocks on behalf of their firm to build up an inventory. This means thatthe dealer always has a range of securities products to satisfy investors' needs. If thedealer doesn't have the security you are looking for, the firm will find it for you andobtain it as your agent.

What is a Self-Regulatory Organization?

Exactly that an organization that regulates itself or its members. In Canada thesecurities industry has a lot of responsibility for regulating itself. This is done through thestock exchanges and the Investment Dealers Association of Canada which are also calledSelf-Regulatory Organizations or SROs.* They have been delegated responsibility by

provincial governments to ensure that the brokers and dealers which are theirmembersmeet agreed-upon standards. These standards are written into provincial laws governingsecurities.

The Self-Regulatory Organizations oversee markets and trading as well as member firmsand their practices.

* The IIROC is not recognized as an SRO in Quebec.

What is the main job of securities commissions?

The securities commissions play a very important role. They make sure that the capitalmarkets work properly and that investors are protected. They do this in three basic ways.First, all the people and companies that trade securities have to meet certain requirementsand be registered with the commissions. Second, the commissions set rules to make surethat all relevant information about securities and their issuers are available to the public.And third, the commissions have special powers to investigate and prosecute those whobreak the law.


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Securities commissions and the like are government bodies subsidized by taxpayers. Tosave money and time, much of the actual work in regulating the market is done by theSelf-Regulatory Organizations. However, commissions pay very close attention to howwell the SROs do this job.

What are clearing corporations and why are they needed?

Clearing corporations, often called depositories, play an important role. First, they ensureprompt payment for securities. Second, they speed up the movement of securitiesbetween buyers and sellers and minimize the chance of losing securities.

Today, you will find that most securities, especially shares, are locked up in hugeconcrete and steel vaults of a clearing corporation/depository where they are safe. Thatmeans you probably won't receive a certificate when you buy a stock unless you ask forit. You own it and your account records are your proof of ownership, but you never see it.Instead of being registered to you, the securities are registered to your broker on your

behalf. This is called registering your shares in street name. Bonds have recently come tobe treated the same way.

A modern clearing corporation/depository uses computers to keep track of all purchasesand sales of securities that are immobilizedin its vaults. At the end of every trading day,transactions between firms are added up for every security. The depository sends a tab toeach dealer of the total amount owed by every other firm. Dealers then settle by sending acheque to the clearing corporation for deposit in other firms' accounts. Securities aretransferred by bookor computer entry.

Firms in Canada have three business days to settle the day's stock and most bond

transactions. In turn, you also have three days to hand over your securities when you areselling (if you actually have them in your possession), or to pay for them if you arebuying.

What are the main clearing corporations I should know about?

In Canada there is one clearing corporation: the Canadian Depository for Securities(CDS). It serves members of the Toronto Stock Exchange, the Montreal Exchange, theVancouver Stock Exchange, the Alberta Stock Exchange and various banks and trustcompanies.

What is the role of the transfer agent and registrar?

A transfer agent is a trust company appointed by a corporation to keep track of itsshareholders who they are and where they live. This information is important should acompany need to send out dividend payments and to make sure eligible shareholdersknow about annual meetings and their right to vote. The registrar checks on the accuracyof the transfer agent's work and keeps track of the status of a company's shares.


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If I want to buy securities, why do I have to go through an investment

dealer?

Investment dealers have a long history of assisting in financial transactions. For centuriesbrokers around the world have made markets by bringing together buyers and sellers. The

central marketplaces where they worked led to better prices for everyone. With centralmarketplaces governments were also able to make sure the rules were being followedbecause the number of players with direct access to the market was limited withoutputting up barriers to public participation.

In the last decade or so, governments in Canada have allowed banks and other groups tobuy investment dealers. This change in ownership will not affect how you work with abroker. Today, registered dealers still have sole access to the markets.

What's the difference between a broker and an investment dealer? Or an

investment advisor and a financial planner?

In the past, a brokertended to deal in stock. An investment dealerspecialized in bonds orin raising money in the securities markets. By definition, a broker acts as an agent orintermediary between buyers and sellers while a dealer buys products and resells them ata profit. In our industry, most investment dealers are also brokers and vice versa. For thatreason the terms are often used interchangeably.

An investment advisor is an individual who works for a broker or dealer within thesecurities industry, providing advice to individual clients. Investment advisors, oftencalled IAs, are governed by SROs and ultimately the securities commissions. Financialplanners, mutual fund salespeople, insurance, bank and trust company financial advisors

provide specialty services to clients, although they are not part of the same regulatorysystem.

Investment advisors and financial planners will both provide financial advice or a servicefor a commission or fee. However, to buy or sell the full range of securities products, aregistered IA working for an investment dealer or brokerage firm must carry out thetransaction. You may buy some securities from non-industry financial advisors. Mutualfunds, for instance, are sold by registered mutual fund representatives as well as by IAs.

Do investment dealers provide different services for larger investors?

In every business larger clients will get more attention than smaller ones. In the securitiesbusiness the largest investors are institutions such as pension funds. Most dealers lowertheir commissions for big orders. Larger clients will also be called more often whenopportunities come up because they are more likely to be interested. However, yourinvestment advisor will be serving investors like you and not large institutions which areserviced by a different department. You won't have to fight for attention!


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Lots of people believe small investors can never beat the big institutions. But there aresafeguards in the market system which help to ensure smaller investors are not penalizedfor their size. Mechanisms like trading halts allow time for important information thatmight affect the price of a security to get out broadly. It is important that all investorshave equal access to information that could affect the market.

How do I find an investment advisor?

Most brokerage firms are staffed by investment advisors who specialize in servingindividual investors. Ask your friends and relatives for a reference and then interviewseveral firms before you select one that is interested in your account. Ask about fees andcommissions and other services. Then talk to the Branch Manager to find out who wouldhandle your account. Talk to this person, too. You want to make sure you're comfortablebefore you entrust your finances to that advisor. Find out about the firm's investmentspecialties and whether it is a member of one of Canada's stock exchanges or theInvestment Dealers Association. This will help you identify what is acceptable business

practice for the firm. Ask about the IA's track record. Only use an advisor who makesyou feel comfortable.

What questions should I ask when looking for an investment advisor?

What kind of clients do you usually deal with? How much money do they typically haveavailable to invest? Some IAs specialize in a certain type of client, such as senior citizensor wealthy individuals. If you have different investment needs than most of the advisor'sclients, you might want a different IA.

How long have you worked as an IA? What's your educational background and training?

Do you have any special designations or areas of expertise? In order to sell stocks andbonds, your IA must have passed the Canadian Securities Course TM as well as theConduct and Practices course. They will also be registered with the provincial securitiescommission. Some IAs have additional qualifications in other areas like financialplanning. Find out what they are.

How are you paid? Does it differ for various products? In general, IAs are paid for eachorder they process. They receive part of the commission charged by the investment firm.In some cases -- most commonly with investment counselors and financial planners --they may be paid a fee instead.

What's your approach to investing? Do you try to maximize returns or do you emphasizesafety? Most importantly, talk about the IA's approach to investing. Since the IA willoften recommend investments to you, it's important that you get a sense of their investingstyle. Make sure you are comfortable with your IA's approach.

The Canadian Securities Course is a registered trade mark of the Canadian Securities Institute.

Once I settle on an IA, what happens next?


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An IA will then open an account for you. You will have to complete a "KYC" form orNew Client Application form, also called a Know Your Clientform. Your advisor willwant to get to know you because he or she is legally obliged to recommend investmentsthat are suitable for you. You will be asked to describe your financial position and yourinvestment objectives; that is, what you hope to realistically achieve from investing

other than to become a millionaire! Many people want regular income from theirinvestments while others can afford to take on more risk in the hope of making moremoney. These are the kinds of things to discuss with your IA when you first open youraccount.

If you're a very small investor, your advisor probably won't call you regularly. However,feel free to call when you have something in mind or wish to change your investmentobjectives. If the firm produces investment research, ask for relevant copies.

The firm will advise you on your investments, take your orders to buy or sell securitiesand carry them out in the market. It will keep track of your account, hold your securities

and issue regular statements. Other specialized services and products may also beavailable.

Some kinds of brokers, called discount brokers, do not provide investment advice.Discount brokers employ investment representatives (IRs). IRs aren't permitted to giveadvice or provide research, but they do execute your order. You pay lower commissionsthan full-service brokers, but also receive less customer service. Discount brokers are agood choice for experienced investors who do their own research and don't want advice.

Full-service brokers provide advice as part of a range of services that includes investmentresearch, helping investors to make appropriate choices when they do not have the time,

interest or knowledge to invest on their own.

How do I know if my investment advisor is well-qualified?

The person you deal with must be legally registered to sell securities. To be registered, heor she must have passed The Canadian Securities CourseTM. You can find out if aninvestment advisor is registered by calling your provincial securities regulator.

However, if your IA is employed by a member of Canada's Self-RegulatoryOrganizations, more qualifications are often required. They must pass exams on rules andregulations, and ethics and conduct. Before they can give advice to clients, IAs must also

complete a three month training course.

To further protect investors' interests, newly registered IAs are strictly supervised for sixmonths by their branch managers. Within two and a half years of being licensed, they arerequired to complete an advanced course in financial planning. In addition, member firmsmay put new IAs through their own training programs.


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Investment representatives must complete the same course requirements as IAs and athree month training course which doesn't involve client contact.

The Canadian Securities Course is a registered trade mark of the Canadian Securities Institute.

Is everyone selling securities in Canada part of this system of checks andbalances?

Some brokers called broker-dealers orsecurities dealers are not members of Canada'sSROs (the stock exchanges and the IIROC) but are still allowed to sell some types ofsecurities. They are regulated by provincial commissions. The securities they sell areoften very risky. Your accounts also will not be protected by the Canadian InvestorProtection Fund. Some provinces require broker-dealers to pay money into contingencyfunds, but these are much smaller than the CIPF and don't offer as much coverage.

Another group of professionals outside the SRO system are financial planners. Financial

planners may offer financial advice for a fee but they may not be authorized to sellsecurities. Their access to most markets must be through a member of a stock exchangeor the Investment Dealers Association. Mutual fund salespeople are registered to sellmutual funds only. They cannot sell you individual securities like stocks and bonds.

Your accounts with the financial planner or the mutual fund salesperson are not coveredby the CIPF, although they may have alternative coverage. If you deal with them, askwhat protection is in place.

In Investor Briefings No. 3 and No. 4, you can learn more about the stock market and thebond market. These will explain more about what you should look for before you invest.

The Bond Markets

What are bonds?

When companies or governments need to borrow money, they may issue a bond. Peoplewho buy the bond are lending their money and will be paid interest on it. The bond is theIOU or contract between the borrower and the lender. The "coupon rate" or interest rate,

the charge that is levied for the use of your money, is outlined in the bond as well as theterm, which is the length of time that the loan will be outstanding.

Most people are not aware that there are all kinds of products like bonds. We might referto the whole market as the bond market, but it is really more precise to call securities likebonds debt securities orfixed income products. Bonds are a specific kind of debtinstrument.


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How do bonds differ from debentures?

Bonds and debentures are both debt instruments. However, debentures are unsecured,which means they are just a promise to pay, while bonds normally have specific assetspledged as security. They're more like house mortgages the house secures the mortgage,

so if you stop paying interest to the lender, the house can be sold. With bonds, you're thelender, so if something happens to your payments, you can count on some return shouldthe assets be sold.

Just to confuse things, Government of Canada bonds are not secured so they are reallydebentures. But everyone still calls them bonds!

Are T-Bills and GIC's kinds of bonds?

Treasury Bills (T-Bills) are short-term debt instruments issued by the federal governmentand sometimes by a provincial government. They are issued in terms of 91, 182 and 364

days, and are sold in large denominations. Investment dealers and banks then repackagethe T-Bills into smaller amounts, such as $5,000, $10,000 or $25,000, depending on theterm, for individual investors.

You might find when you shop for a T-Bill that the return is called the effective interestrate. T-Bills don't actually pay interest. The return is really the difference between theprice the Bill is sold at (which is always less than face value) and what it is worth atmaturity. Banks and investment dealers will often translate this into a percentage returnthat is like an interest rate and allows you to comparison shop with other investments.

Short-term debt securities are also called money market instruments. Despite the name,

money is not traded in the money market. It's called this because products like T-Bills orshort-term paperare almost as flexible as cash.

Guaranteed Investment Certificates or GIC's are really term deposit instruments, notbonds. They are usually issued by a financial corporation like a trust company or a bank,which actually borrows the money from you in the same way that it borrows from youwhen you put your money in a savings account. They use the funds to meet their ownneeds and pay out interest before paying you back in full on a set date. You usually keepa GIC until maturity, but some issuers will redeem their own certificates before maturityfor a little less than their full value.

How does a Canada Savings Bond fit into the picture?

CSBs are another debt instrument issued by the Canadian government. They are not likemost bonds because they can be cashed in at any time by the original purchaser only.With CSBs (unlike bonds) you can't transfer ownership to someone else. When you cashin a CSB, you get back the face value of the bond. If you have held it for at least threemonths, you also get the interest that has accrued to date.


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CSBs are sold between October and April each year. They have been a popularinvestment for Canadians, although these days investors are shopping around for betterreturns.

Are there other debt-type products I should know about?

There are lots of money market products which are available to investors which you maynot have heard of. These include commercial paper, short-term IOUs issued bycorporations and secured by lines-of-credit, and bankers' acceptances, which are debtinstruments issued by a corporation and guaranteed by a bank.

In addition, there are other products that are similar to bonds. Strip bonds are bonds withthe coupons removed, which means they don't pay interest. The coupons and the bondsare then sold separately. Because the bond no longer pays interest, it is sold for less thanthe face value, although it will be redeemed for face value when its term is up. Thedifference is the return. Because regular interest payments are forgone, a strip bond can

be quite risky if you're unlikely to hold it to maturity. The value of the bond will vary alot before its term is up. A Mortgage Backed Security is like a bond that is secured by apool of home mortgages. These securities are issued by banks, trust companies and thelike, and are sold by investment dealers. People buy units of $5,000 for a five-year termand receive a monthly payment made up of interest and some principal. The cash flowfrom these instruments can be less predictable than from bonds because the principal isrepaid over time rather than at maturity. These are very high quality instruments becausethey are backed by the federal government's housing corporation which insures themortgages.

The securities industry brings new products to the market regularly. Although most will

interest sophisticated investors only, your investment advisor can tell you if they are rightfor you.

What happens if a company or government decides to issue a debt

security?

When a company decides to issue new securities, an investment dealer is a bigcontributor in deciding the kinds of security and its terms such as price. The dealer alsohelps prepare the company's prospectus, which is a document that describes the companyand the new securities in great detail. The prospectus is required by law if the securitiesare to be distributed to the public. You or your advisor should always review it carefully

if you are considering buying a new issue of securities.

The issuer then consults with the dealer to decide how the issue should be distributed.The dealer can either purchase it entirely for eventual resale or act as an agent to sellsecurities directly to investors. This process is called underwriting. Dealers offset the riskof buying the whole issue by assessing market conditions before establishing the price ofthe securities. Dealers are looking for the ideal price which will meet users' needs forcapital but will still be attractive to investors.


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Sometimes the process is much shorter and the whole issue is bought by one dealer (or asmall group) before coming to market. This is because eligible large companies that havea long track record in the capital markets are allowed to sell new securities through a lessdetailed prospectus called a prompt offering prospectus.

For provincial and municipal governments or for federal crown corporations, this processis the same. However, the federal government does things differently. It tends to set itsown terms with advice from the Bank of Canada and from investment dealers, then offersits bonds and Treasury Bills to selected senior dealers at auctions. Dealers with winningbids buy part or all of the issue.

What does the dealer do after it has bought a new issue of debt securities

from the issuer?

A dealer will either sell the securities right away or put them in the firm's inventory. Thefirm's fixed income tradingdepartment orbond deskcan then sell them at a later time. In

the meantime, it can collect the interest that accrues over time.

Most firms have different specialists for each of the different kinds of debt instruments.These traders also have the authority to buy and sell bonds in the secondary market.

What is a secondary market?

So far we have talked about debt instruments that have been newly issued. This is theprimary market. The primary market directs money from investors to corporations andgovernments where it is put to use to grow and develop, to add new products andservices, and to create new jobs. This market is the engine of the economy.

However, there is another market called the secondary market. Secondary markets areresale markets. Here, investors buy and sell securities among themselves and money doesnot pass through to the original issuer of the securities. A secondary market in bondsprovides investors with an opportunity to buy or sell their debt securities at any timebefore the term comes due. For example, if you bought a $1,000, 20-year Government ofCanada bond 10 years ago and need to sell it now, you can do so. Being able to buy andsell when you want is what makes the bond market liquid.

Secondary markets support primary markets and are very active and important. Pricesthat investors are paying for securities in the secondary market reflect the value they

perceive in the company. Should a company need to go back to the market to raise moneyagain, the price they can get for the new securities will mirror the prices being paid for itscurrent issues as well as other factors.

Will I get all my money back if I sell my bond before the term is up?

That depends on factors like the coupon rate of the bond, the prevailing interest rate, theterm left to maturity and the current credit rating of the issuer. You could get more than


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face value if the coupon rate is significantly higher than current rates for similarsecurities.

How can I make capital gains on a bond?

Besides making money by collecting interest on a bond, you can also make a capital gainon a bond. Bonds are often sold for less than face value. If you buy one at a discountfrom face value and hold it to maturity you will make a capital gain when you cash it in.You will also make a capital gain if you buy your bond at par(face value) then sell it formore, which is called selling at a premium. But you can also take a capital loss if you sellthe bond for less than what you paid for it.

When do bonds sell for less than face value?

Selling a bond for less than face value is like putting any merchandise on sale. You do itbecause you know it won't sell unless you reduce the price. This will happen when the

coupon rate on a bond is too low or the term to maturity is long. Let's look at a couple ofexamples.

Say a $1,000 Government of Canada Bond is paying an interest or coupon rate of 3%with 10 years left to maturity. That means the income per year is $30. If other bonds areavailable with an interest rate of 5%, this one could sit on the shelf. So market pressureforces a price cut, perhaps to $900, which looks like a good discount. But if you averageout that $100 capital gain which a buyer would make when it is cashed in 10 years later,it only comes to $10 a year. Add that to the $30 interest and the total return is $40 peryear. Taken as a percentage of the discounted price, this return is still only 4.5%. Clearly,if the dealer wants to sell this bond, the discount will have to be a lot bigger!

But if the bond had only five years to run, the picture changes. Now that same $100capital gain (assuming the bond is sold for the same discount) is equal to $20 a year. Thatmakes for a $50 a year return at the 3% interest rate. $50 as a percentage of $900 equatesto about 5.6% which now makes the bond a better deal.

What we have been doing here is calculating bond yields very roughly. Dealers use yieldsto determine what is the best price for selling a bond or to test whether a bond being soldis a good investment. Anyone who wants to invest in bonds should get to know bondyields, too.

Why do some bonds trade for more than face value?

If you have a bond with a high interest or coupon rate and a number of years to run, thebond may very well be worth more than face value. Let's look at a sample yield.

Your dealer has a $1,000 bond offering 12% with three years to run. Lots of peoplewould like to buy that bond if current interest rates are running at half of that. So thedealer raises the price of the bond and offers it for $1,150. (Remember, the dealer may


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also have paid more than face value for the bond.) The capital loss of $150 you will incurif you buy it is equal to $50 a year for each of the three years left. When you subtract thisfrom the interest revenue of $120 a year, the bond is still bringing in $70 a year.Expressed as a percentage of the premium price you paid, the bond is yielding 6%. If thebond has other attractive features, this may be high enough to still make it competitive

against other investments.

What causes the prices of bonds to go up and down?

You can see that the pricing of bonds depends a great deal on current interest rates. Ifinterest rates are now higher than they were a year ago, last year's bonds are not going tobe as attractive. They'll have to sell at a discount. In the securities market if interest ratesare going up, bond prices in the secondary market will generally move down. Theopposite is true if interest rates are falling. Bond prices go up!

Another important factor that affects prices is the credit rating of the issuer. If it is good,

the risk is lower and the issuer will be able to borrow at less cost. That means it will notneed to pay lenders as high a rate of interest as bonds with lower credit ratings wouldhave to pay. The yield for the investor may not be as good, but the risk is lower than for asecurity issued by a less viable firm. These bonds will trade at a premium over similarbonds with lower credit ratings.

The term to maturity is also important. Longer term bonds will need to carry a morefavorable coupon rate because so much can happen to affect rates over a very long term.This makes the price of the longer term bond more volatile.

The coupon rate and bond features will also affect market price. When a bond pays a high

rate of interest, most of the return an investor receives will regularly accrue over the term.This is less risky than waiting for a capital gain upon redemption. Some features are alsovery attractive to an investor, such as whether it can be converted into another form ofinvestment. These terms will affect the pricing of the bond.

How does the bond market operate?

Unlike stock exchanges where stocks are traded, there is no physical place for tradingbonds. Instead, brokers use telephone and computer networks to carry out bond buys andsells.

Investors call the bond sales department if they have a bond they want to buy or sell.They're provided price quotations through the firm's trading desk. The trading desk'scomputer system lists prices and availabilities for a wide range of bonds.

A dealer can use the system to find a bond for an investor and quote competitively even ifthe firm does not currently own the bond. If you want to buy a particular bond, the dealernormally acts as principal by reselling one the firm already owns or by buying in the open


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market and reselling to you at a slightly higher price. In a sell trade, the dealer will buyyour bond and resell it or put it in the firm's inventory.

Who makes sure the bond market is operating fairly?

The bond market in Canada is huge. The dollars involved have been up to 35 timesgreater than the value of trading in the entire stock market. It is also an upstairs orunlistedmarket, which means it operates less out in the open than the stock market.These factors make it a challenge to regulate.

However, rules and regulations governing the bond market are in place to ensure fairnessand equality for all. The industry calls this a level playing field. In Canada, theInvestment Dealers Association and the various securities administrators set the rules forthe bond and money market. In the next few years the bond market will also becomemore visible as public quotation systems are linked to wholesale interdealer networks.Right now, bond prices are available from your dealer and may also be published in the

financial pages of your newspaper.

How do I pick the right bond?

Before you choose any bond, make sure you have adequate advice from your investmentadvisor. He or she will help you decide first of all whether bonds are suitable for you asan investment. Only then should you begin the process of evaluating individual bonds bylooking at yields, credit ratings, terms, coupon rate and other characteristics or features ofthe bond.

What kind of features should I be looking for in a bond?

A bond or debenture always has features which will affect your decision whether or notto buy it. For example, the bond might have an optional call feature which means theissuer has the option to pay you back in full before the term is up. If this happens, theissuer would usually pay a premium on the face value. When a bond has a sinking fundfeature it may be called prior to maturity without payment of a premium.

An extendible feature allows you to extend the maturity of your bond or debenture if youwish with the same or a slightly higher interest rate for the extended period. Retractablebonds allow you to cash in the bond at face value, often five years before maturity. Theseoptions are attractive to investors so bonds with these features can be sold with a slightly

lower coupon rate.

Other popular features include convertibility to common shares of the issuingcorporation, orexchangeability which offers the option to exchange a debenture with thecommon stock of a different but related company. Many bonds today are also issued witha floating rate. This means the interest rate is adjusted regularly to reflect current interestrates. Not surprisingly, these bonds generally pay a lower coupon rate than others withfixed terms.


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How do I work with a bond dealer?

First of all, make sure you choose an investment firm you feel you can trust. It makessense to ask if the firm is a member of one of Canada's Self-Regulatory Organizations.Talk to the branch manager and ask about the firm's investment and client philosophy.

Ask if the firm likes to deal with investors with needs and wants similar to yours.

Then select an investment advisor at the firm you've chosen. Interview a few beforedeciding. After all, this person is going to be very important to your investment success!

Your advisor will open an account with you. This sounds routine but is actually veryimportant. It is now that you will outline your investment needs and your personalfinancial situation. In any dealing with you, your advisor is obliged by law to makerecommendations that are in keeping with your objectives and profile. In the industry,this is what we call the suitable rule.

Investment advisors provide advice and research if the firm is full-service. If it is adiscount broker, the firm will place your orders but will not offer any advice. That's whyyou pay a lower commission. Brokers generally make money on a commission charged toyou for carrying out your business. Commission is not charged on bonds. Profit is madeby selling the bond at a slightly higher price than the firm paid for it. Make sure youknow what this mark-up is in advance.

Normally when you buy a long-term bond or a stock you must pay for it within threebusiness days. Money market instruments generally require same day payment.Sometimes you may work out an arrangement with your advisor allowing you to buy asecurity on margin. This means the firm will lend you a portion of the purchase price of

the security. Remember, the amount you can borrow will change as the market price ofthe security changes. That means if it drops, you will have to come up with more money.You should understand this technique fully before investing on margin.

Once you have purchased securities, it makes sense to track their performance. Make surethey continue to meet your investment objectives. Your investment advisor can help youevaluate your securities and advise you whether any adjustments are needed.

The Stock Markets

What are shares?

As businesses grow, the demand for funds to spur growth and development often grows,too. Many entrepreneurs borrow money, but another option is available. A part or shareof the business can be sold.


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A share, then, is a unit of a company that represents ownership orequity in it. An investorwho buys a share is not lending money to the company. In a very real sense, the investoris putting savings directly to work in the company's business. If it prospers, theshareowners will also prosper in direct relation to the number of shares owned. If it fails,the investor holding its shares may lose money.

The option of raising money by selling shares orequity is only rarely open togovernments. That is because they have few assets to sell. They tend to borrow throughthe bond market instead.

What are the different kinds of shares?

A company can issue eitherpreferredorcommon stock. Preferred stocks payshareholders a fixed dividend but do not normally have voting rights. If the company isliquidated, preferred shareholders will have a claim to a set dollar value per share of theassets. This right comes after the claims of bondholders and other creditors but before

common shareowners.

Preferred shares are similar to fixed-income products like bonds. Their prices rise and fallin response to interest rates. People buy preferreds for the same reason they buy bonds for the regular income. Preferreds do have some advantages, however. Income fromdividends is taxed at a lower rate than income from bond interest.

Common shares do not always pay a dividend. The return from these shares is usuallyfrom the capital gain earned if they increase in value after you buy them. That's whyprices for common shares can be more volatile than prices for preferreds. Over time, theymove up and down due to factors like the economy and company performance.

You can also buy preferred stock that is convertible into common stock at a set price for alimited time. The market price of convertible preferreds will vary more than otherpreferreds because to the investor they look more like common stock than fixed incomeshares.

Remember that a company may issue different classes of common stock. These classesmay have no, or limited, voting rights.

Is common stock more risky than preferred?

Yes. But lots of common stocks aren't that risky. You can help to hedge your bets bylooking at the company's track record, at its dividend payment record, and by carefullyexamining the company's financial reports. Normally, the more stable the company andits earnings, the more stable its stock price will be.

All of this information, as well as a buy, sell or hold recommendation, is available frommost investment dealers' research departments. This can be invaluable in helping youmake your investment selection.


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What are my rights as a shareholder?

As a shareholder, you are part-owner of the business and normally have a right to share inmanagement decisions and to share in profits. Your voice in company affairs is expressedwhen you vote at the company's annual meeting. You usually get one vote for each share

you own. Profits are issued to shareowners at intervals in the form of dividends.

Keep in mind that a company doesn't have to issue dividends or make up for unpaiddividends on common shares. Also, some companies limit their shareholders' votingrights. Before you invest, look at the company's record in paying dividends and checkwhat voting restrictions the shares might have.

Shareholders are also entitled to get regular information about the company's activities.This includes annual and interim financial statements, and ongoing news about thingsthat can affect the value of your shares.

If the company goes bankrupt, common shareholders have last claim on the company'sassets.

How does a company decide whether to borrow or to sell shares?

A company needs to weigh many factors before deciding. The economy will beimportant. If the country's in recession, stock prices could be depressed. Issuing morestock may not be the best way to raise money. If interest rates are falling, the bondmarket may be better because the cost of paying interest to investors will be lower.Alternatively, with stock the company will not have to pay regular interest or account forrepayment. Dividends don't have to be paid if the company is going through lean times.

However, a company may not want to give up any ownership even if issuing shares ischeaper.

An investment dealer helps a company decide whether to issue bonds or shares.

When a company decides to issue shares, what happens?

The process of bringing shares to the market for the first time is called an initial publicoffering(IPO), a new offeringor a new issue. The investment dealer that helps bring thenew securities to market is the underwriter.

The company and the underwriter determine the details of the offering such as type andprice. Special features attractive to investors are designed. A few weeks before theoffering, the company must register a preliminary prospectus with the securitiesadministrator in each province where the offering will be sold. This is a lengthydocument describing the company, its history and officers, and information on theoffering. It can be used to solicit investor interest in the stocks. The preliminaryprospectus is checked by the securities administrators to ensure all important details aredisclosed. But even if the securities administrators approve a prospectus, this does not


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mean that the stocks are a good investment. The administrators don't endorse thesecurities nor do they vouch for the accuracy of the information in the prospectus. Theysimply try to ensure that all important information about the company and the shares ismade public.

Sometimes, a new issue can be sold without a prospectus if it's being sold only to biginvestors. These investors are called exempt purchasers and are mostly financialinstitutions.

If you are looking at a new issue, be sure you or your advisor reviews the preliminaryprospectus. The final version of the prospectus is filed just before the shares aredistributed. This is where you will see the final share price instead of only a price range.

The company and the investment dealer then work out what role the dealer will play indistributing the issue. A dealer can buy the whole issue, either alone or as a part of agroup called a banking group. This situation is called abought deal, and the dealer will

resell the shares to investors or put them in the firm's inventory. The dealer can also actas an agent, simply locating investors who might want to buy the shares from thecompany. This is called a best efforts underwriting. Even though there is risk involved,most issuers prefer a bought deal underwriting because they are guaranteed a certainamount of money and don't need to take back any shares that aren't sold.

What is the stock exchanges role?

They play a very important role in our capital markets. They are better known assecondary markets. Companies can use stock exchanges to raise new capital, but most ofthe trading you hear about in business reports on radio and TV is trading among investors

(secondary trading). The seller is no longer the company which issued the stock, butsomeone who bought the stock earlier, either as a new issue or from another investor.

You should know, however, that stock exchanges can be used in Canada for a company'sfirst distribution of shares. If you encounter one of these, be sure you review theStatement of Material Facts or the Exchange Offering Prospectus describing the offeringand the company. They are similar to prospectuses filed in more usual offerings.

Once a company decides to issue stock for broad distribution, which is what is meant bygoing public, the company can have its shares traded on a stock exchange or in anotherpublic market. Only stocks which are listedon a stock exchange can be traded there.

Why is it important to have a secondary market?

Without a secondary market, investing in companies would be so difficult, timeconsuming and expensive that it might not be worthwhile. Imagine if you bought sharesfrom a company and then wanted to sell them. Without a convenient secondary market,you'd have to go out yourself and try find a buyer for your shares. This could take a long


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time, and you might have to spend a lot of money on advertising to let people know youwant to sell.

With a strong secondary market people can choose to buy from a wide range of availableshares at any time, not just when they are newly issued. They can buy and sell when they

want to. Investors can make quick decisions about the value of a company and act onthem immediately. Unlike many other kinds of markets (e.g. real estate), stock exchangesare very liquid, meaning you can often get money for your shares in a few days.

Companies rely on active secondary markets to help them raise money in the primarymarkets. If one class of shares on a stock exchange is in demand, a new issue wouldlikely be attractive, too. That means the company would be able to raise more money forthe same costs. If stock prices are depressed, the company might choose other financing.

Are all stock exchanges the same?

No. While the shares of many major companies are listed on a lot of stock exchanges,exchanges often specialize in different kinds of listings. Some set quite onerousconditions for the kind of company that can list its shares, while others have less strictstandards. Some may seek out small, start-up companies, while others prefer senior orblue chip companies that are big and established.

In Canada two exchanges lean more toward smaller and newer companies, with somesenior stocks also listed. The Alberta and Vancouver Stock Exchanges are specialists injunioror brand-new companies, especially junior resource companies. These includesmaller oil and gas firms which tend to be traded on the ASE, or mining companieswhich are common on the VSE. Senior companies tend to list on the Toronto Stock

Exchange or the Montreal Exchange, although these exchanges also list juniorcompanies.

All these exchanges play important roles in the capital formation process. Juniorexchanges help new companies get off the ground. They are venture capitalspecialists.Markets like Toronto and Montreal offer bigger companies access to large capital pools.

Are venture capital stocks riskier?

Junior stocks on venture capital exchanges are more likely to be risky. This is because thecompany issuing the stock hasn't been in business long enough to build a track record of

profits and dividends. Stock exchanges monitor such companies, but this can'tcompensate for the risk of being new and unproven.

This does not mean you will lose all your money if you invest on these exchanges. Thereare some very sound and promising companies listed. Don't ever think, either, that stockson more senior exchanges are risk-free. Any stock investment, no matter where it's listed,has to be judged carefully with agreed-to objectives and a clear assessment of the riskinvolved. If the risk is high, you should always be prepared to lose your investment.


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Can anyone buy and sell on a stock exchange?

You can buy and sell any stock listed on a stock exchange, but you can't do it yourself.Stock exchanges are owned by the member brokerage firms and investment dealers. Allorders must go through a member who owns a seaton the exchange. Owning a seat

means the firm has met the membership admission standards and can trade in the stockslisted there.

How are stocks traded on the exchange?

Stocks, especially the better known ones, tend to trade in an auction market. Buying astock is like buying an antique at an auction house. The auctioneer is paid a commissionto sell the antique to the highest bidder. If there aren't lots of bidders, the price will belower than if lots of people want to buy it.

Similarly, members bring orders to a stock exchange for auctioning. They can do this

physically by sending the orders to an exchange trading floor where they are executed bytraders. Or, they can handle the whole order electronically. The goal in both cases is toexpose all buy orders for a stock to all sell orders. That way, the best deal can be struck.

.

What other products trade on stock exchanges?

Most stock exchanges also trade warrants and options. Both of these products give theirowners a right to buy (or with options, to buy or sell) a security at a set price by a certaintime. These products can have value. Think about it this way. If someone gives you a

certificate that will let you buy a stock at less than what it sells for in the market on aparticular day, you know that certificate is worth the difference between the two.Warrants often come with new issues of stock or debentures to make the securities moreattractive. Options are widely available on most large companies' stock.

Options help investors to hedge against market conditions. If they believe the market isgoing down, but are not prepared to sell the stock today, they can buy a putoption whichwill allow them the right to sell the option at today's price at a future date. A calloption,which gives the right to buy at today's price, is useful if the market moves up.

Some stock exchanges also trade futures which are contracts that oblige the investor to

buy or sell the security at a set price and time.

Futures and options are complex products and riskier than equities. You should consultcarefully with your investment advisor before investing.

Who is primarily responsible for investor protection?


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In Canada the various provincial governments have the last word on investor protection.Each province has a securities commission or administrator which oversees a provincialsecurities act. This act is a set of laws and regulations which outlines what players in themarket can do and cannot do.

All the securities acts are based on the principle of full and plain disclosure. Anyinformation that will affect investors must be available to all investors in a timelyfashion. Usually the onus is on the issuer to disperse information. However, just becausea company meets a regulator's requirements for disclosure does not mean its securitieshave investment merit. Potential investors should keep this in mind.

Securities commissions also require registration of all organizations and sales staffinvolved in the investment business. There are different categories of registration investment dealer, registered investment advisor, mutual fund salesperson and so on.Before registration is allowed, basic standards must be met. These include minimumcapital requirements for a firm and minimum educational qualifications for personnel.

The Acts also specify broader responsibilities for investment advisors and theirrelationships with clients. They are obliged to deal fairly, honestly and in good faith withclients.

What are the CSA and SROs?

Because securities regulation is a provincial matter, the various Canadian securitiescommissions and administrators have formed a national group to work towards makingsecurities regulations compatible across Canada. This group is called the CanadianSecurities Administrators. From time to time, this group issues national or provincial

policies. One national policy on shareholder communication ensures that all shareholderswho wish to will receive company information such as annual reports.

In addition, many important rules governing industry practices and standards are set bythe Self-Regulatory Organizations, which include the Vancouver, Alberta and TorontoStock Exchanges, the Montreal Exchange and the Investment Dealers Association ofCanada. In fact, a lot of the regulatory and compliance functions have been delegated tothe SROs by the provincial securities administrators. These organizations oversee thebrokers and investment dealers, as well as the markets themselves.

Isn't the SRO system vulnerable to self-interest?

Some people say that self-regulation is a bit like the fox guarding the henhouse.However, all regulatory responsibilities are carried out under the watchful eye ofprovincial regulators. Every by-law and rule created by an SRO and every singlecomplaint is reviewed by the securities administrators. This ensures that the publicinterest is paramount. In addition, public governors sit on the Boards of all the SROs tomonitor the public interest.


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sure that happens. Stock exchanges have many other rules to make the market more openand fair.

The bond market, however, is an unlistedmarket, generally forprofessionals. That doesnot mean that the market is regulated less strictly. Companies that are active in the bond

markets must provide regular disclosure in addition to the extensive disclosure requiredbefore a new issue. The focus, however, is on ensuring visibility, fair access, and honestprices among dealers so that the investing public who are buying and selling in the bondand money markets can benefit.

Can you tell me more about the investor protection fund?

Called the Canadian Investor Protection Fund(CIPF), it is sponsored by the Vancouver,Alberta and Toronto Stock Exchanges, by the Toronto Futures Exchange, the MontrealExchange and the Investment Dealers Association of Canada. The brokers and dealerswhich are members of these Self-Regulatory Organizations pay an assessment to provide

funds. CIPF also has a line of credit with a chartered bank.

As soon as you become a client of a member, your accounts are covered. The maximumcoverage is $500,000 per account of which $60,000 can be in cash. Accounts such ascash, margin, short sale, options, futures and foreign currency are combined as oneaccount for coverage purposes. Some accounts such as for RRSPs or RRIFs are entitledto separate coverage of $500,000. Customers have 180 days from the date of insolvencyto file a claim.

Glossary

Acceptance Company Paper

Short-term negotiable debt securities issued by finance companies to fund loans toconsumers for items such as cars and appliances.

Accounts Payable

Debts of a company for goods or services purchased that must be paid within one year.These debts are listed as a current liability on the company's balance sheet.

Accounts Receivable

Money owed to a company for goods and services it has sold. Payment is expected withinone year. This money is listed as a current asset on the company's balance sheet.

Accrued Interest

The interest accumulated on a bond ordebenture since the last interest payment date.


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Affiliated Company

A company with less than 50% of its stockowned by another corporation, or one whosestock, with that of another corporation, is owned by the same controlling interests.

Agent

An investment dealer operates as an agent when it acts on behalf of a buyer or a seller,and does not itself own title to the securities at any time during the transactions.

Amortization

Gradually writing-off the value of an intangible asset over a period of time. Commonlyapplied to items such as goodwill, improvements to leased premises, or expenses of anew stockorbond issue.

Annual Report

The formal financial statements and report on operations issued by a company to itsshareholders after its fiscal year-end.

Arbitrage

The simultaneous purchase of a security on one stock exchange and sale of the samesecurity or an equivalent of that security on the same or another exchange which canresult in a profit. The profit is the difference between the buy and sell prices and isusually a very small amount per unit. Arbitrage is a sophisticated manoeuvre executed by

professional traders.

Arrears

Interest ordividends which were not paid when due and are still owed.

Ask

The lowest price at which someone is willing to sell a security.

Assets

Everything a company or person owns or is owed, such as money, securities, equipmentand buildings. Assets are listed on a company's balance sheet.

Associated Company

A company owned jointly by two or more other companies.


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At-The-Money Option

An option with an exercise orstrike price that is equal, or almost equal, to the currentmarket price of the underlying security.

Audit

Verifying the accuracy of accounting and financial records by a member of the Instituteof Chartered Accountants. In some provinces Certified General Accountants andCertified Management Accountants may also act as company auditors.

Authorized Shares

The number ofshares a company is legally allowed to sell.

Averages and Indexes or Indices

Statistical tools that measure the state of the stock market or the economy, based on theperformance ofstocks, bonds or other components. The Dow Jones Industrial Averageand the TSE 300 Composite Index are well-known examples.

Averaging Down

Buying more of a security at a lower price than the original investment. The aim ofaveraging down is to reduce the average cost per unit of the investment.

Balance Sheet

A financial statement showing a company's assets, liabilities and shareholders' equityon a given date. It shows what the company owns and what debts it owes.

Balloon

In some serial bond issues a balloon is an extra-large amount that may mature in thefinal year of the series.

Bank of Canada

The central bankof Canada, founded in the 1930s to facilitate the functioning of thefinancial system. The Bank of Canada issues and removes bank notes, acts as the federalgovernment's financial advisor on debt management and foreign exchange, and conductsmonetary policy to regulate the growth of the country's money supply and influenceinterest rates.

Bank Rate


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The minimum rate at which the Bank of Canada will make short-term advances to thechartered banks and money market dealers. Since 1980 the bank rate has been set at 1/4of 1% (25 basis points) above the weekly average tender rate of 91-day Government ofCanada treasury bills. The upward and downward trend of the bank rate affects theprime lending rates that chartered banks give to their most creditworthy borrowers, as

well as rates on all types of bank deposits, short-term paper, bonds and mortgages.

Bankers' Acceptance

A type of short-term negotiable debt instrument issued by a non-financial corporation,such as Ford or General Motors, but guaranteed as to principal and interest by its bank.The guarantee reduces risk and therefore results in a higherissue price and consequentloweryield.

Banking Group

A group ofinvestment dealers, each of which individually assumes financialresponsibility for part of an underwriting of a new issue ofsecurities for a corporation.

Bankrupt

The legal status of an individual or company which is unable to pay its creditors andwhose assets are therefore administered for its creditors by a trustee in bankruptcy.

Basis Point

A phrase used to describe differences in bond yields, with one basis point representing

one-hundredth of a percentage point. Thus, if bond X yields 11.50% and bond Y yields11.75%, the difference is 25 basis points.

Bear Market

A market in which prices are declining. A "bear" is a person who expects that the marketor the price of a particularsecurity will decline.

Bearer Security

A stockorbond which does not have the owner's name recorded in the books of theissuing company or on the security certificate itself. The holder of the certificate is theowner. Interest, dividends or any profits from sales are payable to the holder.

Beneficial Owner


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The real owner of a security. An investor may have securities registered in the name ofa broker, trustee or bank to facilitate transfer or to preserve anonymity, but the investoris the beneficial owner and will receive any dividends, interest or profits from sales.

Best Efforts Underwriting

The underwriter agrees to use his or her best efforts to sell a new issue ofsecurities, butdoes not guarantee to the issuing company that any or all of the issue will be sold. Theunderwriter acts as an agent for the issuer in distributing the issue to his clients.

Bid

The highest price a person is willing to pay for a security.

Blue Chip Stocks

Nationally-known common stock, usually with a continuous dividend payment record ingood times and bad and other strong investment qualities. These stocks are usually high-priced but have a tendency to be low-yielding.

Blue Sky

A slang term for laws various Canadian provinces and American states have enacted toprotect the public against securities frauds. The term "blue skyed" indicates that a newissue has been cleared by a securities commission and may be sold to the public.

Board Lot

A regulartrading unit which has been decided upon by the stock exchanges. Forexample, one board lot on the Toronto Stock Exchange equals 1000 shares for sharespriced under 10 cents each, 500 shares for shares priced between 10 cents and 99 cents,and 100 shares for shares of $1 and over.

Bonds

A certificate which is evidence of a debt on which the issuer promises to pay the holdera specified amount ofinterest for a specified length of time, and to repay the loan on itsmaturity. Strictly speaking, assets are pledged as security for the loan, except in the caseof government bonds, but the term is often loosely used to describe any debt issue. Bondsare issued by corporations and by federal, provincial and municipal governments. Bondholders are first in line before shareholders to claim any of a company's assets in theevent ofliquidation.

Book Value


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The cash value of a business which, after all debts are paid, belongs to the owners of acompany shareholders liquidated. This is calculated by looking at the balance sheetand subtracting the company's liabilities and value ofpreferred shares from its assets,and then dividing what is left by the total number ofcommon sharesoutstanding.

Bought Deal

An entire issue of new stocks orbonds bought from the issuer by an investment dealer,frequently acting alone, for resale to its clients. The dealer risks its own money in abought deal, and in the event that the price has to be lowered to sell out the issue, thedealer absorbs the loss.

Broadened Base Earnings

A concept whereby the earnings per share of a company are computed to include a prorata share of the earnings of all unconsolidated subsidiaries and associated companies.

Broker

A securities firm or an investment advisor associated with a firm. When acting as abroker for the purchase or sale oflistedstock, the investment advisor does not own thesecurities him or herself, but acts as an agent for the buyer and seller and charges acommission for these services.

Bull Market

A market in which prices are rising. A "bull" is a person who expects that the market or

the price of a particularsecurity will rise.

Business Day

Those days when most corporate and government offices are open for business, usuallyany day except Saturday, Sunday and legal holidays.

Buy-ins

If the seller of a security fails to deliver the securities sold to another person within aspecified number of days after the settlement date, the buyer may purchase the securitiesin the open market and charge the seller the cost of such purchases.

Call Loan

A loan which may be terminated or "called" at any time by the lender. The loan is thenimmediately payable, with any accrued interest, by the borrower to the lender. These


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loans are used to finance purchases ofsecurities and exclude personal loans extended bybanks to its customers.

Call Options

An option which gives the holder the right, but not the obligation, to buy a fixed amountof a certain stockat a specified price within a specified time. Calls are purchased byinvestors who expect a price increase.

Callable

Securities which may be redeemed upon due notice by the security's issuer. In the case ofbonds, issuers of bonds may reserve the right to pay off the bond before maturity to takeadvantage of lowerinterest rates.

Canadian Investor Protection Fund (CIPF)

An industry sponsored fund that protects investors from losses resulting from thebankruptcy of a member firm. The maximum coverage is $500,000 per account, ofwhich up to $60,000 can be cash. The CIPF is sponsored by the Investment DealersAssociation of Canada, the Toronto Stock Exchange and Futures Exchange, and theMontreal, Vancouver and Alberta Stock Exchanges.

Canadian Payments Association

This association operates a highly automated national clearing system for interbankpayments which reduces costs and increases the efficiency of the clearing system in

Canada. Members include chartered banks, trust and loan companies and some creditunions.

Cancel or Change Former Order (CFO)

An order that cancels or changes a customer's current order.

Capital

To economists, capital means the machinery, factories and inventory required to produceother products. To investors, capital means their cash plus the financial assets they haveinvested in securities, their home and other fixed assets.

Capital Cost Allowance

An amount allowed under the Income Tax Act to be deducted from the value of certainassets and treated as an expense in computing an individual's or company's income for a


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taxation year. It may differ from the amount charged for the period in depreciationaccounting.

Capital Gain or Loss

Profit or loss resulting from the sale of certain assets classified under the federal incometax legislation as capital assets. This includes stocks and other investments such asinvestment property.

Capital Market

This market brings together all the providers and users ofcapital, all the financialproducts, like stocks and bonds which make the transfer of capital possible, and all thepeople and organizations which support the process.

Capital Stock

All shares representing ownership of a company, including preferred as well ascommon shares.

Capitalization or Capital Structure

Total dollar amount of all money invested in a company, such as debt, preferred andcommon shares, contributed surplus and retained earnings of a company. It can alsobe expressed as a percentage.

Cash Flow

A company's net income for a stated period plus any deductions that are not paid out inactual cash, such as depreciation, amortization, deferred income taxes and minorityinterest. Cash flow can provide a broader picture of a company's earning power than netearnings alone. Cash flow is important to investors as it shows the company's ability topay dividends and finance expansion.

Central Bank

A body established by a national government to regulate currency and monetary policyon a national and international level. In Canada it is the Bank of Canada. In the UnitedStates it is the Federal Reserve Board and in the United Kingdom it is the Bank ofEngland.

Certificate

An engraved document which shows ownership of a bond, stockor othersecurity.


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Certificate of Deposit (CD)

A fixed-income debt security issued by most chartered banks, usually in minimumdenominations of $1000 with maturity terms of one to six years.

Class A and B Stock

Names used by companies to distinguish between two classes ofcommon stock. Class Astock may receive cash dividends while Class B may receive stock dividends. Therealso could be differences in voting rights or in priority ofassets. The investor shouldreview the terms of the class designation prior to purchase to understand the rights of thatclass of stock.

Clearing House

An independent institution that ensures the payment and delivery ofstocks and bonds

between investment dealers in a timely, cost-efficient manner. For example, aninvestment dealer may execute 10 trades (buys and sells) in the same security on thesame day. Through the clearing house the dealer just settles the difference in the numberofshares and the difference in money owed or received.

Closed-end Investment Company

This is a company which uses its capital to invest in other companies. Shares in aclosed-end investment company are bought and sold on the stock market and thecompany's capital remains relatively unchanged.

Close

The last transaction price for a stockon a particularstock exchange at the end of thetrading day. If there was not an actual transaction that day, the close can refer to the lastposted bid and askprices.

Collateral

Securities or other property pledged by a borrower as a guarantee for repayment of aloan.

Collateral Trust Bond

A bond secured by stocks or bonds of companies controlled by the issuing company, orother securities, which are deposited with a trustee.

Comfort Letter


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A letter filed with the applicable securities commissions by a company's auditor whensubmitting unsigned financial statements for use in a prospectus. The letter says that thefinal format of the statements should not be materially different from those attached tothe letter. The letter is required because the auditor does not sign the report until the finalprospectus is prepared for distribution. The signing is done after the securities

commissions have reviewed the prospectus and any required changes have been made.

Commercial Paper

Short-term negotiable debt securities issued by non-financial corporations with terms ofa few days to a year.

Commission

The fee charged by an investment advisor for buying or selling securities as an agenton behalf of a client.

Commodities

Products used for commerce that are traded on a separate, authorized exchange, such asthe Winnipeg Commodities Exchange or the Chicago Board of Trade. Commoditiesinclude agricultural products and natural resources such as timber, oil and metals, and arethe basis forfutures contracts traded on these exchanges.

Common Stock or Common Shares

Securities which represent ownership in a company and carry voting privileges.

Commonshareholders may be paid dividends but only afterpreferred shareholders arepaid. Common shareholders are last in line after creditors, debt holders and preferredshareholders to claim any of a company's assets in the event ofliquidation.

Compound Interest

Interest earned on an investment at periodic intervals and added to the original amountof the investment. Future interest payments are then calculated and paid at the originalrate but on the increased total of the investment. This is really interest paid on interest.

Computer Assisted Trading System (CATS)

An electronic trading system developed by the Toronto Stock Exchange that allowstraders anywhere in the world to trade stocks listed on the exchange. This was the firstelectronic trading environment developed in Canada.

Confirmation


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Also called a contract. This is a printed acknowledgement giving details of a sale orpurchase of a security, which is normally mailed to a client by the investment dealerwithin 24 hours of an order being executed.

Conglomerate

A company directly or indirectly operating in a variety of industries, usually unrelated toeach other. Conglomerates often acquire outside companies through the exchange of theirown shares for the shares of the majority owners of the outside companies.

Consolidated Financial Statements

A combination of the financial statements of a parent company and its subsidiaries,presenting the financial position of the group as a whole.

Constrained Share Companies

Canadian banks, trust, insurance, broadcasting and communication companies have limitson the number ofshares or percentage of shares owned by people who are not Canadiancitizens or residents. Foreign ownership is restricted since these companies or institutionsare either culturally important or fundamentally important to the Canadian economy.

Consumer Price Index (CPI)

A major inflation measure computed by Statistics Canada. It measures the change inprices of a fixed basket of a variety of goods and services in the previous month. Thisbasket of goods is supposed to reflect the average needs of a Canadian family.

Continuous Disclosure

A securities issuer must issue a press release as soon as a material change occurs in itsaffairs and within ten days for any other changes in the company.

Contributed Surplus

Part ofshareholders' equity which originates from sources other than earnings, such asthe initial sale ofstockabove par value.

Convertible Security

A bond, debenture orpreferred share which may be exchanged by the owner, usuallyfor the common stockof the same company. Convertibles are attractive to investors asthey provide the security and income of a bond, debenture orpreferred share, as wellas the opportunity to participate in the growth of the company through converting tocommon shares.


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Corporation or Company

A form of business organization legally created under provincial or federal statutes whichhas a legal identity separate from its owners. The corporation's owners shareholdersdebts only to the extent of their investment, which is called limited liability.

Country Banks

A term for non-bank lenders such as corporations, insurance companies and otherinstitutional short-term investors, none of which are under the jurisdiction of the BankAct, who provide short-term sources of credit forinvestment dealers.

Coupon

A mini-certificate actually attached to a bondcertificate which represents an actualinterest payment. The coupon becomes negotiable on the date the interest is due and

usually represents the six month interest payment on the face value of the bondcertificate. The term "coupon" is sometimes used as a slang reference to the interest ratepaid on a debt instrument, i.e. the coupon of the new Government of Canada March 2015is 8.75%. This means the interest rate is 8.75% per annum on the face value of the bond.

Cover

Buying a security that you had previously sold short.

Cross on the Board

When an investment dealer has both an order to sell and an order to buy the same stockat the same price, the transaction is allowed without interfering with the limits of theprevailing market. This is also called a put-through or contra order.

Cum Dividend

This means "with dividend." Buyers ofshares quoted cum dividend are entitled to anupcoming already-declared dividend.

Cum Rights

This means "with rights." Buyers ofshares quoted cum rights are entitled to forthcomingrights.

Cumulative Preferred


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A preferred stockwhich has a provision that if one or more of its dividends are omitted,these unpaid dividends accumulate and must be paid before any dividends may be paidon the company's common shares.

Current Assets

Cash and assets such as accounts receivable and inventories, which in the normal courseof business can be converted into cash within a year. Current assets are found on thecompany's balance sheet.

Current Liabilities

Money owed to the company and due to be paid within a year, such as accounts payable.Current liabilities are found on the company's balance sheet.

Current Ratio or Working Capital Ratio

Current assets of a business divided by current liabilities, thus measuring how much thevalue of current assets exceeds its liabilities. This is one of the tests to determine howmuch cash a company has on hand to cover its current liabilities.

Current Return or Yield

The annual income from an investment expressed as a percentage of the investment'scurrent value. On stock, this is calculated by dividing yearly dividends by the marketprice of the security. On bonds, this is calculated by dividing yearly interest by currentprice. For example, if the income is $50 a year on an investment with a value of $1,000,

the current yield is 5%.

Cyclical Stock

Stockin an industry that is particularly sensitive to swings in economic conditions, suchas mining or forestry.

Day Order

An order to buy or sell a security valid only on the day the order is given.

Debenture

A certificate of indebtedness of a government or company backed only by the generalcredit of the issuer and unsecured by property orassets.

Debt


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Money borrowed from lenders for a variety of corporate or personal purposes. Theborrower pays interest for the use of the money and is obligated to repay the principalamount on a set date.

Deemed Disposition

Under certain circumstances, taxation rules state that a transfer of property has occurred,even without a purchase or sale. For example, there is a deemed disposition on death oremigration from Canada.

Default

A bond is in default when the borrower has failed to live up to the obligations under theterms of the agreement. Examples of this are declining to pay interest orsinking fundpayments or failure to redeem the bonds at maturity.

Defensive Stock

Stockof a company with continuous dividend payments, which has demonstratedrelatively stable earnings despite poor economic conditions.

Deferred Income Taxes

Income tax that would otherwise be payable currently, but which is not paid immediately.This is because larger allowable deductions are made when calculating taxable incomethan when calculating net income in the financial statements. An acceptable practice, it isusually the result of timing differences and represents differences in accounting reporting

guidelines and tax reporting guidelines.

Deferred Profit Sharing Plan (DPSP)

In a DPSP an employer makes cash contributions for an employee's retirement plans outof business profits. The contributions and earnings accumulate tax-free until withdrawn.

Deficiency Letter

A securities commission letter sent to a company that has submitted a preliminaryprospectus on a planned new issue of the company's securities. The letter poses anyquestions the commission wants answered, and outlines any recommendations forchanges to the prospectus. When all points raised in the letter are resolved, the issue'sfinal prospectus may be filed.

Deficit


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A financial situation for an individual, company or government where expenses exceedincome.

Delist

The removal of a security's listing on a stock exchange. This is done when the securityno longer exists, the company is bankrupt, the public distribution of the security hasdropped to an unacceptably low level, or the company has failed to comply with theterms of its listing agreement.

Delivery

Securities sellers must deliver the certificates on or before the third business day afterthe sale. Delayed delivery refers to a transaction in which there is a clear understandingthat delivery of the securities involved will be delayed beyond this three day period.

Depletion

Refers to the consumption of natural resources which are part of a company's assets.Since oil, mining and gas companies deal in products that cannot be replenished,depletion reduces the company's natural assets over a specified time period. Therecording of depleti

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