CHAPTER 8:

EQUITY SECURITIES: COMMON AND PREFERRED SHARES

Topic One: Common Shares

1. Overview.
A. Shares may be designated as preferred, common, restricted, subordinated, or by class.
(1) Preferred shares receive dividends before common shares, and have a claim on
corporate assets ahead of common shareholders if the corporation goes
bankrupt.
(a) There are no voting rights associated with preferred shares.
(2) Common shares come with voting rights. This provides the common shareholder
with a degree of control over corporate affairs, including the right to elect
directors and to vote on stock splits and other issues.
(a) Their claim on corporate assets comes after that of preferred shares and
before subordinated shares.
(b) Common shares are called ordinary shares in the UK and some other
countries.
(3) Restricted shares give unlimited participation in earnings and assets on
liquidation, but not full voting rights.
(4) Subordinated shares are junior in priority in a claim on corporate assets if the
corporation goes bankrupt. They also have fewer voting rights.
(5) Classes of shares are issued that may be distinct from each other in terms of
voting rights (for instance), but all shares within one class will have the same
rights.

B. All shares represent ownership in a corporation.

(1) A publicly traded company issues shares in return for capital.
(a) Privately owned companies also issue shares; their activities
are beyond the scope of this course.
(2) The value of shares reflects the real or perceived worth of the company
that has issued the shares at that particular point.
(a) A company that increases in worth will see its shares increase
in value. The opposite also holds true.
(3) Ownership is represented by the number of shares owned by a
shareholder (e.g., 500 shares).
 (a) A large degree of ownership, typical of institutional investing,
will be represented as a proportion of the total number of shares
issued (e.g., a 17% shareholding).

C. Shares are rarely issued in the name of the shareholder. Instead, they are
issued as street certificates in the name of a securities firm, so that they can be
easily traded.
(1) CDS Clearing and Depository Services Inc. facilitates trading by offering
a computer-based registration system for securities.

D. Shares increase in value when profitability increases.

(1) Profitability will enhance the earnings multiple, also known as the price-
earnings (P/E) ratio, that is used by investors as a measure of value.

(2) Profitability provides:

(a) Regular dividend payments to common shareholders.
i. Dividends may be paid as cash or additional shares.
(b) Earnings (above those needed for dividends) that are retained
and reinvested in the company.
i. Retained earnings build shareholder equity.
ii. Companies with higher equity command a higher price for
their shares.

2. Common Share Ownership.

A. The advantages of ownership of common shares are:
(1) Increase in share value.
(a) This is known as capital appreciation.
i. Capital appreciation is not guaranteed.
(b) Dividends.
i. Dividends are not guaranteed. For instance, Warren
Buffett's company Berkshire Hathaway has never paid a
dividend, despite share values topping $150,000 per share.
(2) Favourable tax treatment of dividends and capital gains.
(a) Only dividends of Canadian corporations receive favourable
tax treatment.
(3) Ease of buying and selling the shares.
(a) Marketability of shares is never guaranteed.
 (4) Certain rights.
(a) The right to vote at shareholders’ meetings.
(b) The right to receive financial reports.
(c) The right to view some company documents (e.g., bylaws or
the register of shareholders).
(5) Limited liability: An owner of common shares has liability limited to
the value of the shares owned.

3. Dividends.
A. Earnings may be paid as dividends, retained by the company, or some
combination of both.
(1) A level of working capital must be maintained before common share
dividends can be paid.
(a) Working capital is current assets minus current liabilities.
(2) A company is not contractually obligated to pay dividends on common
shares.

B. Dividends can be paid quarterly, semi-annually, or annually.

(1) The board of directors will announce the amount and the date of
payment prior to the payment date.
(2) Cheques are mailed directly to the registered owners, or, for street
certificates, the funds go to the client’s securities firm and are deposited
to the investor’s account.

C. Payout ratios for dividends depend on the company, the industry, and how long
the company has been in business.

D. A regular dividend is a set amount, paid annually.

(1) An extra dividend is paid in addition to the regular dividend at the end of
the year.
(2) An annual yield calculation should be based only on the regular
dividend, unless there is a strong indication the extra dividend will be
paid again.
 E. Dividend announcements are published by the stock exchanges in daily
releases to securities firms as follows:

Dividend Record Date

Company Payment Payment Date for Shareholders of Ex-Dividend Date Cum-Dividend

Record Date

TCB Inc. .30 August 21 July 29 July 27 July 26

SEY Inc. .20 November 27 November 7 November 5 November 4

F. The dividend record date is the date used to determine who is entitled to receive
dividends.
(1) Two business days prior to the dividend record date, the stock begins
trading ex-dividend (without dividends). Transactions on or after this day
will not settle before the dividend record date, because trades in shares
settle three business days following the day of the trade (called T + 3).
(a) When a share trades ex-dividend, the dividend will be paid to
the seller, because the seller is the owner of the share on the
dividend record date.
(b) When a share begins trading ex-dividend, the stock price
usually declines by the amount of the dividend.
(2) If a share is trading cum dividend (with dividend), the purchaser will
receive the declared dividend. The last day a stock trades cum dividend
is the third business day before the dividend record date.

G. A dividend reinvestment plan “pays” the shareholder additional shares instead of

cash.
(1) Such dividends are taxed the same way as cash dividends.
(2) The shareholder benefits because:
(a) Commissions are not paid to acquire the additional shares.
(b) The reinvestment of small or fractional amounts increase
shareholdings with the advantage of dollar cost averaging.
(3) Some companies allow occasional cash contributions to a dividend
reinvestment plan.
 H. A company can issue a dividend of additional shares (known as a stock
dividend) instead of paying cash.
(1) The stock dividends are recorded on the company’s Statement of
Retained Earnings, the same as cash dividends.
(2) Issuing stock dividends benefits a company that needs cash for
operations.

4. Voting.
A. The right to vote at annual and general meetings provides common
shareholders with a degree of corporate control, because questions can be
asked of management during shareholders’ meetings.
(1) Issues voted on include election of directors and approvals for financial
statements and auditor’s reports.

B. Voting privileges and dividend policies vary, according to the class of share
(e.g., Class A, Class B).

C. Restricted voting shares have a limit on how many or what percentage of

shares may be voted on by a person, company, or group.
(1) Stock exchanges have regulated restricted shares to protect
shareholders:
(a) Restricted shares must be properly identified and coded in the
financial press.
(b) Restricted shareholders must receive all material, such as
information circulars and financial statements, that voting
shareholders receive. These documents must spell out the
voting-right restrictions on restricted shares.
(c) Any dealer or advisor that releases and confirms trades must
describe these shares as restricted.
(d) Restricted shareholders must be invited to shareholder
meetings and given the right to speak.
(e) Before more restricted shares can be created, minority approval
must be given.

6. Tax Treatment of Dividends.

A. Tax benefits for Canadian shareholders include:
(1) A dividend tax credit on dividends paid by taxable Canadian companies.
 (2) A 50% capital gains exemption from tax.
(a) Capital gains are incurred when investments are sold for more
than the purchase price, and a capital loss when investments
are sold for less than the purchase price.
(b) 50% of all capital gains are taxable at the investor’s marginal
tax rate, and must be claimed the year they are incurred, unless
they are in a registered account such as an RRSP.
(c) Capital losses may be used to reduce capital gains, but cannot
be used to reduce any other income. They may be applied
against gains incurred in the three previous years or be carried
forward indefinitely.
(3) Stock savings plans, whereby an investor receives incentives to
purchase shares of certain companies within his or her province.

B. For tax purposes, a stock dividend is treated the same as a cash dividend.

C. Dividends from taxable Canadian corporations.

(1) Dividends from Canadian corporations are taxed at a lower rate than
interest due to the dividend tax credit.
(2) Dividends from foreign corporations and non-taxable Canadian
corporations do not receive dividend tax credits.
(3) For tax purposes, dividends are grossed-up.

(4) For example:

To determine the taxable dividend income from which federal tax payable for a public corporation
in Canada that is subject to the general corporate income tax rate:

If George received $765 as dividends from the Canadian corporation, he would include $1,101.60
in income for tax purposes ($765 + 44% = $1,101.60) The $336.60 ($1,101.60 - $765 = $336.60)
is called the gross up.

$1,101.60 is the taxable dividend income

Total federal tax payable is calculated as the taxable dividend income multiplied by George’s
federal tax rate (note: not marginal tax rate). If the investor's federal tax rate is 26%:

$1,101.60 x 26% = $286.42 in total federal tax payable

 The dividend tax credit (2010) is 17.98% of the grossed up dividend income (not of the total
federal tax payable) or 25.88% of the actual dividend received.

$1,101.60 x 17.98% = $198.07 is the dividend tax credit

The federal tax payable is the total federal tax payable less the dividend tax credit:

$286.42 - $198.07 = $88.35 is the federal tax payable

on the dividend received

Provincial tax must then be calculated. There is also a provincial dividend tax credit and a
provincial tax rate to be applied; both of which vary by province. Let us assume that in the
province where the investor lives the provincial tax payable nets out at 8.5% of the taxable
dividend income (after the provincial dividend tax credit and any provincial investment surtax).

$765 x 8.5% = $65.03 in provincial tax payable

Total tax payable is net federal tax payable plus provincial tax payable.

$88.35 + $65.03 = $153.38

George keeps $765 - $153.38 = $611.62

(b) There is also a provincial dividend tax credit.

C. By switching interest income investments into dividend-paying investments, an

investor can reduce taxes and improve after-tax yield.

D. Dividends from non-Canadian corporations normally have tax deducted at source.

(1) Investors may receive a tax credit that is the lesser amount of what has
been paid or Canadian tax.

7. Stock Splits and Consolidations.

A. Stock splits are used to lower the cost of high-priced stock; the market price of
the new shares reflects the basis of the split. For example: the price of a $100
stock split 5 to 1 will trade post-split at $20 ($100 ÷ 5).

B. Common shareholders must approve of a proposed stock split.

 C. Stock splits broaden distribution of a company’s shares, increase marketability
of the shares, and make future equity financing easier.
(1) Stock splits often initially create a bullish market. Whether this is
sustained is based on corporate performance.

D. The dollar value of a company’s equity and the proportional ownership of an

investor do not change as a result of a split. For example: before a split an
investor owned 100 shares at $50 for a total of $5,000. After a 2:1 split, he or
she owns 200 shares at $25 for a value of $5,000.

E. A reverse stock split or consolidation results in the investor owning fewer

shares, but the price per share increases proportionately. For example: a stock
trading at $0.50 and consolidated at 1:10, would then be priced at $5.
(1) Reverse splits occur when a stock price is too low to attract investors
with large amounts of capital.
(2) Stock exchanges have minimum share price rules, and a reverse split
can keep a company from being delisted.

8. Reading Stock Quotations.

A. Stocks that are listed trade on an exchange.

B. Unlisted stocks trade on the over-the-counter (OTC) market.

C. The following is an example of a listed stock quotation:

52 weeks
High Low Stock Div. High Low Close Change Volume
8.25 6.50 GDD .40 7.55 7.45 7.50 +.10 7,000

(1) This quote means that:

(a) Over the past 52 weeks, GDD common has traded between
$8.25 and $6.50.
(b) GDD has paid total dividends of $.40 per share over the past 52
weeks. (The unlisted tables do not have this column, because
unlisted stocks do not tend to pay dividends.)
 (c) In the last day of trading before this quote appeared, GDD
shares traded as high as $7.55 and as low as $7.45. The last
trade of the day was at $7.50 which was $.10 higher than the
previous day’s closing price.
(d) A total of 7,000 GDD common shares traded.

(2) Additional information may include the yield, price earnings ratio, and
earnings per share.
(3) Market prices are for trades in board lot sizes (i.e., usually 100 shares)
and exclude commissions.
(4) Stocks that did not trade would be in the bid and ask section as follows:

Issue Bid Ask Last

APM 10.25 10.75 10.25
 (5) This quote means:
(a) For APM stock, the highest price a buyer offered was $10.25
(the bid) and the lowest offer a seller would accept was $10.75
(the ask). However, since no trade actually took place, the bid
and ask are not trade prices for that day.
(b) The most recent trade in APM shares was at $10.25.

Topic Two: Preferred Shares

1. The Preferred’s Position.

A. Preferreds rank after creditors and bond and debenture holders but before
common stock in case of corporate insolvency.

B. Preferreds are entitled to a fixed dividend stated as a percentage of the value of

the share, or as a specified dollar amount. For example: an 8% $25 par
preferred would have an annual dividend of $2.00 ($25 x 0.08).
(1) the dividend is paid from earnings.
(2) dividend payments are not a contractual obligation. However, if they are
not paid, the creditworthiness of the company may be called into
question.
(3) referred shares do not offer the same potential for capital gains as
common shares. Therefore, the dividend rate is very important.

2. Reasons Companies Issue Preferred Shares.

A. Preferred shares offer flexibility for their issuers that debt issues do not.
(1) There is no maturity date as there is with debt (a bond or debenture) on
which principal must be repaid.
(2) Dividends are not obligatory.

B. Preferreds are issued instead of debt when:

(1) Assets are already pledged to debt holders, so no additional debt
obligations can be taken on in the form of new bonds.
(2) The market may not be receptive to debt.
(3) The company’s debt/equity ratio may be too high to issue more debt.
Preferreds increase equity.
(4) Obligations for payments on debt are to be avoided.
 (5) The company can afford to pay dividends.

C. Preferreds are issued instead of common stock as a compromise means of

raising capital that avoids the disadvantages of debt and common shares.
(1) Debt requires servicing that a company may be unable or unwilling to
take on.
(2) An issue of more common shares requires favourable market
conditions.
(a) Common shares dilute equity.

3. Who Buys Preferred Shares.

A. Investors seeking income.

B. Investors who want the benefit of the dividend tax credit.

C. Corporations favour preferreds, since the dividends they receive are not taxable.
(1) Interest paid on bond issues is taxable to the receiving company.

4. Features of Preferred Shares.

A. The rights of a preferred shareholder are described in a company’s articles of
incorporation, and thus those rights enjoy some protection from being changed.
(1) The directors and the company’s underwriters decide on what type of
preferred shares to issue, and their features.

B. Cumulative feature.
(1) Most Canadian preferred shares are cumulative. This means that, if the
board of directors votes not to pay preferred dividends, unpaid dividends
accumulate in arrears.
(a) Preferred dividends in arrears must be paid before any common
share dividends are paid or before the preferred shares are
redeemed.
(2) Skipping a payment of preferred dividends is taken very seriously by the
investment community. Their displeasure will be reflected in a drop in
the price of the preferred shares.
 (3) When dividends are resumed, they are paid to shareholders who own
the shares as of the record date announced by the company.
Shareholders who sold their shares prior to dividends being resumed
will not receive dividends, and the company does not pay any interest
on the arrears.

C. Non-cumulative feature.
(1) Shareholders of a share with this feature receive a specified dividend
payment only when declared.
(2) Non-cumulative preferred shares do not pay dividends in arrears.

D. Callable or Redeemable Feature.

(1) Like a callable bond, a callable preferred allows its issuer to redeem the
shares at a set price and a set date.
(2) Also like a callable bond, callable preferreds are usually called at a
small premium as compensation to the shareholder; this premium
declines over time.
(3) The call for shares will be made on the open market or by invitation to all
shareholders.
(4) Companies that issue callable or redeemable preferreds often
incorporate purchase funds or sinking funds.
(a) A purchase fund ensures that the company will buy shares if the
price declines to a certain level.
(b) Purchase or sinking fund buys are usually made on the open
market rather than by calling the issue.
(c) As shares are redeemed via fund purchases, the number of
outstanding shares is reduced. Less shares available in the
market reduces marketability but increases price.
 (d) Eventually, dividend requirements to preferred shareholders will
be diminished and earnings earmarked for this purpose can be
retained by the company to support or expand operations and
thus benefit common shareholders.

E. Non-callable feature.
(1) The preferred with this feature cannot be called or redeemed.
(2) This feature requires the issuing company to always make the stipulated
dividend payment.
F. Voting Privileges.
(1) Providing dividends are paid, preferreds are usually non-voting.
(2) If a certain number of dividends are missed, preferred shareholders then
receive voting privileges.
(a) Voting privileges are also assigned if considerations arise that
affect preferred shares (e.g., if the company wishes to issue
more preferred shares or if a debt issue is contemplated).

5. Types of Preferreds.
A. Straight Preferreds.
(1) Straight preferreds have no maturity date.
(a) They may, or may not, be cumulative, callable, or with purchase
funds.
(b) They pay a fixed dividend and trade on the basis of their yield.
(2) Straight preferreds have the same relationship between price and
interest rates as bonds and debentures: when interest rates rise, the
price of straight preferreds falls, and vice versa.
(3) Investors who select straight preferreds receive:
(a) A degree of safety greater than common shareholders but less
than debt holders.
(b) Dividend tax credits for individuals and tax-exempt preferred
dividends for corporations.
(c) Fixed dividend rates.
(d) No voting privileges.
(e) An investment that does not mature at a specified date, the way
a bond would.
(f) A lower degree of marketability, due to smaller numbers of
preferreds compared to common shares.
 (g) Limited potential for capital appreciation, compared to common
shares.

B. Convertible Preferreds.
(1) When straight preferreds are difficult to sell or dividend coverage is
lacking, convertible preferreds are issued.
(a) The conversion feature enhances saleability of the issue.
(2) Like convertible bonds, convertible preferreds allow the holder to
convert the preferreds into common shares at a predetermined price
and time.
(a) Conversion from preferreds to common shares is permanent.
(b) There are no commission costs for conversion.
(c) Capital gains or capital losses are not incurred until the
converted shares are sold.
(3) Conversion terms are set at the time of issue. They:
(a) Indicate the conversion rate (how many common shares each
preferred can be converted into and the preferred price).
(b) Expire after a stated period of time.
(c) Set the price at a premium in dollars, or as a percentage above
its convertible value, to discourage early conversion.
i. The additional amount paid for the convertible share over
the value of the common share is the cost premium.
ii. Investors seek convertible preferreds that have a low cost
premium. This should not necessarily be the basis for
investment:
- A low premium might result from a poor outlook for
the common shares.
- A high premium might result from a positive outlook
for the preferred.
- The higher premium will be justified if the common
shares increase in value.
iii. Expressing the cost premium as a percentage makes it
easier to compare premiums between issues of convertible
preferreds.
iv. To calculate the cost premium:
For example: RKM Inc. has 7%, $35 par convertible preferreds, currently trading in
the marketplace at $42 per share. They are convertible into two common shares at
any time. The common shares are currently trading at $20 per share, and pay an
annual dividend of $0.60.

- The cost of one convertible preferred is $42.

- The cost of buying two common shares is $40 (2 x $20).
- The conversion cost dollar premium is $42 – $40 = $2.

As a percent of the common share price, the cost premium is

[2 ÷ 40] x 100 = 5%

v. Over time (the payback period), the higher yield of the

convertible preferred share will result in the investor being
“paid back” their premium. To calculate the payback period:

The formula for the payback period is:

% cost premium = # of years
Convertible yield – common yield

- The yield on RKM’s preferred is annual income (or dividend) of 7% x $35 =

$2.45

- Convertible yield is Annual Income

X 100 = %
Amount Invested

- The convertible yield is [$2.45 ÷ $42] x 100 = 5.83%

- The yield on the common is [$0.60 ÷ $20] x 100 = 3%

- The payback period is [5 ÷ (5.83 – 3)] = 1.77 years.

(4) Usually the issuer can force conversion when the preferred’s market
price is above the redemption price by calling the preferred.
(5) If common shares split, the split is automatically reflected in the number
of shares into which the preferred can be converted.
 (6) Advantages of investing in convertible preferreds include:
(a) The holder has a two-way security: he or she can benefit from
capital gains if the market price for the common stock rises, but
has more security than the common shareholder.
(b) Higher yields than common shares.
(c) Acquisition of common stock on conversion without paying a
commission.
(7) Disadvantages for the investor include:
(a) Lower yields than straight preferreds.
(b) A loss in value if the price of the common stock declines.
(c) Conversion to more or less than a board lot, possibly making
them harder to sell.
(d) Loss of the conversion privilege when the conversion period
expires.

C. Retractable Preferreds.
(1) A retractable preferred share sets maturity price and date at issue.
(a) Unlike convertible preferreds, there is no option with a
retractable preferred that the company may not redeem the
shares.
(b) Bonds and debentures can be retractable on this same principle.
(2) A soft retractable preferred pays the redemption value in cash or
common shares.
(3) Advantages of retractable preferreds include:
(a) The safety of knowing when and at what price retraction will
occur.
(b) A capital gain when bought at a discount and sold at the
retraction price.

(4) Disadvantages of retractable preferreds include:

(a) The requirement for the shareowner to monitor the retraction
date.
(b) If the retraction date is missed, they become straight preferreds
and subject to price changes due to the impact of interest rates.
D. Floating Rate Preferreds.
(1) Floating or variable rate preferreds pay dividends in which their value
moves in tandem with interest rates.
(a) Rising interest rates see a higher dividend.
(b) If interest rates fall, so will dividend payments, but most carry a
guaranteed minimum dividend.
(2) The interest rate used typically in Canada is a percentage of the prime
rate.
(3) Delayed floaters, fixed-reset, or fixed floaters entitle the holder to a fixed
dividend for a specified period. Thereafter, the dividend becomes
variable.
(4) The advantages of variable rate preferreds are:
(a) More income if interest rates rise.
(b) Income that reflects current interest rates (whether high or low).
(c) Less sensitivity of market price to interest rates.

E. Foreign-pay Preferreds.
(1) Foreign-pay preferreds pay dividends and other features in foreign
currency.
(a) The value of the dividend increases if the foreign currency rises
against the Canadian dollar.
(b) The value of the dividend declines if the foreign currency
declines against the Canadian dollar.
(2) The dividend qualifies for the dividend tax credit when it is paid by a
Canadian company.

F. Other Preferreds.
(1) Participating preferreds share in the earnings of the company above the
specified dividend rate (e.g., they participate in “profits”).
(2) Deferred preferreds pay a return at a future maturity date (hence,
deferred) that equals dividends on a preferred share held over that
period of time.
(a) The return, called the dividend premium, does not receive the
dividend tax credit and is taxed as income.
(b) These are attractive to those who want to defer income (until
they are in a lower tax bracket), or who want compounded
growth in a registered account.
Topic Three: Stock Indexes and Averages

1. Overview.
A. Stock indexes and averages are indicators that measure and report changes in
the value of a selected group of stocks.

B. Stock indexes and averages:

(1) Track performance and direction of the overall market.
(2) Provide a benchmark against which individual portfolios can be
measured.
(3) Are used to create index mutual funds.
(4) Act as underlying interests for exchange-traded funds, and derivatives.

C. Stock indexes.
(1) A stock index is a representation of the market price of the stocks listed
on a particular exchange.
(a) The total market value of a stock is its price multiplied by the
number of outstanding shares.
(b) The total market value of all the stocks in an index is calculated
each day and compared to its previous value to find the daily
percentage change of the index.
(c) A change in the price of a large-cap company stock will have a
greater impact on a value-weighted index than that of a smaller
company.
(2) The TSX is a stock index.

D. Stock averages.
(1) A stock average is an average of the current price of a group of
stocks.
(2) Stocks in an average are equally weighted unlike the case in an index.
(3) The best-known stock average is the Dow Jones Industrial Average
(DJIA), which consists of 30 blue chip stocks that trade on the NYSE.
(1) Its daily value is computed by adding together the current prices of
the 30 stocks and dividing by a factor developed by Dow Jones.
2. Canadian Market Indexes.
A. The S&P/TSX composite index.
(1) This index measures the changes in market capitalization of all the
stocks in the index.
(a) The weight of a stock on the index is a function of its price and
shares outstanding.
(2) Requirements for price, capitalization, and liquidity must be satisfied
prior to inclusion on the index.
(3) A quarterly review ensures that requirements for listing are met. If not,
the company will be removed from the index. Meanwhile, other
companies may be added because they have met requirements.
(4) Stocks are classified according to their industry into ten sectors with an
index for each sector (i.e., the 10 Sector S&P/TSX Composite Index)
and three subsector indexes: Diversified Mining, Real Estate, and Gold.

B. The TSX also has a set of Total Return Indexes.

(1) A total return index measures changes in stock prices and includes the
value of dividend reinvestment.
(a) Because dividend reinvestment is included, such indexes
illustrate the compound return from stocks over a period of time.
(2) The indexes provide timely data, because they are calculated daily.

C. Change in an index is reported on both the basis of a percentage change and a

point change.
(1) A percentage change is the more reliable indicator of market
performance.
(a) It is calculated as the number of points the market moves as a
percentage of the level of the index. Therefore, if the TSX is
trading at 10,000 and the index moves up 500 points, there has
been a 5% increase.
(b) Percentage changes should be used to compare indexes.
(2) A point change is an absolute number of index points that the index has
changed over a period of time, such as an hour, day, week, month, or
year.

D. The S&P/TSX 60 Index is comprised of the 60 largest companies by market

capitalization on the TSX.
 E. S&P/TSX Venture Composite Index.
(1) This index measures performance of venture capital companies that are
listed on the TSX Venture Exchange.
(2) The number of companies in the index is not set; a quarterly review
determines new additions and deletions.
(3) Requirements for inclusion must be satisfied. Companies must be:
(a) Listed on the TSX Venture Exchange for at least 12 months.
(b) Incorporated.
(c) Weighted at least 0.05% of the total index market capitalization.

3. U.S. Stock Market Indexes.

A. Dow Jones Industrial Average (DJIA).
(1) There are 30 stocks in the Dow Jones Industrial Average.
(2) The DJIA is not a true representation of widespread market activity:
(a) Since it is price-weighted, a high stock price can skew the
average.
(b) So few listings tend to magnify the impact of changes in the
price of any one listing.
(c) It tends to perform below the overall market because its stocks
have lower risk profiles.

B. Standard & Poor’s 500 Stock Composite Index (S&P 500).

(1) This is the main measure for U.S. institutional investment performance.
(2) All stocks are weighted by market capitalization.
(3) The value of the index is affected by stocks with higher market
capitalization than price.
(4) Many institutional investors hedge their portfolios on S&P 500 futures’
contracts.

C. New York Stock Exchange Indexes are weighted by market capitalization.

D. Amex Market Value Index is a total return index based on the approximately 800
stocks listed on the American Stock Exchange.
E. NASDAQ Composite is a market-value-weighted index of mostly smaller
capitalization companies.
(1) Includes more than 4,000 over-the-counter traded stocks.
 F. Value Line Composite is calculated by the average daily percentage change of
each of its listings.
(1) Equal-weighted.
(2) Includes approximately 1,700 stocks and tries to cover all stocks that
have daily quotations.

4. International Stock Market Indexes and Averages.

A. Nikkei Stock Average (225) Price Index (Japan).
(1) Calculated like the DJIA.
(2) Equity derivatives based on the Nikkei trade on Singapore’s SIMEX.

B. FTSE 100 Index (United Kingdom).

(1) Comprises 100 of the largest market-capitalization companies.
(2) Recalculated by the minute.

C. DAX (Germany).
(1) Comprises 30 blue-chip stocks that are weighted by market
capitalization.
(2) A total return index.

D. CAC 40 Share Price Index (France).

(1) An underlying index for derivatives based on 40 of the largest French companies.
(2) Calculated by market capitalization.

E. Swiss Market Index (Switzerland).

(1) Comprised of 30 of the largest Swiss stocks, as ranked by market capitalization.