1. STOCK [EQUITY] MARKETS CHAPTER 10 Dr. David P Echevarria

2. PRIVATE EQUITY • Venture Capital • Financing for high risk start-up ventures • Dollars for Equity position • a. Receive lettered stock (SEC Rule 144a) • VC profits when venture goes public (IPO) • Secondary registration required Dr. David P Echevarria

3. PUBLIC EQUITY: COMMON STOCK • Corporate Charter; shareholder rights • Elect directors • Amend the charter • Raise capital • Approve mergers • Preemptive rights • Classes Of Common • Voting • Non-Voting • Weak voting Dr. David P Echevarria

4. PUBLIC EQUITY: COMMON STOCK • Lettered Stock • Private issue to investors • May be privately resold to qualified investors • Covered by SEC rules (i.e., 144a) D. Rights Offerings • Right granted by the corporate charter • New shares must be offered to current holders (rights) • Rights (R) may be exercised or sold to public Dr. David P Echevarria

5. PREFERRED STOCK • Hybrid Security • Fixed payouts like bonds • An equity investment like common • Attributes Of Preferred Stock • Par value; meaningful in bankruptcy or liquidation • Cumulative Features; missed dividends must be made up • Participating; in years of high profits, an extra dividend • Non-Voting; except as provided in corporate charter • Convertibility; typically into common Dr. David P Echevarria

6. NEW ISSUES OF STOCK (IPOS) • Typically below current market prices • Process • Developing Prospectus • Price the issue • Distribute the issue • Transaction Costs: Spread, fees • Shelf Registrations • Corporation can plan issues up to two years to completion • Permits issuer to time issuance for best price action Dr. David P Echevarria

7. SECURITY MARKETS • Organized Exchanges • NYSE, AMEX, Tokyo (TSE), London (LSE), etc • Restricted participation, trading rules strictly specified • Traders (members) hold seats (Specialists, Floor traders) except NYSE – buy “license” to trade • Sale of seats must be approved (Pre-qualifications must be met) • Transactions tend to be centralized; advantageous for price discovery Dr. David P Echevarria

8. SECURITY MARKETS • Over-The-Counter (OTC) NASDAQ, • Government Sec, Money Markets, Foreign Exchange • Transactions tend to be decentralized; price discovery less efficient • Liquidity more expensive in terms of bid-ask spreads • Bulletin Board: price listing for "penny" stocks • Pink Sheets: teeny-tiny fractional price low volume stocks Dr. David P Echevarria

9. SECURITY MARKETS • Stock Market Information • Ticker Symbol • 52-Week Price Range (Hi-Lo) • Dividend • Dividend Yield • Price-Earnings Ratio (TTM) • Volume (in hundreds = round lots) • Closing Price, change from previous close • Indexes (DJIA, SP500, NASDAQ) Dr. David P Echevarria

10. Fidelity Active Trader Pro Version 9.9 Dr. David P Echevarria

11. SECURITY MARKETS • Auction Markets • Orders of traders are directly matched • NYSE Members may act as dealers (specialists) or brokers (traders) E. Cost of Liquidity Services: Bid–Ask Spread • Bid = highest unexecuted price to buy • Ask = lowest unexecuted price to sell Dr. David P Echevarria

12. MARKET MONITORING • SEC: reporting requirements • www.sec.gov/edgar (web site for SEC reports) • Sarbanes-Oxley (2002) • Cannot audit books of firm any one of whose CEO or CFO formerly worked for the auditing firm • Require outside directors to be on audit committee • Members of audit committee may not receive special compensation • Require CEO / CFO certification of correctness • Failure to comply draws fines and imprisonment Dr. David P Echevarria

13. HOMEWORK QUESTIONS • What rights do common stockholders have in the Corporate Charter? • What characteristic of preferred stock causes sensitivity to interest rate changes? • What does it mean when a preferred stock is cumulative & participating? • What are preemptive rights and why are they important to common stockholders? • How do we measure the cost of liquidity? • What is the major requirement of Sarbanes-Oxley on the company’s management? Dr. David P Echevarria