1 / 32

CHAPTER 3

CHAPTER 3. Securities Markets. Primary vs. Secondary Security Sales. Primary New issue Key factor: issuer receives the proceeds from the sale Secondary Existing owner sells to another party Issuing firm doesn’t receive proceeds and is not directly involved. How Firms Issue Securities.

lluvia
Télécharger la présentation

CHAPTER 3

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 3 Securities Markets

  2. Primary vs. Secondary Security Sales • Primary • New issue • Key factor: issuer receives the proceeds from the sale • Secondary • Existing owner sells to another party • Issuing firm doesn’t receive proceeds and is not directly involved

  3. How Firms Issue Securities • Investment Banking • Shelf Registration • Private Placements • Initial Public Offerings (IPOs)

  4. Investment Banking Arrangements • Underwritten vs. “Best Efforts” • Underwritten: firm commitment on proceeds to the issuing firm • Best Efforts: no firm commitment • Negotiated vs. Competitive Bid • Negotiated: issuing firm negotiates terms with investment banker • Competitive bid: issuer structures the offering and secures bids

  5. Figure 3.1 Relationship Among a Firm Issuing Securities, the Underwriters and the Public

  6. Figure 3.2 A Tombstone Advertisement

  7. Shelf Registrations • SEC Rule 415 • Introduced in 1982 • Ready to be issued – on the shelf

  8. Private Placements Private placement: sale to a limited number of sophisticated investors not requiring the protection of registration • Allowed under Rule 144A • Dominated by institutions • Very active market for debt securities • Not active for stock offerings

  9. Initial Public Offerings • Process • Road shows • Bookbuilding • Underpricing • Post sale returns • Cost to the issuing firm

  10. Figure 3.3 Average Initial Returns for IPOs in Various Countries

  11. Figure 3.4 Long-term Relative Performance of Initial Public Offerings

  12. Types of Secondary Markets • Direct search • Brokered • Dealer • Auction

  13. Types of Orders Instructions to the brokers on how to complete the order • Market • Limit • Stop loss

  14. Figure 3.5 Limit Order Book for Intel on Archipelago

  15. Figure 3.6 Price-Contingent Orders

  16. Trading Mechanisms • Dealer markets • Electronic communication networks (ECNs) • Specialists markets

  17. U.S. Security Markets • Nasdaq • Small stock OTC • Pink sheets • Organized Exchanges • New York Stock Exchange • American Stock Exchange • Regionals • Electronic Communication Networks (ECNs) • National Market System

  18. Nasdaq • National Market System • Nasdaq SmallCap Market • Levels of subscribers • Level 1 – inside quotes • Level 2 – receives all quotes but they can’t enter quotes • Level 3 – dealers making markets • SuperMontage • OTC Bulletin Board

  19. New York Stock Exchange • Member functions • Commission brokers • Floor brokers • Specialists • Block houses • SuperDot

  20. Table 3.6 Electronic Computer Networks (ECNs)

  21. Market Structures in Other Countries • London - predominately electronic trading • Euronext – market formed by combination of the Paris, Amsterdam and Brussels exchanges • Tokyo Stock Exchange

  22. Costs of Trading • Commission: fee paid to broker for making the transaction • Spread: cost of trading with dealer • Bid: price dealer will buy from you • Ask: price dealer will sell to you • Spread: ask - bid • Combination: on some trades both are paid

  23. Margin Trading • Using only a portion of the proceeds for an investment • Borrow remaining component • Margin arrangements differ for stocks and futures

  24. Stock Margin Trading • Maximum margin is currently 50%; you can borrow up to 50% of the stock value • Set by the Fed • Maintenance margin: minimum amount equity in trading can be before additional funds must be put into the account • Margin call: notification from broker you must put up additional funds

  25. Margin Trading - Initial Conditions X Corp $70 50% Initial Margin 40% Maintenance Margin 1000 Shares Purchased Initial Position Stock $70,000 Borrowed $35,000 Equity 35,000

  26. Margin Trading - Maintenance Margin Stock price falls to $60 per share New Position Stock $60,000 Borrowed $35,000 Equity 25,000 Margin% = $25,000/$60,000 = 41.67%

  27. Margin Trading - Margin Call How far can the stock price fall before amargin call? (1000P - $35,000)* / 1000P = 40% P = $58.33 * 1000P - Amt Borrowed = Equity

  28. Short Sales Purpose: to profit from a decline in the price of a stock or security Mechanics • Borrow stock through a dealer • Sell it and deposit proceeds and margin in an account • Closing out the position: buy the stock and return to the party from which is was borrowed

  29. Short Sale - Initial Conditions Z Corp 100 Shares 50% Initial Margin 30% Maintenance Margin $100 Initial Price Sale Proceeds $10,000 Margin & Equity 5,000 Stock Owed 10,000

  30. Short Sale - Maintenance Margin Stock Price Rises to $110 Sale Proceeds $10,000 Initial Margin 5,000 Stock Owed 11,000 Net Equity 4,000 Margin % (4000/11000) 36%

  31. Short Sale - Margin Call How much can the stock price rise before a margin call? ($15,000* - 100P) / (100P) = 30% P = $115.38 * Initial margin plus sale proceeds

  32. Regulation and Trends in Markets • Major regulations • Securities Acts of 1933 • Securities Acts of 1934 • Securities Investor Protection Act of 1970 • Trading scandals and reactions • Sarbanes-Oxley Act

More Related