Chapter 3; Securities Markets Flashcards
Capital Market
The capital market is divided into a primary and a secondary market. In both markets, banks are key mediators
Financial Market
The financial market is divided into monetary markets, where supply/demand of short- and long-term money capital meet, and derivative markets, which are determined by the supply of and demand for financial derivatives. Financial markets bring together investors (as capital providers) and companies (as capital seekers). Mediation is performed by financial intermediaries such as banks, investment companies and insurers.
Primary Market
New issue is created and sold
Secondary Market
Existing owner sells to another party Issuing firm doesn’t receive proceeds and is not directly involved .
The issue of securities;
initial public offering (IPO)
- Registration with a supervisory body
- SEC(securities and exchange commision),
- SWX(swiss exchange)
- Road Show(A presentation by an issuer of securities to potential buyers)
- Prospectus(A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. )
The issue of securities
Private Placement
Firm sells shares directly to a small group of institutional or wealthy investors. No registration with supervisory body.
• Less suited for very large offering; not available to the public
• Reduced liquidity
Best Effort
The underwriter agrees to use all efforts to sell as much of an issue as possible to the public. He is not responsible for any unsold inventory.
Firm Commitment
In a typical underwriting arrangement, the investment bankers purchase the securities from the issuer, and then resell them to the public. An underwriter’s agreement to assume all inventory risk and purchase all securities directly from the issuer for sale to the public at the price specified. In addition to the spread, the investment bankers also might receive shares of a common stock or other securities of the firm.
Underwriters
(Investment Banks)
Public offerings are marketed by investment bankers who in this role are called “underwriters”. More than one investment banker usually markets the securities, as the issue might be too large for any single entity to handle. A lead firm forms an underwriting syndicate of other investment bankers to share the responsibility.
Primary Offerings
An IPO in which a company sells its unissued securities and receives all the proceeds in the form of additional capital is called a primary offering. IPOs are almost always primary offerings, but may include the sale of shares held by the present owners. Investment bankers manage the issue of new securities to the public.
Reasons for IPO
- Access to capital markets to raise money for the expansion of operations
- Financing acquisitions with publicly traded stock as the currency
- Attracting and retaining talented employees
- Diversification and reduction of investor holdings
- Providing liquidity for shareholders
- Enhancing the company’s reputation
- Succession issues
Procedure of IPO
(1) Road Shows
(2) Book Building
(3) Fixing of the issue price (firm commitment)
(4) Subscription
(5) Allocation
Book Building
Issuer nominates a ‘book runner‘
Issuer specifies number of securities to be issued and defines price range
Issuer appoints syndicate members.
Investors place order with a syndicate member who puts the orders into the ‘electronic book’.
The book runner and the company conclude the final price and allocation of securities.
Key services of exchanges
Assuring information flows
Allocation of orders / clearing
Execution / settlement
Selected exchanges ;
NYSE Euronext
is the only exchange operator in the Fortune 500. With exchanges in the US and Europe, NYSE Euronext equities marketplaces represent one-third of equities trading worldwide. NYSE Euronext is also one of the world’s leading futures and options trading venues, with four markets based in the US and Europe offering derivatives on commodities, FX, equities, bonds, interest rates, indices and swaps.
Selected exchanges;
NYSE ARCA
The fully-electronic NYSE Arca trades more than 8,000 exchange- listed equity securities, including listings on Nasdaq.
Selected exchanges;
NASDAQ
Today, the NASDAQ OMX Group owns and operates 24 markets, 3 clearing houses, and 5 central securities depositories, spanning six continents, making NASDAQ the world’s largest exchange company. Eighteen of the 24 markets trade equities. The other six trade options, derivatives, fixed income, and commodities. NASDAQ is also the largest single liquidity pool for US equities and represents 1 in 10 of the world’s securities transactions. Seventy exchanges in 50 countries trust its trading technology.
Dark Pools
Dark pools are an ominous(ugursuz)-sounding term for private exchanges or forums for trading securities; unlike stock exchanges, dark pools are not accessible by the investing public. Also known as “dark pools of liquidity,” *they are so named for their complete lack of transparency. *
Credit Suisse operates the largest Dark Pool in den USA; UBS is the number two. Numerous high-frequency traders meet institutional clients. Pure market makers are not causing any damage, as the increase liquidity in a market place. However, there are also some front- runners.
Types of market orders
*Market orders: They have to be executed immediately at current market prices.
Bid Price?
Ask Price?
Spread?
Bid price: price at which a dealer is willing to purchase a security.
Ask price: price at which a dealer or other trader will sell a security.
Spread: represents the gap between bid and asked price.
Price-contingent orders
Best and limit buy (sell):
**Stop-loss und Stop-buy: **
Best and limit buy (sell): an order specifying a price at which an investor is willing to buy or sell a security.
Stop-loss und Stop-buy: Trade is not to be executed unless the stock hits a price limit.
Price contingent orders
Fill or Kill
A fill-or-kill order can be viewed as a cousin of the immediate-or-cancel (accept) order. “Fill or kill” essentially means “everything or nothing at all”; in other words, the order must either be executed in full or cancelled and the entire volume of orders is deleted.
Price contingent orders
Stop Loss
This order is designed to limit losses or in some cases to lock in a certain level of profit. As soon as the price of the security hits the stop-loss price (or falls below), the order becomes a market order. .
**Short selling **
Short selling or “shorting” is a way to profit from the decline in price of a security, investors who “go long” with an investment hope the price will rise.
