CH 7A Flashcards
What are the two types of maturities?
- Money Markets
- Capital Markets
What is Money Markets?
- Where short term debt securities are bought and sold
What are Capital Markets? what is an ex of a capital market?
- Where long term debt and equity securities are bought and sold
- All stocks
Who gets the money?
- Primary and secondary markets
What is a Primary Market? and among who trades these securities?
- Where firms raise capital by issuing new stock shares to thee public
- Trade is between firm and investor
What is a Secondary Market? and who trades these securities?
- Where securities are re-traded
- Vast majority of trading is done
- Trade is between investors
What are the ways to issue new securities?
- Public Offerings
- Private Placements
- Rights Offering
What are the ways firms public offer their securities?
- IPO’s
- Secondary equity offerings
What is Secondary equity Offering?
- An existing firm selling new stock shares to raise capital for the firm
What is a Private Placement?
- The selling of stock or bond to institutional investors and not the public
What is the purpose for the Primary Market?
- Raise Capital for the firm (long term money)
What is the purpose for the Secondary Market?
- Provide liquidity to the market
What is the procedure for a firm to become an IPO? #1
- The firm gets the existing shareholders’ approval
- Selects underwriter: Investment bank
- SEC approval
What does the investment bank do for the firm?
- They advice, Promote and facilitate sale of the new shares
What is prospectus?
- Part of the registration filling prior to SEC approval
What is Red herring?
- Preliminary prospectus prior to SEC approval
What is the procedure for a firm to become an IPO? #2
- Quiet Period
- Road Show
- Once stock is trades publicly, supply and demand determines the price
What is a Quiet Period?
- Corporate insiders are forbidden to speak to the public about their business to avoid tipping certain analysts, journalists, investors and portfolio managers to an unfair advantage
What is Road Show?
- Presentations to potential investors
What do underwriters do with road shows?
- They measure the interest level of the public in the IPO, they might increase the price if people are too interested
What is the underwriting process #1
- Lead underwriter
- Syndicate
- Selling Group
- Compensation
What is a lead underwriter? and what does it eliminate
- Typically buys the issue at an agreed price
- Eliminates risk to issuing firm
What is a syndicate?
- Additional investment bankers brought in by Lead to share financial underwriting risk
What is Selling Group?
- Investment banks and brokerage firms responsible for selling a part of the issue
What is Compensation
- in the form of a discount to the expected sale price of the new securities
What is the underwriting process #2
- tendency to underprice amount paid to issuing firm
- ## IPO’s are risky investments
In finance what does it mean the word Spread?
- “The difference Between”
Why are IPO’s risky?
- Generally they overperform the 1st day (hype, excitement)
- Statistically speaking most IPO’s under perform the market 3-5 years
