Lecture 3 Flashcards
What are primary markets?
Markets where new securities are sold
What are 3 types of equity?
- IPOs → Initial Public Offerings: Selling the stock to the public for the first time
- Seasoned Equity Offerings → Stock issued by firms that need additional funds after an IP
- Private Placement → Company is private and selling it to institutions directly
What are IPOs?
- Initial public offers
- Selling stock to the public for the first time
What are SEOs?
- Seasoned Equity Offerings
- Stock issued by firms to get additional funds
What are private placements?
Sale of stocks, bonds or securities directly to a private investor
What are the two types of debt?
- Public Offering
- Private Placement
What are public offering?
Offering the stock on the public stock exchange
Why are secondary markets significant?
Markets for outstanding issues are bought and sold
What are examples of the secondary market?
NYSE, Nasdaq, London Stock Exchange
How does the IPO process work?
- Register with the SEC to prepare a registration statement that provides financial and other information about the company to investor
- Preliminary prospectus will circulate before shares are offered
- The underwriter performs due diligence by ensuring that all the stated facts are correct
What are the types of Underwriting process?
- Lead underwriter
- Deals are usually either firm commitment or best effort deal
- Book building
- Bond Underwriting
What are the lead underwriter?
- Primary investment banking firms responsible for managing the deal
- Provides advice and arranges for group of other underwriters to help market and sell the issue
What is firm commitment?
Investment bank purchases securities from issuing the company and reselling them to the public
What are the steps to book building?
- Process of coming up with the offer price based on marketing
- Customers inform underwriters of interests by telling them how many shares they want to purchase
What are the 4 main types of secondary market?
- Auction markets
- Dealer Markets
- Direct search markets
- Bokered markets
What are auction markets?
- Traders converge at one place to trade
- Used for stocks, options, futures
- Limit order/order driven markets
- Best order wins the trade
What are dealer markets?
- Dealers have inventories of assets from which they buy and sell
- Used for bonds, currency, swaps and over the counter derivatives
- Quote driven
What are direct search markets?
Buyers and sellers seek each other
What are brokered markets?
Search out buyers and sellers (real estate)
Why is it that markets are not clear?
- Size, product specifications, information asymmetry, inventory costs
- Institutional framework/market microstructure
- Sunspot equilibria
- Historical accidents
What does designated market maker mean?
- Liquidity providers, designated dealer
- Supports the markets reputation as a place where a customer can always find liquidity
What does the DMM do to make money?
- Holds inventory and are ready to buy/sell to provide liquidity
- Have special privileges ie.) naked short selling
- Make money through bid ask spread
What does it mean for exchange listing?
A listing = a sponsorship and companies pay to be listed
What are the different types of Canadian Markets?
- Toronto Stock Exchange
- TSX Venture Exchange
- OTC Stock Market