Chapter 3 Securities Market I How Firms issue Securities a Primary Market Market for ne issue Securities i Initial Public Offering IPO company First sale of stock by a formerly private 1 Under pricing is common Most IPOs Increase 1st day of trading 2 is left on the table that Company could have gotten ii Seasoned equity offerings offered by companies that already have floated equity stock already in secondary market Market for already existing securities b Secondary Market Investment Banking c i Underwriters and resell them underwriters purchase securities from the issuing company 1 2 Prospectus 3 Shelf Regestration Issue a Red Herring to SEC outlining their plan a description of the firm and te security it is issuing when securities have already been sold but some from the initially IPO are kept on the shelf for up to 2 years This way the firm can sell securities on the 2ndary market and get more money If not all shares are issued Underwriter sill have to sell them on secondary market for a loss 4 d Private Placements group of institutional investors or wealthy investors primary offerings in which shares are sold directly to a small II How Securities are traded a Types of Markets i Direct Search Market 1 Least organized 2 Craigslist other classified ads buyers and sellers must sekk each other out directly trading in a good is active Brokers offer search ii Brokered Markets services to buyers and sellers 1 Real Estate Market 2 Primary Securities Market 3 Large Block Transactions in the securities market a Larger than 10 000 shares in one transaction in which teraders specializing in particular assets buy and iii Dealer Markets sell for their own accounts 1 Make money on spread between bid and ask prices 2 Save traders on search costs becase traders can easily look up prices they can buy and sell from dealers 3 Over the counter market iv Auction Markets sell an asset a market where all traders meet at one place to buy or 1 Either physicall or electronic a NYSE or NASDAQ 2 You do not have to search across different dealers to find the best price All participants converge and the price are mutually agreed upon b Types of orders i Market Orders current market price 1 Bid Price buy and sell orders that can be executed immediately at the the price at ehich a dealer or other trader is willing to purchase a security sell a security 2 Ask Price the price at which a delaer or other trader is willing to 3 Spread ii Price Cntengent Orders difference between Bid Price and Ask Price 1 Limit Buy Order imstructs the broker to buy some number of shares if and when Company X can be bought below a set price instructs broker to sell if and when the stock price rises above a stipulated price 2 Limist Sell Order a Limit Order Book a collection of limit orders waiting to be executed 3 Stop Order limit trade is not to be executed unless stock hits a price a Stop Loss Orders a stipulated level b Stop Buy Orders price rises above a limit stock is to be sold if the price falls below a stock should be bought when a stock Condition Price Falls Below Limit Limit Buy Order Stop Loss Order Price Rises Above Limit Stop Buy Order Liit Sell Order n o ti c A Buy Sell c Trading Mecghanisms i Dealer Markets 4 Used to cover short sales Stop Buy Orders 1 Over the Counter OTC dealers who negotiate sales of securities an informal network of brokers and a NASDAQ 2 Electronic Communication Network ECN allow direct trading without the need for market makers computer network that a Offer anomity b Can actual trade on these systems 3 Specialist Market or more firms and who maintains a fair and orderly market by dealing personally in the market a trader who maes a market in the shares of one a Trades brokers or deals for one security The guy for that stock ticker ii US Securities Market 1 NASDAQ 2 NYSE a Block Sales shares are bought and sold large trasactions in which at least 10 000 III Margin margin is the networht of the investors account describes securities purchased with money borrowed in part from a broker The a Margin Equity in Account Value of stock b Maintance Margin stock to cover loan price level wherte if stock falls below the broker will sell the required the investor to add new cash or broker sill sell stock i Margin Call to cover loan ii ROR are exaggerated both on the upside and downside of loan 1 ROR difference between gain loss and cost of loan including principal and interest assets invested assets invested the sale of shares not owned by the investor but borrowed through a broker IV Short Sales and later purchased to replace the loan a Steps i Tell broker to sell short X stock ii Broker borrows shares to cover this position and credits the value of this to your account requirement iii Broker required for you to keep a in your account called margin iv Close out position and buy back shares at a lower price using this money that was creditied to your account v The difference is the profit Purchase of stock Action Buy Share Receive Dividend Sell Share Csah Flow initial PRICE Ending Price Dividend Profit Ending Price Dividend Initial Price Short Sale of Stock Action Borrow Share Sell It Repay Dividiend and buy share to repalce the share originally borrowed Csah Flow Initial Price Ending PRICE Dividend Profit Initial Price Ending Price Dividend b Tim e 0 1 Tim e 0 1