Finance Study Guide Exam 2 Textbook Chapter 8 Securities markets and transactions In 1792 twenty four stockbrokers signed the Buttonwood Agreement agreeing to trade securities on commission basis thus becoming the first organized American securities exchange o In 1817 the Buttonwood organization renamed itself the New York Stock Exchange board and rented rooms on Wall Street to establish the first centralized exchange location of what in 1863 became known as the New York Stock Exchange o Securities markets are forums that allow suppliers and demanders of securities to make financial transactions Goal to permit such transactions to be made quickly and at a fair price Types of Securities Markets o Two main types Money markets Capital markets Short term debt securities mature less than one year are bought and sold Short term borrowing and investing Buy and sell long term securities with maturities of more than one year such as stocks and bonds Can either be classified as primary or secondary depending on whether securities are being sold initially to investors by the issuer primary market or resold among investors o Primary market New issues of securities are sold Issuer of the equity or debt receives the proceeds of sales Initial Public offerings IPO marks the first public sale of a company s stock and results in the company s taking on a public status Before offerings it securities for public sale the issuer must register them with and obtain approval from the Securities and Exchange commission SEC o Confirm adequacy and the accuracy of the information provided Seasoned equity issues sale of additional stock of a company that is already public To sell securities in primary market the firm has three choices Public offering which the firm offers its securities for sale to public investors Rights offering which the firm offers shares to existing stockholders on a prorata basis Private placement which firm sells securities directly without SEC registration to select groups of private investors such as insurance companies investment management funds and pension funds Going Public The IPO process to continue expanding o Most companies are small fast growing that require additional capital o Risk business are not necessarily good long term investments o Steps First must obtain the approval of its current shareholders the investors who own its privately issued stock Must find an investment bank willing to underwrite the offering Underwriter also assists the company in filing a registration statement with SEC o Prospectus describes key aspects of the securities to be used the issuer s management and the issuer s financial position Preliminary version is called red herring because a notice printed in the red on the front cover indicated the tentative nature of the offer Once the SEC approves the registration statement the investment community can begin analyzing the company s prospects From the time the company files its preliminary registration statement until at least one month after the IPO is complete the company and the company s auditors lawyers and underwriters must observe a quiet period during which there restrictions on what can be said about the company o Allow all investors to have access to the same information about the company During the registration period and prior to the actual IPO dates the investment bankers and company executives promote the company s stock offering through a road show which consists of a series of presentations to potential investors typically intuitional investors Allow bankers to gauge the demand for the offering and set an expected price range The investment banker s role o Financial intermediary that specialized in assisting companies to issue new securities and advising firms with regard to major financial transactions o Main role is underwriting Purchasing securities from the issuing firm at an agreed on price and bearing the risk of reselling them to the public and advice about price and other aspects In large security issues underwriter brings on partners to form underwriting syndicate Syndicate shares the financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public Selling group made up of lead investment bankers and brokerage firms Each member is responsible for selling a certain portion of the issue and is paid a commission on the securities it sells Compensation for underwriting and selling services typically comes in the form of a discount on the sale price of the securities Example pay 24 per share for stock that will be sold for 26 per share for lead 25 25 per share to syndicated members o Difference is referred to as the gross spread which comprises the lead underwriter s management fee the syndicate underwriters discounts and the selling group s selling concession Secondary markets o Securities are traded after they have been issued Do not involve the corporation that issued the securities Ability to make securities transactions quickly and at a fair price in the secondary market provides securities traders with liquidity o Include securities exchanges forums Nasdaq market all electronic trading platform and over the counter OTC markets to execute trades Broker Markets and Dealer Markets o Broker market consists of national and regional securities exchanges whereas the dealer market is made up of the Nasdaq market and the OTC market biggest difference in the two markets is a technical point dealing with the way trades are executed Security exchanges the two sides the buyer and the seller are brought together the seller sells his or her securities directly to the buyer with the help of a broker Dealer markets buyers orders and sellers orders are never brought together directly Executed by market makers who are securities dealers that make markets by offering to buy sell a certain amount of securities at stated price Broker Markets o The New York Stock Exchange Only such designated individuals can make transactions on the floor of the exchange Commission brokers execute orders for their firm s customers An independent broker works for himself herself and handles orders on a fee basis typically for smaller brokerage firms or large firms that are too busy to handle their own orders All transaction on the floor of the exchange occur through an o Trading Activity auction process The goal is to fill all buy orders at the lowest price and to fill all sell orders at the highest price
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