WK3b Flashcards
What is a stock
also known as common stock or equity, are shares in a firm’s ownership.
What are stockholders entitled to do (2)
- A stockholder is entitled to participate in the profits of the enterprise.
- Stockholders are entitled to vote at the firm’s annual meeting.
How do stockholders earn a return (2)
- price of the stock rises over time
- dividends are paid to the stock holder
What is residual claimant
Stockholders are paid last after all creditors have been paid
What does it mean that stockholders have limited liability
Even if a company fails completely, the maximum amount shareholders can lose is their initial investment.
What does a firm do when it goes public
Issues stock on the primary market in exchange for cash
What effects does going public have (2)
- It changes the firms ownership structure by increasing the number of owners
- it changed the firms capital structure by increasing the equity investment in the firm, this allows them to pay off there debts and increase their operations
When does an ipo happen
When a privately owned company issues shares of stock to be allocated to the general public
Why might stockholders not recieve dividends
The company may chose to reinvest the profit into the company hence increasing the value of the company and stockholders will receive capital gains
What is the process of going public (4)
will involve a security firm serving as the lead underwriter
- developing a prospectus
- pricing
- allocation of IPO shares
- transaction costs
What is developing a prospectus
Contains details discussions about the consonant and the financial statements and a discussion about of the risks involved
What does pricing mean
The offer price that the shares will be offered at the time of the IPO
Allocation of IPO
Most of the shares are sold to institutional investors
What happens before a company goes public
Company are valued by asset liability
The pricing process of a company
Look at demand and supply of the stock
Selling the shares for a lower price is called “leaving money on the table”
Timings of ipo
IPO tend to occur when frequently during bullish stock markets and when the market is doing well
What are initial returns of IPOs
Flipping shares is the process of purchasing the stock at its offer price and sell it shortly afterwards.
Gooogle IPO
- massive media attention (18 August 2004 )
- used a Dutch auction process instead of institutional investors
- price per share was $85
- end of the day the price increased by 18% to $100.34
What is an organised exchange
Auction markets that use floor traders who specialise in particular stocks
Structure of the secondary market (2)
- order driven market
- quote driven market
Order driven market
All participants are natural buyers and seller and there are no intermediary
Quote driven market
The price is decided by the dealer based on the current market conditions
Bid
Buy order specifying a price ( price )
Offer
We’ll order specifying s price (price is called an ask )
Best bid
standing buy order that bids the highest price bid
Best offer
standing sell order that has the lowest price offer.