Financial markets and the identification of financing needs Flashcards
How does a primary market differ from secondary?
Primary market is a “new issues market” where companies can raise “new” funds by issuing shares or loan stock.
Secondary market permits the primary market to operate more efficiently by facilitating deals in existing securities.
What are the key advantages of a public market over a private market?
Public markets are where the general public can participate in such a stock market. Can participate with as little as £10. Offer greater liquidity - smooth purchase or sale. Risk profile is relatively small because of regulations, transparency and monitoring by seasoned investors and regulators.
Key advantages over private: no qualification or net worth criteria required; highly regulated and transparent markets - reducing risk; highly liquid investments
Why do companies list their shares on a stock exchange?
- To raise funds for business requirements
- Comply with requirement of a stock exchange flotation where a mimum proportion of shares must be made available to the public
- Exit to investors who have invested in the company by providing liquidity to the stocks of the company
- Increase brand image of the company
- For many other reasons
What are key functions of a stock exchange?
- Providing the value of a stock of a company
- Acting as a barometer for the economic performance of the company
- Ensuring fair dealing between investors
- Regulating intermediaries and companies
- Promoting economic growth
What are the three forms of market efficiency?
According to the Efficient-Market Hypothesis:
Weak form - market prices reflective of all historical information contained in the record of past prices. Share prices will follow a “random walk” and move up or down depending on the next piece of information about the company that reaches the market. The weak form implies that it is impossible to predict future prices by reference to past share price movements.
Semi-strong form - reflect not just the past and historical data but all information which is currently publicly available. Investors unable to gain abnormal returns by analysing publicly available info after it has been released. The price will alter only when new info is published. With this level of efficiency, share prices can be predicted only if unpublished info were known - insider dealing.
Strong form - share prices reflect all available relevant information, published and unpublished, including insider info. This implies that even insiders are unable to make abnormal returns as the market price already reflects all of the information.
In what form of market efficiency can money be made by insider dealing?
Evidence suggests that stock markets are semi strong market efficiency at best. Any new info is rapidly reflected in the share price. In semi-strong efficiency, all public info is already reflected in the share price. With this level, share price can be predicted only if unpublished info - insider dealing.
Provide an example of exceptions when a sudden price change is not triggered by new information about the company reaching the market
In October 1987, the value of shares on the LSE fell by on-quarter during the course of the month with no specific new info identified as the cause of the fall. In contrast, the steep fall in share prices in 2008 could be associated with the accumulated impact of the global credit crisis that started with sub-prime lending failures in the US.
How can companies raise finance from private equity?
Private equity finance is not publicly traded but raised through private investors that are typically large institutional investors, university endowments, or wealthy individuals. Organisation through mediation of a venture capital company or private equity business. Raising private equity finance does not expose the company to the similar scrutiny and regulation of a stock market.
Relatively high risk for investors. They provide finance through placing as they yield higher returns than they would from a stock market listed company. Placing is a way of raising equity capital by selling shares directly to third party investors (usually a merchant bank). Business angels are a source of private equity finance to start-up and early-stage businesses in return for a share of the company’s equity.
