Primary Market Makers and Market Indices Flashcards

1
Q

Primary and secondary markets:

A
  • 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.
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2
Q

Alternative Investment Market (AIM)

A
  • 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
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3
Q

Advantages and disadvantages of investing in the primary market?

A
  • 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
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4
Q

Offer for sale - key points:

A
  • 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
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5
Q

Pricing of initial offers of shares - key points:

A
  • 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.
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6
Q

Offer for subscription - key points:

A
  • 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.
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7
Q

Placing (selective marketing - key points:

A
  • 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.

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8
Q

Fixed price offer for shares - key points:

A
  • 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).
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9
Q

Tender price offer for shares - key points:

A
  • 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
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