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.
