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.
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
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
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
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.
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.
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.
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).
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