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What are installment receipts and how do they work?

Installments receipts are a way to buy shares in a company, or other securities, without having to pay the entire price right away. It's like buying a refrigerator on a lay-away plan.

You pay part of the stock's price up front, with either one or several other payments due at a later date. Installment receipts are used by some companies and underwriters to encourage you to buy stock. Underwriting is the process in which an investment dealer assists a company in selling stock to investors. A key point to keep in mind is that you make the required payments as they are due, even if the price of the shares falls to less than what you have paid or are required to pay. If you don't want to make those final payments, you have to sell your installment receipts before those other payments are due. If you are satisfied that a particular stock suits your investment objectives, buying it through an installment receipt may be an attractive incentive.

Example:   A company issues shares at $12 each. Rather than actually being issued a $12 share certificate, you buy an installment receipt which requires you to make an initial payment of say $8 and the balance of $4 a year later. If the market price of those shares rises to $16, you will end up earning $4 a share, since your total cost will be $8 plus $4. On the other hand, if the market price fell to $8 a share, you would lose $4 a share.

If the value of the underlying stock increases after the installment receipt is issued, that should boost the receipt's value and enable you to gain from financial leverage. You could make the initial payment on the installment receipt -- representing only part of the full price of the stock -- and sell that receipt later at a profit before the next or final payment is due.

Installment receipts trade on the Toronto Stock Exchange and the Montreal Exchange. The Globe and Mail lists them at the end of the listings for those two exchanges in its Report on Business under the heading "Partly paid shares". The Financial Post shows them among the stock listings. Typically the notation "IR" is included as part of the name of the security, indicating it's an installment receipt. As with stocks themselves, you pay brokerage commissions to buy or sell installment receipts. Installment receipts are offered on such companies as Barrick Gold, Hudson's Bay and Laurentian Bank. Your investment advisor should be able to obtain a list and further details on stocks which can be bought this way. Before considering buying installment receipts or any other investment, make sure you are well - versed on the pros and cons of the particular security. Decide whether the investment meets your needs. You may benefit from seeking professional investment advice.