Chapter 16 Final Flashcards
Investment Banks specialize in (commercial)
Organization, underwriting, and distributing issues of debt and equity securities
Securities firms specialize in (retail)
the purchase, sale, and brokerage of existing securities
Jp morgan and Goldman Sachs are examples of what type of firms
Full service investment banks that service both retail(broker-dealers) and corporate(underwriting) customers
Investment banking refers to
activities related to underwriting and distributing new issues of debt and equity securities
In 2021…
$11.47 trillion of debt and equity was underwritten globally
Securities underwriting can be undertaken through either
Public or Private offerings
Firm Commitment Underwriting
Inv bank buys all the shares from the company and sells to investors. Bank takes on the risk since it guarantees that all shares will be sold
Best efforts underwriting
Inv bank tries to sell as many shares as possible but doesn’t guarantee that all will be sold. Company bears risk of not raising desired amount of capital
Private Placement
Inv bank sells securities to a small number of investors directly rather than the general public
Inv banks may also participate as
An underwriter in government, municipal, and mortgage back securities
What is a securities underwriting process
-analyze company’s financial statement
-create prospectus
-Register offerings with SEC
-Assess demand for stock
-set price
-set time for IPO
What is a likely IPO stock return result
Short run underpricing- priced below value so stock price jumps which attracts investors
Long run underperformance- once initial excitement wears off stock price often declines compares to other established company’s
- IPO’s often see a quick price increase right after starting but may not perform as well in the long term
Venture Capital
Money managed by professionals to finance new and often high risk firms (often have good ideas but need unds to grow)
Venture Capital firms provide capital to companies in exchange for
an equity investment in the firm( VC firm becomes part owner of the company)
Institutional VC firms
purpose is to find and fund the most promising new firms
Angels are
Wealthy individuals who make equity investments
Why would a company go to a VC firm instead of a regular bank
New and small firms often struggle to get loans from banks because they are seen as risky investments
What is the difference between venture capital and private equity
VC firms tend to concern themselves more with startup businesses and private equity deals more with existing companies that have already proven themselves in the business field
Why does lower risk tolerance affect the competition between VC and private equity firms
Investors are more cautious about taking risks so they compete more directly since they are now both looking for the best investment opportunities even though they traditionally focus on different stages of company development
Market Making
Creation of a secondary market in an asset
Agency Transactions
Market maker acts as a broker buying and selling securities on behalf of customers. Market maker doesn’t own the security but facilitates the trade
Principal Transactions
Market maker buys or sells securities for its own account. Market maker owns the securities and takens on the risk of holding them
What is the primary regulator for the securities industry
Securities and Exchange Commission (SEC)
What’s the primary role of the SEC
-enforce securities laws
- review registrations of new security offerings
- review annual reports of public corporations
prohibition of security market manipulation
-spreading false info
- pumping and dumping thinly traded securities
