FIN3244 EXAM 3 REVIEW 1 New Stock Issue Process Documents Used and Impact on Shareholders p158 o o o o o o o o o o o o o o 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 The most significant transaction is the initial public offering IPO marks the first public sale of a company s stock and results in the company s talking on a public status The primary markets also provide a forum for the sale of additional stock called seasoned equity issues by already public companies To sell its securities in the primary market a firm has 3 choices Public offering the firm offers its securities for sale to public investors Rights offering the firm offers shares to existing stockholders on a pro rata basis Private placement in which the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies investment management funds and pension funds The IPO Process most companies that go public are small fast growing companies that require additional capital to continue expanding When a company decides to go public it first must 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 The company then finds an investment bank willing to underwrite the offering This bank is the lead underwriter and is responsible for promoting the company s stock and facilitating the sale of the company s IPO shares The lead underwriter often brings in other investment banking firms to help underwrite and market the company s stock The underwriter also assists the company in filing a registration statement with the SEC One portion of this statement is called the prospectus describes the key aspects of the securities to be issues the issuer s management and the issuer s financial position While waiting for the registration statement s SEC approval prospective investors may receive a preliminary prospectus The preliminary version is called a red herring because a notice printed in red on the front cover indicates the tentative nature of the offer After the SEC approves the registration statement the investment community can begin analyzing the company s prospects However from the time the company files its preliminary registration statement until at least one month after the IPO is complete the 2 Types of Exchanges stock and Listings o o o o o o o o company and the company s auditors lawyers and underwriters must observe a quiet period during which there are restrictions on what can be said about the company During the registration period and prior to the actual IPO date 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 Once all of the issue terms have been set including the price the SEC must approve the offering before the IPO can commence Investing in IPOs is risky business particularly 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 IPO stocks aren t necessarily good long term investments Most public offerings are made with the assistance of an investment banker Investment bankers specialize in assisting companies to issue new securities and advising firms with regard to major financial transactions The New York Stock Exchange Also referred to as the Big Board The NYSE is a listed exchange where a lot of trading is done face to face on the trading floor The flow of an order starts first at the brokerage firm then down to the broker on the floor at their trading post This person is also known as the specialist and they match the buyers and sellers of a given stock At the time of the actual sale the price is determined via auction where the current price is the greatest amount a buyer is willing to pay and the lowest price at which one is willing to sell All transactions on the floor of the exchange occur through an auction process The goal is to fill all buy orders at the lower price and fill all sell orders at highest price Members interested in purchasing a given security publicly negotiate a transaction with members interested in selling that security The job of the designated market maker DMM an exchange member who specializes in making transactions in one or more stocks is to manage the auction process The DMM buys or sells to provide a continuous fair market Firms such as Merrill Lynch designate officers to hold trading licenses Only such designated individuals can make transactions on the floor of the exchange The two main types of floor brokers are commission and independent brokers Listing policies to list its shares on a stock exchange a firm must file an application and meet certain listing requirements Some firms have dual listing To be listed on the NYSE A firm must have at least 400 stockholders owning 100 or more shares at a minimum of 1 1 million shares of publicly held stock outstanding aggregate pretax earnings of at o o o o least 10 million over the previous three years of at least 2 million in the next most recent year and a minimum market value of public shares of 100 million Once the NYSE accepts a firm s securities for listing the company must continue to meet SEC requirements for exchange listed securities The NASDAQ The NASDAQ is a virtual stock exchange referred to as an over the counter or OTC market There is no physical location for the neither NASDAQ nor are there floor brokers on the NASDAQ All stock trades are done electronically through a network of dealers While the NYSE used to be the only place to go if you are a big company the tech boom of the 1990 s changed that though The NASDAQ is now the home of tech giants like Cisco Dell Intel Microsoft and Oracle With the NASDAQ brokerages act as market makers for the stocks being traded It is the task of the market maker to provide a streaming bid and ask price within a certain percentage spread for shares being traded on the NASDAQ They have the option to match buyers and sellers directly However most often they will maintain an inventory of shares to sell to investors American Stock Exchange The American Stock Exchange or the NYSE AMEX is the third largest on the major US stock
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