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FSU FIN 3244 - Chapter 8 – Securities Markets and Transactions

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Chapter 8 – Securities Markets and TransactionsTypes of Securities Markets 1. Securities Markets- classified by maturitya. Money Markets: the market where short-term debt securities are bought and soldi. Are less than one yearii. Used for short term borrowing and lendingb. Capital Markets: the market to buy and sell long-term securitiesi. Maturities of more then one yearii. Ex. stocks and bonds iii. More risky iv. More likely to produce higher returns in the long run2. Primary, Secondary, Third and Fourth Markets- classified by what and who does the tradinga. Primary Markets: the market in which new issues of securities are sold to investorsi. Types of offerings:1. Seasoned Equity Offerings: the sale of additional stock, by already public companies2. Initial Public Offering (IPO): the first public sale of a company’s stock and results in the company’s taking on a public statusii. Ways to market new firms:1. Public offering2. Private placement3. Rights offering iii. Purpose: to raise capital iv. Trades: between issuing firms and investors b. Secondary Markets: the market in which securities are traded after they have been issuedi. Aka the aftermarket ii. Transactions are between investors1. Unlike the primary market, transactions do not involve the corporation that issued the securitiesiii. Role of secondary Markets:1. Provides continuous pricing of securities that helps to ensure that securities reflect their true value on the basis of the bet information availablea. Allows for frequency and volume 2. Provides liquidity a. Transactions are made quickly and at a fair price iv. Security exchanges: forums where security buyers and sellers are brought together to execute trades1. Physical locations 2. May be virtual telecommunications networksv. Includes Nasdaq market and Over the Counter (OTC) marketc. Third Markets: consists of OTC transactions made in securities listed on the NYSE, NYSE Amex, etc. i. Typically handled by market makers that are not members of a securities exchangeii. Listed securities: large trades (institutional investors)1. Minimize price impact and lower commissions d. Fourth Markets: Consists of transactions made through a computer network, rather than on an exchange, directly between large institutional buyers and sellers of securitiesi. Bypass the market maker ii. Electronic communication networks help to do this1. Effective for high- volume, actively traded securities, key in after hours trading 2. Exact matches required3. Only small transaction fees, no bid-ask spreads3. Broker vs. Dealer Markets- classified by how trades are executeda. Broker Markets: buyer and sellers come together. That is, the seller sells their securities directly to the buyer. i. Direct trade- broker assists1. Auction process goal is to fill buy orders at lowest price and sell orders at highest price ii. Occurs in stock exchanges such as NYSE, NYSE Amex, regional stock exchanges, option exchanges and futures exchangesb. Dealer Markets: buyers’ orders and sellers’ orders are never brought together directly. Rather, they are executed by market makers, who are securities dealers that “make markets” sell a certain amount of securities at stated prices i. Is made up of:1. Nasdaq: a. All stocks must have at least two market makersb. Dealers electronically post all their bid/ask prices so that when investors place market orders, they are immediately filled at the best available price 2. OTC Market: a. Non-Nasdaq issues include mostly small companies that either cannot or not wish to comply with Nasdaq’s listing requirements b. Unregulated segment of the market, companies are not even required to file with the SEC 3. Includes IPO’sii. Virtual linked telecommunication networksiii. Dealers (market makers) their offers to buy and sell keep trading going; they “make the market” iv. Three party trades1. Two separate trades, can be with the same or different dealersv. Dealer profit: bid/ask spread1. Bid price: the highest price offered to purchase a given securitya. An investor receives the bid price when buying securities2. Ask price: the lowest price offered to purchase a given securitya. An investor pays the ask price when buying securitiesInitial Public Offering- Initial Public Offering (IPO): the first public sale of a company’s stock and results in the company’s taking on a public statusA. The most significant transaction in the primary marketB. Most companies that go public are small, fast growing companies that require additional capital to continue expanding C. Issuing firm needs existing shareholder’s approval D. The IPO Process:1. When a company first decides to go public it must first obtain the approval of its current shareholders (investors who own its privately issued stock). 2. Then, auditors and lawyers must certify that all financial disclosure documents for the company are legitimate 3. The company then finds an investment bank willing to underwrite the offering4. This bank is the lead underwriter and is responsible for promoting the stock and facilitating the sale of the IPO share’s5. The lead underwriter often brings in other investment banking firms to help underwrite and market the company’s stockE. Filing a registration statement with the SEC1. Prospectus: describes the key aspects of the securities to be issued, the issuer’s management, and the issuer’s financial position2. Red Herring: a preliminary prospectus that may be given to prospective investors3. Quiet period: after the company files, there is a period which there are restrictions on what can be said about the company. The purpose is to make sure all potential investors have access to the same information about the company 4. Road Show: a series of presentations to potential investors prior to the issuing the IPO. Done to gauge interest and set an expected price range F. Investing in IPO’s is riskya. Esp. for individual investors who can’t easily acquire shares at the offering price b. Most of the shares go to institutional investors and brokerage firms’ best clientsc. First day gains do not mean they are necessarily good long-term investments- The Investment Banker’s RoleA. Main activity is underwriting, which is the tendency to “underprice” the share price to issuing firm. This process involves purchasing the securities from the issuing firm at an agreed on price and bearing the risk of reselling them to the publica. Higher profits, less risk, easier to sell b.


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