Study guide for test 3 1 New stock issue process Documents used and impact on shareholders PG 158 To sell securities in the primary market a firm has three choices 1 A public offering in which the firm offers its securities for sale to public investors pro rata basis 2 A rights offering in which the firm offers shares to existing stockholders on a 3 Private placement in which the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies investment management funds and pension funds When a company decides to go public it must first obtain approval of current SH the investors who own its privately issued stock then it has to certify that all financial disclosure documents are legit Prospectus Describes the key aspects of the securities to be issued the issuer s management and the issuer s financial position Red herring temporary pass while waiting for the SEC to finish the paperwork Quiet Period Time when the lawyers and everyone involved can t say anything about the company until the IPO has ended Prior to the IPO the investment bankers and company execs promote the company stock through a road show which consists of a series of presentations to potential investors Helps gauge the demand for the stock and set an expected price range 2 Types of exchanges and listings PG 162 All of the exchanges accounts for about 60 of the total dollar volume of all shares traded in the US stock market The New York Stock Exchange NYSE is the largest securities exchange in the world and known as the Big Board In order to trade on the NYSE one must purchase a one year trading license for 44 000 Mostly consists of investment banks and brokerage firms In other words if you want to make a trade on the market you have to go through one of these firms in order to make the buy sell happen usually follows with a small fee The NYSE Amex is the 2nd largest exchange in terms of the number of listed companies handles 90 of all common shares traded on organized exchanges Requirements are less stringent so typically smaller and younger firms can be found here approx 500 companies About 2 3 of its daily volume come from ETF exchange traded funds ETFs are a group of assets such as such as stocks commodities or bonds and trades that get traded together as one individual stock less risky then common stock bc of the variety Regional Exchanges smaller exchanges that are part of the broker market Consist of 100 to 500 companies They are Chicago Pacific Philadelphia Boston and National Stock exchanges The largest regional exchange the Chicago stock exchange has a higher dollar volume of trading Again much more lenient some firms are in both NYSE and regional exchanges to increase trading activity Intermarket Trading System ITS connects nine markets through electronic communications network that allows brokers and dealers to make transactions at the best price Option Exchanges allow holder to sell or buy another security at a specified price over a given period of time This is available on almost all of the exchanges and markets Future Exchanges Contracts that guarantee the delivery of a specified commodity or financial instrument at a specific future date at an agreed price The dominant exchange for this service is the Chicago Board of Trade CBT 3 Bull Boar Markets PG 164 Bull Markets normally associated with rising prices investor optimism economic recovery and government stimulus Higher returns in common stock during this time Bear Markets normally associated with falling prices investor pessimism economic slowdown and government restraint The beginning of 2003 was generally bullish until it peaked in October 2007 As of March 2009 it appears to be headed somewhat to a bullish market again 4 Identify an Appreciated Depreciated Currency PG 168 Trading profits are affected not only by security price changes but by currency exchange rates The relationship btwn two currencies on a specified date is called the currency exchange rate Changes in the value of a particular foreign currency with respect to the US dollar or any currency are called appreciation and depreciation Appreciated Depreciated currency example the euro US rate was 6975 Aug 21 2009 from April to August the Euro appreciated relative to the US dollar Therefore the US dollar depreciated relative to the Euro In other words if the value of one currency goes up relative to another currency it has appreciated and vice versa for the other Currency Exchange Risk risk caused by the varying exchange rates btwn two currencies 5 Paper Focus Impact of Sox PG 208 Capital Gain Loss are realized only when the investor sells an asset So in other words if your stock has risen from 100 to 110 10 increase it doesn t effect your income until you actually sell it This is called a Paper Return 6 Types of Brokerage Accounts PG 189 Full Service Broker In addition to executing clients transactions offers investors a full array of brokerage services providing investment advice and info holding securities in street name offering online brokerage services and extending margin loans see end of number 7 for definition Premium Discount broker focus primarily on making transactions for customers Charge low commission and provide limited free research Ex Charles Schwab Basic Discount Broker Online electronic broker are deep discount brokers through which investors can make trades electronically on the internet or phone Confirmation of trades take seconds and provide some customer support in case an error has occurred Firms charge higher commission when broker assistance is required Discount brokers are growing rapidly as young investors prefer to make trades online 7 Long Short Position PG 171 and 177 Long Purchase transaction in which investors buy securities in the hope that they will increase in value and can be sold at a later date for profit Buy low sell high Short Selling selling borrowed securities This occurs when an investor borrows securities from a broker and sells them in the market place at a higher price Later when the price has declined the short seller will buy back the securities and return them to the lender Major advantage is obviously making money on a price decline but face high risk and limited returns bc the value can only fall so much but there is no limit as to how high it can increase in value Basically the investor is betting AGAINST the market Its not listed in the study guide but Margin Trading When
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