FIN3244 Test 3 Study Guide CHAPTER 8 Terms to know Buttonwood Agreement An agreement signed by 24 brokers in 1792 which agreed to trade securities on commission basis becoming the first organized American securities exchange Securities Markets Forums that allow suppliers and demanders of securities to make financial transactions quickly and at a fair price They are generally classified as either money markets or capital markets Money Markets Capital Markets Prospectus Quiet Period Road Show Selling Group Gross Spread Market where short term debt securities with maturities less than one year are bought and sold Markets in which long term securities such as stocks and bonds with maturities of more than one year are bought and sold typically by investors Classified as either primary or secondary A portion of the registration statement sent by the underwriter to the SEC during an IPO Time period from the preliminary registration statement until at least one month after the IPO is complete in which the companies auditors lawyers and underwriters are restricted on what they can say about the company so that all investors have the same fair advantage to access information about the company During the registration period and prior to the IPO date the investment bankers and executives promote the company s stock through a series of presentations to potential investors Group made up of the lead investment bankers and the syndicates along with a large number of brokerage firms Each member is responsible for selling a certain portion of the issue and is paid a commission on the securities it sells The difference between what the issuer is issuing the stock and what the investment bankers may sell it for accounting for lead management fee the syndicate underwriters discounts and the selling groups selling concession Management fee If the issuer is guaranteed 24 per share and the originating underwriter sells the share to the underwriting syndicate members for 24 25 those 25 cents are considered the management fee example Underwriters Discount The difference between what the syndicates pays 24 25 per share and what they sold to the selling group 25 25 Amounting in their profits per share example Selling concessions The members of the selling group will earn a 75 cent concession if they sell each share for 26 cont example Intermarket trading system ITS An electronic computer system that joins the trading floors of all the major equity American exchanges This system essentially allows all eligible member market makers and brokers the ability to execute buy and or sell orders at different exchanges whenever they see that a better price quote available Diversification The inclusion of a number of different securities in a portfolio to increase returns or reduce risk American depository shares ADSs Backed by ADRs American depository receipts which are U S dollar denominated receipts for stocks of foreign companies that are held in the vaults of banks in the companies home countries Currency exchange rate The relationship between currencies on a specified date Financial Leverage The use of debt financing to magnify investment returns Notes In 1817 the buttonwood organization renamed itself the New York Stock Exchange More than 4 000 NYSE listed companies with a market capitalization of more than 10 trillion dollars Types of Securities Markets The 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 sales Only 21 companies in 2008 but over 477 in 1999 IPO Initial public offering o The most significant transaction in the primary market o Marks the first public sale of a company s stock Seasoned Equity issues o A forum for the sale of additional stock issued by already public companies Before offering securities they much be registered and approved by the SEC Securities and Exchange Commission o Confirms adequacy and accuracy of the information provided to potential To sell is securities in the primary market a firm has three choices Firm offers its securities for sale to public investors Firm offers shares to existing stockholders on a pro rata basis Firm sells securities directly without SEC registration to select groups of private investors such as insurance companies investment management funds and pension funds investors 1 Public Offering 2 Rights Offering 3 Private Placement The IPO Process o Most companies that go public are small fast growing companies that require additional capital to continue expanding o First Must obtain the approval of its current shareholders which are the investors who own the private stock o Next The Companies auditors and lawyers must certify that all financial disclosure documents for the company are legitimate o Then The company finds an investment bank willing to underwrite the offering The bank is responsible for promoting the company s stock and facilitating the sale of its IPO shares Often bring in other investment banking firms to help underwrite and market the company s stock Also assists the company in filing a registration statement with the SEC One portion called the Prospectus describes the key aspects of the securities to be issued the issuers management and the financial position While waiting for the approved registration system investors may receive a temporary prospectus called a Red herring which contains a notice printed in red on the cover of its tentative nature After the SEC approves the registration the investment community can begin to analyze the company s prospects o Investing in IPO s is risky especially for individual investors who cant easily acquire shares at the offering price because most of those go to institutional investors and brokerage firms o IPO s are not good long term investments The Investment Bankers role o An investment banker Financial intermediary that specializes in assisting companies issue new securities and advising firms with regard to major financial transactions o The main activity of the investment banker is underwriting The process involves purchasing securities from the issuing firm at an agreed price and bearing the risk of reselling them to the public o When dealing with large securities issues the lead investment banker brings in other bankers to form underwriting syndicate They share the financial risk The lead and syndicate members put together a selling group Secondary Markets Also known as aftermarket Market
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