Primary Market Makers and Market Indices

Question 1

Primary and secondary markets:

Answer 1

• Primary market is the market for equities which are sold or issued for the first time, as a means of new long-term funding for companies
• Secondary market is the market on which existing shares are traded. For example, the LSE makes both primary and secondary market.

Question 2

Alternative Investment Market (AIM)

Answer 2

• Trading marketplace for (often young) smaller UK companies - by definition it is higher risk than buying shares on the main primary LSE
• Launched in June 1995
• Not all companies have true liquidity - or any liquidity
• Lower listing standards and lighter touch regulation than for the main LSE market
• Lower listing fees and ongoing costs than for main LSE market

Question 3

Advantages and disadvantages of investing in the primary market?

Answer 3

• Advantages
  
  • Shares may be priced at an attractive level to ensure good take-up
  • Transaction costs generally lower/ no dealing commissions
  • May be limited supply of shares - financial institutions such as pension funds may require exposure and demand may force price higher than initial offer price
• Disadvanatges
  
  • No track record of company commericial/ investment performance and lack of hard trading data to analyse
  • Companies generally list via IPO at times which are favourable to the company’s existing management/ founds: not favourable to investors
  • May be less stirngent reporting requirements
  • Share allocatio may be scaled back and investors may get less than applied for
  • Initial listing price may be subject to high volatility

Question 4

Offer for sale - key points:

Answer 4

• Issuing house will buy the shares from the company at a lower price than it intends to sell them so they can make a profit
• Company directors will prepare a detailed prospectus called an offer documet - needs to be assessed by independent specialist consultant
• The independent sponsor must also provide a letter to the UKLA, confirming working capital adequacy. This normally accompanies the prospectus.
• Advert called a formal notice will be placed in newspaper

Question 5

Pricing of initial offers of shares - key points:

Answer 5

• Fixed Price -
  
  • fixed price is stated and offered on that basis (sometimes this initial price is set low to encourage take up).
  • Difficuly to strike balance between encouraging an active secondary market and full take up.
  • If shares too cheap, shares can be oversubscribed - too expensive will mean low take up.
• Tender -
  
  • Investors make bids for amounts of stock and price they are willing to pay.
  • Based on bids a strike price is set - with anyone bidding above the strike price paying the strike price for the stock.
  • Advantage of tender is that the markt has an input as to the price of the stock.

Question 6

Offer for subscription - key points:

Answer 6

• Mainly used for new investment trusts
• Similar to offer for sale, in that a company or someone on their behalf invites the public to susbcribe to shares.
• Minimum subscription level must be met of orffer is withdrawn.
• Detailed prospectus and advertisement are required for full listing, nowadays published electornically on sponsor website.
• Issuing house fully underwrites the issue for an agreed commission, ensuring the company sells all shares on offer.

Question 7

Placing (selective marketing - key points:

Answer 7

• Company offers shares to selected clients, typically institutions.
• Shares marketed via broker, issuing house or other financial institution.
• Advantages
  
  • Prospectus does not need to be as detailed
  • Underwriting not required
  • Advertising not necassarily required.
  • Cheaper form of initial offering
• Disadvantages
  
  • Narrower shareholder base and lower levels of secondary market liquidity.
  • Dilutiion of existing shareholder holdings if they do not take up right to buy.

Most AIM companies use this method.

Question 8

Fixed price offer for shares - key points:

Answer 8

• A fixed price offer is where the shares are offered to investors at a fixed price as a price just below what can be expected for the offer to be fully subscribed.
• This is in order to encourage an active secondary market
• However, this may encourage over subscription, so guidance in the offering document will explain how the shares will be allocated (scaling down, random allocation, etc).

Question 9

Tender price offer for shares - key points:

Answer 9

• A tender offer is where investors specify amounts of shares they’d like to purchase and the amount they’re willing to pay
• A strike price is then determined with all successful bidders who bid at/above tis strike price payin the strike price for the shares
• The strike price is generally set low enough to ensure an active secondary market