Equity Markets and Primary Markets Flashcards
Primary stock markets allow suppliers of funds to raise ______
Equity capital
What market is the most closely watched and reported of all financial markets?
Secondary Markets
Who
- Has a right to share in the firms profits
- Are residual claimants
- Have limited liability
- Have voting rights?
- Are the legal owner’s of a corporation
Shareholders
What is the fundamental ownership claim in a public or private corporation?
Common Stock
Do common stockholder’s have voting rights?
Yes
_____ voting is the number of votes assigned to each stockholder equals the number of shares held multiplied by the number of directors to be elected?
Cumulative
_____ voting allows stockholder’s to vote by an absentee ballot.
Proxy
___ ____ is a hybrid security that has characteristics of both bonds and common stock
Preferred stock
When are fixed dividends usually paid?
Quarterly
Do Preferred stockholders have voting rights?
No
What is the difference between cumulative and noncumulative in preferred stock?
Cumulative dividends you have to add up and pay all to preferred stock before you can pay common stockholders. Noncumulative dividends you do not have to.
What is the difference in nonparticipating and participating?
Nonparticipating - getting the same amount regardless of whether the company does good or not.
Participating - When you are rewarded based upon the company doing well
Why go public?
- Can raise a lot of money
- Not held liable by a bank if the company does bad
- Allows for an easier time getting loans
- Shareholder monitoring benefits – make sure the company is upholding moral standards
- Brand awareness
What is an IPO?
Initial public offering – first public issue of financial instruments by a firm
What is prospectus?
A long list of reasons why you shouldn’t invest in a company
What is a red herring prospectus?
Not the final prospectus – a preliminary
What is an underwriter?
An underwriter sets the price (low enough to ensure strong demand), issues shares to institutional investors at an offer price on the IPO date
What is the theory to underpricing?
An investment banker purposely underprices a little because they do not want to be in charge of paying it back
What is the normal reason for underpricing?
To make it appetizing to investors to want to purchase it. This also helps to try and stabilize prices in markets
What is spinning?
Allocating shares of a hot IPO to favored customers in exchange for receiving investment banking business from the buyers firm later on – you do not have the company’s best interest in mind
What is laddering?
Allocating the IPO shares to firms to agree to buy more in the aftermarket in an attempt to increase the price over the short tun, increasing gains to original purchasers – involves some potential underwriting to help investment bankers out
What are overly optimistic research reports?
They support the underwriting business – make people;e invest due to overly optimistic reports and overprice a little in order to raise prices
Is long term underperformance or over performance more common for IPO issuers?
Underperformance
What is a seasoned equity offering (SEO)?
An SEO is the sale of additional securities by a firm whose securities are already publicly traded. (Any stock issuing after a company is already public)
What are preemptive rights?
when existing stockholder’s have the rights to maintain their proportional ownership when there are new shares issued
What is shelf registration?
allows firms to offer multiple issues of stock over a two year period with only one registration statement
What happens after SEO?
Shares outstanding goes up
cash goes into the firm
and public float usually rises
What is public float?
Shares held by public
Why does a stock price tend to fall when SEO returns happen?
Idea: The stock price is way too high. We aren’t worth that much so lets issue stock and make a lot of money. This is why stock price falls.
