Exam 3: Chapter 8, 9, & 10 Outline Chapter 8 Securities markets: forums that allow suppliers & demanders of securities to make financial transactions quickly & at a fair price Types of Securities Markets Securities markets are broadly classified as money markets or capital markets. Money markets: where short-term debt securities (maturities < a year) are bought & sold. Investors use this market for short-term borrowing & lending. Capital markets: where long-term securities (maturities of more than a year) are bought & sold. Capital markets can be further classified as either primary or secondary. Primary Market (PM) o The market in which new issues of securities are sold to investors. The issuer of the equity or debt securities receives the proceeds from the sale. o The most significant transaction in the PM – the initial public offering (IPO). This marks the first public sale of a company’s stock & results in a company taking a public status. The PM also provides a seasoned equity issue, which is a forum for the sale of additional stock by already public companies. o Before offering securities for public sale, the issuer must register them w/ & obtain approval from Securities & Exchange Commission (SEC). SEC regulates the securities markets, & confirms adequacy & accuracy of the info provided to potential investors. o To sell securities in the PM, a firm has 3 choices: 1) public offering, in which the firm offers its securities for sale to public investors 2) rights offering, in which the firm offers shares to existing stockholders on a pro rata basis 3) private placement, in which the firm sells securities directly w/o SEC registration to select groups of private investors. Going Public: the IPO Process o Most companies that go public are small, fast-growing, and require additional capital to keep expanding. o To go public a company first needs the approval of its current shareholders. Next, the company’s auditors and lawyers need to certify all financial documents for legitimacy. Then the company finds an investment bank who will underwrite offer. o The underwriter assists the company in filing a registration statement w/ the SEC. One portion of the statement is called the prospectus, and it describes the key aspects of the securities to be issued, the issuer’s management, & the issuer’s financial position. A red herring is a preliminary prospectus investors receive when they await SEC approval. A notice printed in red on the front cover indicates the tentative nature of the offer. o A quiet period is from the time the company files its prelim registration statement until at least 1 month after the IPO is complete. The company and the company’s auditors, lawyers, & underwriters are restricted on what can be said about the company during this time. The purpose of the quiet period is to make sure all potential investors have access to the same info about the company. o Road shows are a series of presentations to potential investors around the country and sometime overseas. They provide investors info about the new issue and help investment bankers gauge the demand for the offering to set an expected price range. o Investing in IPOs is risky business for individual investors who can’t easily acquire shares at the offering price. Most of those shares go to institutional investors and brokerage firms’ best clients. The Investment Banker’s Role o Investment banker: financial intermediary that specializes in assisting companies to issue new securities & advising firms w/ regard to major financial transactions. The main activity, however, is underwriting. Thisprocess involves purchasing the securities from the issuing firm at an agreed price & bearing the risk of reselling them. o An underwriting syndicate happens when a lead investment banker brings in other bankers as partners for large security issues. The syndicates share the financial risk associated with the entire issue. The lead investment banker & syndicate members put together a selling group, made up of themselves & a # of brokerage firms. Each member of the selling group is responsible for selling a certain portion of the issue & is paid a commission. o Gross spread: the difference in which the lead underwriter’s management fee, the syndicate underwriters’ discounts & the selling group’s selling concession. Secondary Markets (SM) o Aka the aftermarket, the SM is the market in which securities are traded after they have been issued. It does not involve the corp that issued the securities. The SM allows investors to sell his or her holdings to another investor. Provides an environment for continuous pricing of securities. o The ability to make securities transactions quickly & at a fair price provide securities traders w/ liquidity. Broker Markets & Dealer Markets Broker Markets o Consists of national & regional “securities exchanges.” o When a trade occurs, the two sides to the transaction are brought together. The seller sells his or her securities directly to the buyer. W/ the help of a broker, the securities change hands on the floor of the exchange. o NYSE is the dominant broker market. o Regional exchanges are national stock exchanges that reside outside of NYC. One of the things that these exchanges have in common is that all trading takes place on centralized trading floors. These exchanges account for 60% of the total $ value of all shares traded in the US stock market. o NYSE Amex – 2nd largest US stock exchange in terms of # of listed companies. Chicago Stock Exchange – largest regional stock exchange, even larger than the NYSE Amex in terms of $ value of trading. o Regional exchanges deal in securities w/ local & regional appeal. Their membership & listing requirements are more lenient. New York Stock Exchange o NYSE – the Big Board – largest securities exchange in the world; accounts for over 350 billion shares of stock o Before the NYSE became a for-profit, publicly traded company in 2006, an individual or firm had to lease one of the 1,366 seats on the exchange. Today, the NYSE sells one-year trading licenses. o The 2 main types of floor brokers are commission brokers & independent brokers; the only ones that can make transactions on the floor of the exchange. Commission brokers execute orders for their firm’s customers. Independent broker works for him/herself & handles orders on a fee basis. o The floor of the NYSE is the size of
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