FIN3244 EXAM 3Fundamentals of Investing Chapters 8-10EXAM CLASS REVIEW 1. New stock issue process- documents used and impact on shareholders2. Types of exchanges (stock) and listings3. Bull and bear markets4. Identify an appreciated/depreciated currency5. Major focus/impact of Sarbanes-Oxley act6. Types of brokerage accounts7. Long/short positions8. Major published reports/analysis9. Types of averages/indexes10. Types of markets11. Major characteristics to/of bonds12. Capital gain/loss parameters and calculation13. Total return parameters and calculation14. Impact of inflation on securities/assets15. Internal/external impacts on investments16. Calculate interest income17. Calculate PV, FV18. Calculate risk premium19. Identify an annuityFIN3244 EXAM 3Chapter 8: Securities Markets and Transactions1. Securities Markets-Securities markets: forums that allow suppliers and demanders of securities to make financial transactions; goal is to permit transactions quickly and at a fair price Types of Securities Markets-Securities markets are classified as either money markets or capital markets.-Money market: where short term debt securities (with maturities less than one year) are bought and sold-Capital market: where long term securities (with maturities of more than one year), are bought and sold-including stocks, bonds, mutual funds, exchange traded funds, options, and futures-Capital markets are classified as either primary or secondary, depending on whether securities are being sold initially to investors by the issuer (primary market) or resold among investors. The Primary Market-Primary market: the market in which new issues of securities are sold to investors; the issuer of the equity or debt securities receives the proceeds of the sales-Initial Public Offering (IPO): marks the first sale of a company’s stock and results in company’s taking on a public status; the most significant transaction in the primary market-Primary markets also provide a forum for the sale of additional stock, called seasoned equity issues, by already public companies.-Securities and Exchange Commission (SEC): federal agency that regulates securities offerings and markets; an issuer must register their securities and get them confirmed for both adequacy and accuracy of the information provided to potential investors before they are publicly offered for sale-A firm’s 3 choices to sell its securities in the primary market:1. A public offering, in which the firm offers its securities for sale to public investors2. A rights offering, in which the firm offers shares to existing stockholders on a pro rata basis3. A private placement, in which the firms sells securities directly without SEC registration to select groups of private investors such as insurance companies, investment management funds, and pension funds-Most companies that go public are small, fast-growing companies that require additional capital to continue expanding.FIN3244 EXAM 3-The IPO Process of Going Public-must first obtain the approval of its current shareholders, the investors who own its privately issued stock-next, the company’s auditors and lawyers must certify that all financial disclosure documents for the company are legitimate-then the company finds an investment bank willing to underwrite the offering -the lead underwriter brings in other investment banking firms to help underwrite and market the company’s stock as well as assists the company in filing a registration statement with the SEC, including the prospectus-after the SEC approves the registration statement, the investment community can begin analyzing the company’s prospects-this time period from the time the company files its preliminary statement until at least one month after the IPO is complete is called a quiet period, where there are restrictions on what can be said about the company to prevent unfair advantages-during the registration period and prior to the actual IPO date, road shows promote the company’s stock offering through a series of presentations to potential investors and they also gauge the demand of the offering and set an expected price range-once all the issue terms are set, including the price, the SEC must approve the offering before the IPO can commence-Prospectus: a portion of a security registration statement that describes the key aspects of the issue and issuer-Red Herring: a preliminary prospectus made available to prospective investors while waiting for the registration statement’s SEC approval-Investing in IPO’s is a risky business and they are not good long term investments-Investment banker: a financial intermediary that specializes in assisting companies to issue new securities and advising firms with regard to major financial transactions-Underwriting: the role of the investment banker in bearing the risk of reselling the securities purchased from an issuing corporation at an agreed-on price-Underwriting syndicate: a group of investment banks formed by the originating investment banker to share the financial risk associated with underwriting new securities-Selling group: a group of dealers and brokerage firms that join the investment banker(s); each member is responsible for selling a certain portion of a new security issue Secondary Markets-Secondary market: the market in which securities are traded after they have been issued; the aftermarket-Secondary markets allow selling between investors.-An environment for continuous pricing of securities that helps to ensure that securities reflect their true value on the basis of the best information then available at any point in time.-The ability to make securities transactions quickly and at a fair price in the secondary market provides securities traders with liquidity.FIN3244 EXAM 3-Segments of the secondary markets:1. Securities are listed on one of the various organized securities exchanges, which are forums where the buyers and sellers of securities are brought together to execute trades2. Nasdaq market: a major segment of the secondary market that employs an all-electronic trading platform to execute trades3. Over-the-counter (OTC) market: a segment of the secondary market that involves trading in smaller, unlisted securities Broker Markets and Dealer Markets-The secondary market divided into two segments: broker markets and dealer markets-Broker market: consists of national and regional “securities exchanges”; the seller sells his securities directly to
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