Investing Basics

TD Waterhouse provides access to hundreds of new issues per year. The term 'new issue' describes any security that is being offered to the public for the first time by a company. New issues include IPOs (Initial Public Offerings) as well as secondary or treasury offerings, and include, among others, common shares, preferred shares, income trusts, and fixed income products.

A

ACCRUED INTEREST:
Interest that is due on a bond or other fixed income security since the last interest payment was made. This often occurs for bonds purchased on the secondary market, since bonds usually pay interest every six months, but the interest is accrued by the bondholders every day. When a bond is sold, the buyer pays the seller the market price plus the accrued interest. The buyer will receive the full interest payment at the next pay date.

ACCUMULATED DIVIDEND:
A dividend that is due, but not yet paid, to a preferred shareholder.

ALLOTMENT:
The amount of securities assigned to each of the participants in a new issue syndicate.

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B

BEST EFFORTS:
For clients buying new issues, best efforts are made to fill a client's order based on the actual number of shares available from the brokerage firm. Share allocations may also be set by the issuer so that a maximum number of clients can participate in the issue.

BOUGHT DEAL:
In securities underwriting, this is a firm commitment by an underwriter or underwriting group to purchase an entire issue outright from the issuing company. Typically, the underwriters put up a portion of their own capital and borrow the rest from a commercial bank. Then all members of the underwriting group resell the issue to the public at a pre-set price.

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C

CASH-ON-CASH YIELD:
Yield is based on a similar pattern to that of a mortgage-backed security. The yield consists of an interest and a capital component. This is typically seen on investments such as trust units. The investment decreases over the life of the unit as the asset pool is used up. Upon maturity, the remaining assets are sold and paid out to the unit holders.

COMMON SHARES:
Shares representing an ownership interest in a corporation. Holders of Common Shares have the right to receive remaining property of the corporation upon dissolution, after all other claims are satisfied. They, therefore, assume the risk of the business failing and the potential gain, if the share value of the business increases. They also elect the board of directors that controls the company.

CONTEXT OF THE MARKET :
When a new issue is priced in the CONTEXT OF THE MARKET it means the exact price is not known during the marketing period. When the issue is priced, it will be priced according to the market price of the stock on a set date or range of dates. The exact price will be available the day after pricing occurs.

CONTRACTING DATE:
The date when expressions of interests for a new issue are officially processed by TD Waterhouse into clients' accounts. A trade confirmation is printed and sent to the client, along with a final prospectus (if applicable).

CONVERTIBLE SECURITIES:
Corporate securities (usually preferred stock or bonds) that are exchangeable by the owner for a fixed number of shares of common stock at a stipulated price. Convertible securities are usually bought by investors who want higher income than available from common stock combined with greater potential appreciation than available from regular bonds.

CONVERSION PRICE:
The price at which convertible securities, such as bonds and preferred stock, can be converted into common stock at a set conversion ratio. For example, if the conversion ratio is 25 to 1, and you own a $1000 face value convertible bond, then the conversion price is $40 per share.

CONVERSION VALUE:
Using the above example, the value of 25 shares at the current price per share of $32.00. Since the bond has a higher face value, it is better not to convert.

CONVERSION RATIO:
The conversion ratio determines the number of shares of common stock for which a convertible security can be exchanged. The conversion ratio is determined upon issuance of the security and it's typically protected against dilution from stock splits, but not from secondary offerings. To determine conversion ratio, divide $1,000 par value by the conversion price.

CREDIT RATING:
Assessment of a corporation's credit history and ability to pay its obligations. There are two major credit agencies serving the Canadian marketplace: Standard and Poor's and Dominion Bond Rating Service.

STANDARD AND POOR'S

The term "suspended" indicates that the issuer is experiencing severe financial or operating difficulties of which the outcome is uncertain.

DOMINION BOND RATING SERVICE (DBRS)

High and Low designations after a rating indicate the relative asset quality status of the fund within a rating category.

DOMINION BOND RATING SERVICE (DBRS)

CUMULATIVE DIVIDEND:
A provision requiring that unpaid accumulated dividends on preferred shares must be paid before dividends on any common shares.

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E

EXCHANGE TRADED FUNDS (ETFs) :
ETFs are similar to conventional mutual funds in that they provide investors with an affordable way to invest in a diversified basket of securities. But unlike conventional mutual funds, which can only be bought or sold at a price fixed at the end of each trading day, ETFs are listed on a stock exchange and can be traded throughout the day at changing market prices. In addition, you can buy ETFs on margin, as well as sell them short. ETFs also have a lower management expense ratio (MER) than conventional mutual funds and are more tax efficient because there is less buying and selling of the underlying portfolio.

EXPRESSION OF INTEREST:
An expression of interest is a FIRM order to purchase a specific number of shares in a New Issue. Once you place an Expression of Interest, you are obligated to purchase that number of shares of the new issues, if available.

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F

FINAL PROSPECTUS:
A legal document describing securities being offered for sale to the public which is filed with the applicable provincial securities regulators in jurisdictions where the issue was sold and which supercedes the preliminary prospectus. It details material information about the corporation and the new issue and must be given to each first-time buyer of the new issue.

FLOW-THROUGH SHARES:
A tax incentive investment. The Canada Customs and Revenue Agency (CCRA) allows an individual investor to buy flow-through shares in Canadian exploration and mining companies and register an expense on their taxes for a "Canadian Exploration Expense (CEE)." This deduction can be at 100% of the investment or less, depending on the terms of the issue. Investors are entitled to deduct these expenses from all other income and then start at an adjusted cost base of zero or higher on the shares, depending on the investment. When the investors sell the shares, they take the difference between the sales price and the adjusted cost base as a capital gain (or loss) for tax purposes. Points to keep in mind with this type of issue:

• Investors should invest only if they are comfortable with the underlying stock and not just because of the tax benefits
• Shares may be issued at a premium to current market prices if they are not restricted from sale for a designated period
• Shares may be issued at par with current market prices if the issuer is a junior issuer and the shares will be restricted

As this type of investment has tax considerations, clients should consult with their tax consultant or tax advisor before investing.

Example: An investor buys a flow-through share in XYZ Oil & Gas. The price is $10.00 and he/she is allowed a 100% write-off on taxes. The investor then sells it for $12.00 the next year. What would be the tax implication?

1. Immediate tax deduction of $10.00 as CEE is deductible against current income (tax savings).
2. Investor now has a $0.00 cost base.
3. Realizes a gain of $12.00, taxed as capital gains.

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G

GREENSHOE:
Similar to an over-allotment option, this is a clause in an underwriting agreement that states that, if demand is high, additional shares may be authorized for distribution. These shares are distributed to selling group participants by the underwriters in the initial allotment, so brokers such as TD Waterhouse will have already received any additional shares prior to these announcements in the press.

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H

HIGH YIELD DEBT:
High risk debt issued by companies with little or no collateral or liquidation value, little or no sales and earnings track records or by those with a questionable credit history. To compensate for this higher risk, the bonds are issued with a high coupon rate. They are usually issued by corporations without solid sales and earnings track records or by those with a questionable credit history. Also known as Junk Bonds.

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I

IF, AS, AND WHEN ISSUED:
Indicates a conditional transaction in a security that is authorized for issuance, but not yet issued. This type of transaction is finalized only on the settlement date.

INITIAL PUBLIC OFFERING (IPO):
A company's new issue of securities offered to the public for investment for the first time.

INSTALLMENT RECEIPT:
The purchaser agrees to pay the full issue price of a security by a set series of installment payments over time. The receipts trade on the open market. By purchasing a receipt, the new buyer accepts the obligation to pay the next installment(s) on the security. The number of installments, period between installments, and dollar amounts of each installment will vary from issue to issue. Installment receipts often pay the same dividend as the fully paid security, providing the income seeking investor with a leveraged yield on the underlying security.

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L

LEAD UNDERWRITER:
The originating investment banking firm of an underwriting group organized for the purchase and distribution of a new issue of securities. The lead underwriter acts as agent for the group in purchasing, carrying and distributing the issue, as well as complying with all federal and provincial requirements. It also forms the selling group, determines the allocation of the securities to each member, make sales to the selling group at a specified discount from the offering price, engage in open market transactions during the underwriting period to stabilize the market price of the security, and borrows from the syndicate account to cover costs.

LIMITED PARTNERSHIPS:
Organizations made up of a general partner and limited partners. The general partner is responsible for managing the project. Limited partners invest their money, but are not involved in day-to-day management and have limited liability (they usually cannot lose more than their capital contribution). There are tax advantages to a limited partnership holding, since the partners are allowed to deduct a certain percentage of the partnership’s operating expenditures from their taxable income. Limited partnerships are typically used for investment in real estate, oil and gas and equipment leasing, but may also be used to finance movies, research and development and other projects.

LINKED NOTES:
A security whose return is "linked" or based on the return of an underlying security or index. The issuer ensures the holders a return equal to the return of the underlying investment, less administrative charges and fees. The principle may or may not be guaranteed, and the credit worthiness of the security is based on that of the issuer and not that of the underlying "linked" security.

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M

MARKETED DEAL:
The usual scenario for a New Issue where the issue is marketed over a period of several days or weeks.

MARKETING PERIOD:
The period where the syndicate is actively selling an issue. During this time, which often lasts several weeks, potential investors have access to the preliminary prospectus and may place an expression of interest.

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O

OVERSUBSCRIBED:
The term used to describe how much demand exceeds supply for an issue. For instance, an issue is said to be '3 times oversubscribed' if expressions of interest are 3 times greater than the stock available.

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P

PARI PASSU:
Means "in equal proportion." It usually refers to equally ranking issues of a company's preferred shares.

PREFERRED SECURITIES:
Not to be confused with Preferred Shares (see below). Subordinated debt structured to trade like preferred shares. Preferred securities are exchange-traded and usually pay quarterly interest income. The term to maturity is typically quite long (usually 49 to 99 years). The coupon is typically higher than comparable fixed income securities.

PREFERRED SHARES:
A type of capital stock that pays dividends at a rate set at the time of issuance. Dividend payments to preferred holders must be made before common share dividends can be paid. Preferred shares usually do not have voting rights.

Cumulative Preferred Shares :

A preferred share that has a provision stipulating if one or more dividends are omitted (in arrears) because of insufficient earnings or other reasons, the dividends will accumulate until they are paid to shareholders. Cumulative preferred share dividends have seniority over common share dividends--that is, a common share dividend cannot be paid until all cumulative preferred dividend payments are current.

Non-Cumulative Preferred Shares :

Preferred share on which unpaid dividends do not accrue. Unpaid dividends, for the most part, will never be paid. This contrasts with cumulative preferred shares in which unpaid dividends accumulate until paid to shareholders.

Retractable Preferred Shares :

A feature of some preferred shares which grants the holder the option, under specified conditions, to redeem the security on a stated date, usually at a stated price.

Callable Preferred Shares :

A feature of some preferred shares which grants the issuer the right to redeem, under specified conditions, preferred shares at a stated time and at a stated price.

PRELIMINARY PROSPECTUS:
The first document filed with regulators and released to prospective investors by an underwriter of a new issue. The document offers financial details about the issue but may not contain all the information that will appear in the final prospectus; parts of the document may be changed before the final prospectus is issued. The preliminary prospectus must state that commitment for the purchase and sales of securities cannot be made until a receipt for the final prospectus has been issued.

PRICING DATE:
This is the date set by the underwriters to determine the final terms of the offering. For instance, this is when the final price is set, the yield is finalized and the total size of the offering is announced. This usually occurs approximately one week before the final settlement date.

PRIVATE PLACEMENT:
A security issued to large institutional investors and sophisticated individuals. Requirements for filing a prospectus, detailed disclosure and public notice may be waived, thereby reducing the cost of floating an issue. These investments may be illiquid because the investor is often prohibited from selling the security for a stated period of time. Minimum investment thresholds exist for individual investor participation and individual participation may be subject to further regulatory restrictions.

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R

REAL ESTATE INVESTMENT TRUST (REIT):
A trust which manages a portfolio of real estate to earn profits for shareholders and is usually publicly traded. Modeled on investment companies, REITs may make investments in a diverse array of real estate from shopping centers and office buildings to apartment complexes and hotels. REITs can be a mixture of equity and debt investments. Equity REITs take equity positions in real estate and shareholders receive income from rents received from properties and receive capital gains as buildings are sold at a profit. Mortgage REITs specialize in lending money to building developers and pass interest income to shareholders.

REDEMPTION (OR CALL) PROVISION:
A provision granting the issuer of bonds or preferred shares the right to buy back all or part of an issue prior to the maturity date.

RETRACTION PROVISION:
A provision granting the holder of a bond or preferred share the right to sell the security back to the issuer at a specified price and at a specified time.

RIGHTS:
A security granted to shareholders of a corporation to subscribe for additional shares of common stock from the company, usually at a discount for a limited period of time. Rights are usually transferable and may be traded in the open market.

ROYALTY TRUST UNITS :
Royalty Trust Units are a "flow through" type of investment, similar to an interest in a limited partnership. The trust unit holds a variety of assets, such as natural resources, commodities, or real estate and earns cash flow from these investments. The net cash flow (cash flow minus the administration costs) is passed on to the unit holders in the form of interest and dividends.

A portion of this income is treated as a return of capital, and receives preferential tax treatment. Returns on these units is typically higher than current returns for fixed income products like GIC's and government and provincial bonds, however, these units are an equity investment. The value of the trust units will fluctuate based on the value of the underlying asset base, prevailing interest rates and market forces.

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S

SECONDARY OFFERING:
The public sale of previously issued securities held by large investors, usually corporations, institutions, or other affiliated persons. Usually handled by investment bankers acting alone or as a syndicate. They purchase the shares from the seller at an agreed price, then resell them at a higher price to the public through a selling group. Do not confuse this with a Treasury Offering, which is the company itself selling additional shares of a security that has already been issued (i.e. issue of additional shares to raise capital).

SECURED:
A security that is backed by a pledge of collateral.

SELLING GROUP:
A group of dealers appointed by the lead underwriter (on behalf of the underwriting group) to market a new or secondary issue to the public. The selling group is the distribution arm of the deal. Members may or may not be part of the underwriting group.

SETTLEMENT DATE:
This is the date set by the issuer and the lead underwriter for the purchasers of the securities to take delivery and pay for those securities. Members of the selling group may close their books well in advance of this period. Also known in the industry as the closing date.

SPLIT SHARES:
There are typically two types. One holds a portfolio of securities, similar to a closed-end mutual fund, designed to invest in a specific group of companies or an industry (i.e. banks, oil and gas firms, telecommunications, etc). The other holds an individual security. Both of these styles, however, use the same structure to create 2 classes of securities which are "split" into Preferred Shares and Capital Shares. The Preferred shareholders receive only the dividends from the underlying portfolio, whereas the Capital shareholders usually only receive the capital appreciation in the underlying portfolio (and sometimes the increases in the dividends). Both of these securities provide a leveraged investment on either the dividend (Preferred Shares) or the capital gain (Capital Shares).

STABILITY RATING:
Standard and Poor's has created a Canadian Income Fund Stability Rating Scale. Income Funds are ranked based on several criteria, including the fund's underlying business model and the sustainability and variability in distributable cash flow generation in the medium to long term.

STRUCTURED TRUSTS:
This category of new issues describes trusts that are managed by professional money managers. Proceeds of an issue are invested in a portfolio of income trusts in an effort to diversify risk and to provide unitholders with a steady income stream. Other features may include capital repayment at maturity, opportunities for redemption without commission, a stated maturity date and TSX listing.

SYNDICATE:
A group of investment dealers who underwrite and distribute a new issue of securities, whether it be an IPO, treasury, or secondary offering.

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T

TREASURY OFFERING:
Issuance of additional shares of an already existing class of security by the company's treasury, as a means of raising capital. This type of offering has the adverse affect of diluting the earnings on the existing shares.

TRUST UNIT:
A security structured to pay the investor regular distributions of income (typically, quarterly or monthly) from the income generated by the trust. The trust typically owns corporate securities that provide a stable, predictable cash flow that is distributed to unit holders.

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U

UNIT:
Typically, a security that combines a common or preferred share and a specific number of warrants or rights offered at a single combined price. Upon settlement, components of the unit often separate and trade as individual securities.

UNSECURED:
A security that is not backed by collateral, but by the general credit worthiness of the issuer.

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W

WARRANTS:
Similar to long term options, they give the holder the right to convert the warrant at a set price, into a set number of shares of the associated stock. They are often issued with newly issued common stock or bonds as an inducement or "sweetener" for investors to buy the issue. This combination is called a unit.

WHEN ISSUED BASIS:
Refers to the trading of new issue securities on an exchange before actual settlement and/or official trading is scheduled to begin. If there is enough demand for an issue, the lead underwriter may decide to trade the shares on the market on an "if and when issued basis." A security trading on a "When Issued" basis will typically have a ".W" suffix attached to it's trading symbol. On the actual settlement date, the ".W" is removed.

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