Equity Securities Flashcards
How do you differentiate short term vs long term assets?
Short term = held less than one year
Long term = held more than one year
What does IPO stand for?
Initial Public Offering
What is the initial prospectus to potential investors for an IPO called?
A red herring
Describe the IPO process
-Company sells stock to investment bank at x price
-IB forms syndicate of other investment firms to sell the stock
-Syndicate sells stock to public (price will depend on “factors”)
What is a private placement?
-The sale of securities directly to private investors (eg pension funds, investment pools, banks, insurance companies, and EVEN individuals)
-LEGAL
What does Regulation D (Reg D) state?
Private placements of up to $5 mil can be offered to 35 or less non-accredited investors and infinite accredited investors
Pros & Cons of IPO
Pros:
-Broad distribution in secondary market
-Fluctuating market means prices CAN rise
CONS:
-Time & cost of initial registration
-Subject to ongoing reporting requirements of SEC
Pros & Cons of private placements
Pros:
-No registration with SEC
-No prospectus requirement
-NO investment banking fees
-potentially quicker way to raise money than IPO
-stable price
CONS:
-Limited distribution
-Resale of securities by investors is restricted
-Rules of restricted securities are governed by intricate regulations
-No secondary market to enable an increase in stock price
Pros & Cons of Crowdfunding
Pros:
-Investment minimums are generally low
-Opportunity to invest in companies not listed on the exchange
-Potential for outsized returns
CONS:
-Investment risk can’t generally be determined
-Increased risk of business failure
-Increased risk of fraud
SEC Requirements for crowdfunding (5 things)
- Must file disclosure statement w/ SEC
- Investments must take place “online, through an SEC-registered intermediary, either a broker/dealer or funding portal.”
- A max of $5mil (2022) in capital may be raised in a 12-month period
- A non-accredited investor’s investment during any 12 month period is limited to as little as $2,200 (2022) or as much as 10% of investor’s income or net worth
- Investor generally may not resell any securities for 1 year
True or False
Anti-fraud penalties do not apply to fraudulent practices
False; the SEC is allowed to get you
True or False
The issuing company receives money from the exchange of securities on the secondary market
False
2 types of secondary markets (AKA aftermarkets)
- Auction Market
- Over the counter market
Auction Market
vs
Over the Counter Market
Auction Market - (eg NYSE) physical location where prices of securities are determined by buyers & sellers (supply + demand, intensity of desire, etc)
OTC Market - (eg NASDAQ) Public stock issues not traded on any domestic stock exchange; no physical location
Features of Auction Market (3 things)
- Simultaneous competitive bids (bid price)
- Intermediary/broker
- Specialists to create orderly /efficient market
Features of Over the Counter Market (2 things)
- Computer/telephone transactions
- Each transaction is negotiated between buyer and seller (not simultaneous)
2 major Auction Markets & their vibe/what they do
New York Stock Exchange (NYSE)
-oldest and largest stock exchange in US
-most stringent requirements for nearly 2,800 companies
-technically nonprofit w/ roughly 400 member firms that own seats on the exchange
NYSE American
-micro-cap & small-cap stocks
-less restrictive listing rules
Who established NASDAQ stock market?
FINRA
(used to be Nat. Assc. Securities Dealers)
What are stock market indices?
What are their purpose?
Smaller groups of stock designed to represent the broad market & thus measure movement of market
What does DJIA stand for and what is it?
-Dow Jones Industrial Average
-Price weighted average of 30 leading industrial stocks (chosen by editors of WSJ)
Price Weighted vs Value Weighted
Price-weighted - based on value of one share
Value-weighted - each stock affects the index in proportion to its market value
Securities Act of 1933 explained (2 things)
-requires security issuers to disclose significant info
-it’s now illegal to commit fraud
Glass-Steagall Act of 1933 explained
(4 things)
-Restricts commercial national banks from most investment banking
-Prohibits any member bank from affiliating in specific ways with an investment bank
-Restricts investment banks from commercial banking
-Investment bank people can’t serve at commercial bank in Fed system
Explain the Securities Exchange Act of 1934
(2 things)
Boom SEC exists
Boom secondary market is regulated
Explain the Investment Company and Investment Advisors Act of 1940
Sought to prevent abuses by requiring all investment companies and advisors to register with the SEC & to fall under its oversight
Explain the SEC Regulation Best Interest of 2019
(Reg BI)
Individuals and firms subject to Reg BI are held to higher standard than the previous “reasonable basis and suitability” standard
Explain the Securities Protection Act of 1970
(2 protections)
Protects against:
-losses caused by financial failure of broker dealer
-losses caused by unauthorized broker/dealer trading in customer’s account
Securities Investor Protection Corporation (SIPC) arranges for payment of claims up to…
2 things
$500k per customer, of which $250k can be for cash claims
Explain the Employee Retirement Income Security Act of 1974
Sets minimum standards for most voluntary established pension & health benefit plans in private industry
