Primary and Secondary Markets

Question 1

What are the main stages of an IPO? (3)

Answer 1

Decision to raise capital via IPO

Prospectus preparation

Sale of securities led by the investment bank

Question 2

What is underwriting in an IPO?

Answer 2

This is where the investment bank agrees to try and sell all shares available in the IPO and take on any leftover shares which aren’t placed

Question 3

What is a follow on Offering?

Answer 3

Where an already listed company decides to raise more capital with an additional IPO containing a base number of shares

Question 4

What is a greenshoe option?

Answer 4

This is where a company undertakes a follow on option and retains the right to issue more shares in case there is larger demand. This is also known as an over allotment option

Question 5

What is an offer for sale?

Answer 5

This is where a company seeking a listing approaches in issuing house (e.g. investment bank) that approaches potential shareholders

Question 6

Features of an offer for sale (2)

Answer 6

Company doesn’t always necessarily issue new shares

Can be used when by a company’s founders to release some or all of their equity stake

Question 7

What is a fixed priced offer (for sale)?

Answer 7

Subscribers apply for the number of shares they want to purchase at a fixed price which is usually fixed just below the price of fully subscribed shares

Question 8

What is a tender offer (for sale)?

Answer 8

Where the price is set at a level that doesn’t lead to over subscription by the issuer inviting tenders for prices rather than setting a price

Question 9

What is selective marketing/placing?

Answer 9

This is where an issuer markets the issue directly to a broker, institution or issuing house i.e. they are selecting who the securities are marketed to

Question 10

What is a private placement?

Answer 10

Offering marketed to sophisticated investors so a prospectus is not prepared as disclosure is less onerous due to ability of investors to make their own decision

Question 11

What is an introduction?

Answer 11

This is where a company wishes to become listed in order to gain access to the secondary market and utilise liquidity in its shares

Question 12

What is the difference between exchangeable and convertible bonds?

Answer 12

Convertible bonds can be redeemed for shares of the same company whereas exchangeable bonds can be redeemed for shares in a diff company owned by the same group

Question 13

Who is part of an origination team?

Answer 13

Issuer, investment bank, reporting accountants, legal and PR advisors

Question 14

What is stabilisation?

Answer 14

When a large number of new securities are issued, the lead manager agrees to buy back the securities in the market if the price falls below a certain level to prevent a substantial fall in the value of securities

Question 15

Who is part of the syndicate group? (2)

Answer 15

In listings of large quantities of securities, the syndicate group includes stockbrokers and investment banks

The sponsor is the lead manager

Question 16

What is a broker/dealer?

Answer 16

Larger banks which allow their

Question 17

What is a broker/dealer?

Answer 17

Larger banks which allow their clients to both arrange and deal

Question 18

What does the Companies Act require companies to do? (2)

Answer 18

Prepare annual audited accounts

Hold an AGM

Question 19

What is the role of the FCA? (3)

Answer 19

Recognise an Exchange before it can trade in the UK

Assess if an exchange has sufficient systems in place to run a market

Through the UKLA lays down detailed rules that have to be met before a company is admitted on the Official List

Question 20

What is AIM’s purpose?

Answer 20

Less stringent admission requirements provide market for smaller, less well established companies

Question 21

Requirements for a Premium Listing on LSE (5)

Answer 21

Must be incorporated and represented by a sponsor with trading record of at least 3 years

Market cap of at least £700,000

At least 25% of the company’s shares in public hands exc directors and their associates or one person holding more than 20% of the capital

Can’t issue warrants of more than 20% of the issued share capital

Must publish prospectus

Question 22

Requirements for an AIM listing

Answer 22

No transfer restrictions

There is a nominated advisor and broker appointed

If company ceases to have broker or or advisor, shares are suspended from trading

If company still doesn’t have broker or advisor after one month, removed from AIM

Question 23

Requirements for an AIM listing (4)

Answer 23

No transfer restrictions

There is a nominated advisor and broker appointed

If company ceases to have broker or or advisor, shares are suspended from trading

If company still doesn’t have broker or advisor after one month, removed from AIM

Question 24

Who issues bonds? (6)

Answer 24

Supranationals

Governments

Agencies

Municipalities

Corporates

Financial institutions and SPVs

Question 25

What is a quote driven system?

Answer 25

Market makers agree to buy and sell a set min of shares at quoted prices

Question 26

What is an order driven system?

Answer 26

investors indicate what securities they want to buy and at what price

Question 27

What does a principal in stock exchanges do?

Answer 27

Buying shares on its own account hoping the value will increase before reselling

Question 28

What does an agent in stock exchanges do?

Answer 28

A firm arranging and making deals on behalf of other third parties and charges fees/commission

Question 29

What is algorithmic trading?

Answer 29

Where shares are bought automatically by a computer when certain conditions are met

Question 30

Subcategory of algorithmic trading (1)

Answer 30

High Frequency Trading where computers can submit orders based on algorithms

Question 31

Order types on an exchange’s order driven system (6)

Answer 31

Limit - price and time limited

Iceberg - client can partially hide the size of order from market

Market - no price, just number of shares

Execute and eliminate - execute as much of the order as possible and cancel the rest

Fill or kill - either entire order filled at specified price or whole order cancelled

All or none - same as fill and kill except order won’t be cancelled until end of trading day

Question 32

Advantages of Central Counterparty (CCP) (3)

Answer 32

Reduced counterparty risk if one side defaults

Providing total anonymity for both sides

Reduced admi

Question 33

What is a free float of a public company?

Answer 33

The estimate of proportion of shares not held by large owners and don’t have sale restrictions

Question 34

Who issues gvt bonds in the UK?

Answer 34

DMO

Question 35

Who issues gvt bonds in the US?

Answer 35

Federal Reserve