The Primary And Secondary Market Flashcards
What is the primary market
New market for new issues/ securities
1) new participants who wish to obtain listing for the first time and sell to new investors
2) Co with stock exchange listing who wish to bring new securities to the market (rights issues to raise finance for expansion)
New issues = sale of new securities
What is flotation
Process why which co puts it shares on to a stock market for the first time (IPO - initial public offering)
Existing securities for unlisted Co
Enables increase exposure and marketable shares
If directors decide to obtain a SE quotation they must undergo stringent vetting process
Expensive/ min cost of £500,000
How to companies become listed
Obtaining listing on the main market stock exchange (LSE) co must satisfy following criteria of UKLA (division of FCA)
Incorporation - under law with legal docs and set up as a plc
Accounts - recent set of published and auditors financial accounts
- no more than 6months old
- cover 3 year period
Track record - independent trading and rev earning record covering 3year period
The Directors - experienced directors collectively in all aspects of running the business (finance, strategy)
-individuals must be known in the industry
Working Capital Requirement - Co must demonstrate has enough WC for immediate needs, settle debts as they fall due and also for next 12 months
-market capitalisation of £700,000
Reasons why directors opt for floatation
Raise finance/ access capital markets (expansion)
Reduce dependency on debt cap or banks don’t lend more/ source or finance unavailable
Shareholders unwilling or unable to commit to additional capital
Widen investment pool
Marketability of shares increased
Co can raise profile in press/ publicity
Market/ competitor perception (financial stability and dominance in market sector)
Directors wish to retain staff by offering share schemes (only marketable if listed)
Original founders wish to release some/ all of original capital (difficult if held privately)
Funding investors want exit route due to short term focus (venture capitalists)
- decision must be based on stage of Co life cycle
- time consuming and expensive
Reasons for new issues
Sale of securities to raise additional finance
Require non financial benefits (quoted on SE or rights issue)
As Co expands faces issues dealing with;
- need for additional finance for major projects
- replacement if debt cap
- lack of marketable shares
-Co is either new or unlisted plc joining for first time
What is the secondary market
Historically physical market now conducted using screens/ telephones/ computers
Place shares are traded
Second hand securities/ shares already issued and been brought at least once
Securities traded through intermediaries
UK - LSE is active and efficient secondary market
Who are the market participants In secondary markets
Investors (individual or institutional) who buy/sell securities for own purpose (long term or speculate)
Brokers act on behalf of investors and control account with them/ some hold shares as nominee for clients
-intermediaries take a cut/ commission
Market Makers (orgs or investment banks) buy/sell shares to create selling market for particular securities
-post bid/ offer prices available for investors
Outline why it’s important to have well regulated secondary markets
Vital for Efficiency
Without it no means of disposal for securities purchased in primary markets
Gives consumer confidence/ liquid market
Level playing field for trading
