1 / 35

Class Business

Class Business. Upcoming Homework. Investment Banking. Main intermediary in security issuance Terms Primary vs Secondary market Underwritten vs. “Best Efforts” offering Negotiated vs. Competitive Bid Red herring vs. Tombstone. Security Offerings.

loren
Télécharger la présentation

Class Business

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. Class Business • Upcoming Homework

  2. Investment Banking • Main intermediary in security issuance • Terms • Primary vs Secondary market • Underwritten vs. “Best Efforts” offering • Negotiated vs. Competitive Bid • Red herring vs. Tombstone

  3. Security Offerings • Public offerings: registered with the SEC and sale is made to the investing public • Shelf registration (Rule 415, since 1982) • Initial Public Offerings (IPOs) • Two IPO pricing puzzles • IPO stocks experience on average large returns on the first day of trading. • IPO stocks under-perform comparable publicly traded companies over the next five years.

  4. Number of IPOs (Bars) Average First-Day Returns (Diamonds) Source: Ritter (2004)

  5. Money Left on Table (Bars) Average First-Day Returns (Diamonds) MLOT = (Closing Price – IPO Price) ´(Number of Shares Sold at IPO Price) Source: Ritter (2004)

  6. Long-Term Performance of IPOs (1970-2002) Source: Ritter (2004)

  7. IPO Puzzles: Bookbuilding • Bookbuilding • Preliminary price set • Road show • Those who show a willingness to pay a higher price get more shares • Money “left on table” is compensation for revealing price information

  8. Trading • Types of orders • Locations • Margin buying • Short selling

  9. Order Types • Market buy: buy at best going price • Market sell: sell at best going price

  10. Bid-Ask Prices • The ask price is the price at which someone stands willing to sell. • The bid price is the price at which someone stands willing to buy. • Ask>Bid (always)

  11. Bid-Ask and Over-the Counter Markets • On Over-the-Counter markets: • Only dealers post bid-ask prices. • All buy orders buy at ask (the higher price) • Market buy • Limit buy • Stop buy • All sell orders sell at bid (the lower price) • Market sell • Limit sell • Stop Sell

  12. Trading on OTC Market • Investor places an order with broker. • Broker tries to locate the dealer offering the best deal. • Trades are negotiated through dealers who maintain an inventory of securities.

  13. Trading on Exchanges • Investor places an order with broker. • Brokerage firm contacts its commission broker or independent floor broker to execute order. • The specialist “makes a market” in the shares of one or more firms. • Can act as both a broker and a dealer • Maintains a limit order book. • Maintains a “fair and orderly market” by dealing personally in the stock.

  14. Bid-Ask and Exchanges • Any limit order is a bid-ask price • Any broker can post a limit order • These are arranged at specialist desk Last Trade = $50.00 market buy & stop buy orders executed at lowest ask market sell & stop-loss orders executed at highest bid

  15. Example of Limit Order Book • Last trade: $50 • If a market buy for 100 shares comes in, what price will it get? • At what price will the next market buy be filled? • If you were the specialist, would you want to increase or decrease your inventory?

  16. Costs of Trading • Commission • Fee paid to broker • Bid-Ask Spread • Bid: Price dealer will buy from you • Ask: Price dealer will sell to you • Market Impact • Larger orders impact the market price • Taxes • Government taxes realized capital gains for taxable investors.

  17. Exchange vs. Nasdaq • Lower direct costs to list and trade on Nasdaq • No physical location to maintain • Indirect costs of Trading on Nasdaq • Price Discovery • Collusion (Paul Schultz, Notre Dame) • Trading through (next slide)

  18. Trading Through • Dealer posts: bid $20, ask $20.15 for 1000 shares • Customer order #1: • limit order buy 1000 shares at $20.10 • Customer order #2: • Market sell 1000 • Dealer can • Buy 1000 shares at $20 (at her bid price) • Immediately sell for 20.10 • Pocket $100 – instant no risk

  19. Margin and Short Sales • Buying on Margin • Use borrowed funds to invest in securities. • Bullish strategy. • Short Sales • Sell securities without owning them. • Bearish strategy.

  20. Buying on Margin • Suppose you have $10,000 and you are very bullish in Microsoft. • You can borrow $10,000 from your broker at a 10% interest rate. • Buy $20,000 worth of MSFT stock. • What are the returns of this trading strategy if Microsoft stock increases or falls by 25% during the next year?

  21. Return of Buying on Margin 15,000 25,000 -11,000 -11,000 4,000 14,000 40% -60%

  22. Buying on Margin • Federal securities law mandate limitations on borrowing. • Limit is defined in terms of “the margin”. • A=L+E implies E=A-L = Price*Shares - Loan • Initial margin must exceed 50% • Maintenance margin set by broker • Value of shares in previous example initially=$20,000 • Value of loan = $10,000 • Initially, margin is (20,000-10,000)/20,000 = 50%

  23. Example of Margin Calls • Suppose now, that MSFT dropped within a year by 30%. • Broker has set maintenance margin at 25%. • The securities are then worth just $14,000. • Your margin equals: • Your current margin is lower than the maintenance margin and you will receive a margin call from your broker.

  24. Three Possible Options to Satisfy Margin Call • Close out position • Reduce your loan • Increase your equity position

  25. Risks of Margin Purchases • Broker gives you a margin call if the maintenance margin is not met. • Broker can sell your securities without asking for your permission • The potential losses can exceed your initial investment. For example: Initial PositionIn One Year MSFT: 20,000 10,000 Loan: 10,000 11,000 Equity: 10,000 - 1,000

  26. Short Selling • Securities are sold by someone who does not own them. • How does this work? • Borrow the securities from somebody, • Sell the securities at the current market price, • Pay dividends to the original owner, • Eventually, buy back the securities and return them to the owner along with fee for borrowing

  27. Short Selling • The broker keeps the proceeds • Broker requires a margin account as collateral. • A = L + E • Total assets = cash from selling stock + equity • Cash from selling stock cannot be invested elsewhere • Equity can be cash or some kind of security • The value of the stock is a liability (varies over time) • Always true E = A – L • As value of asset shorted increases, equity drops

  28. Short Selling • Suppose the current price of GM is $50. • You expect the price to fall. • You decide to short sell 2000 shares • If initial margin must be 50%, how much equity do you need to post in your margin account? • Value of asset shorted = 2000*50 = 100,000

  29. Short Selling • Suppose the price of GM suddenly jumps to $55. What is your margin? What is your total gain/loss? • Assets have not changed: A = $150,000 • But liabilities have: L=2000*55=110,000 • E=A-L implies E=150,000-110,000=40,000 • Value of asset owed = 2000*55 =110,000 • You have lost $10,000 of equity.

  30. Three Possible Options to Satisfy Margin Call on Short Position • Close out position • Reduce liabilities • Buy back shares • Add more equity to your account

  31. Risks of Short Sales • Broker can force you to cover short position • If borrowed stocks are called back from lender and broker cannot borrow different shares. • If margin call is not satisfied. • What is the limit on losses due to short selling?

  32. Returns and Short-sales • You have $100 of equity • Current price of Intel = $50 • Current price of Microsoft = $25 • You are bearish on Intel and bullish on MSFT • Short 1 share of Intel (get $50 now) • This money cannot be invested elsewhere • Assume return is zero. • Buy 4 shares of MSFT • Assume these shares satisfy margin requirement

  33. Returns and Buying on Margin • You have $100 of equity • Current price of Intel = $50 • Current price of Microsoft = $25 • You are very bullish on MSFT • Invest 100% of your investment equity in MSFT • Borrow $50 and also invest that in MSFT • Rate on loan is rF

  34. Example • You have $1000. • Short sell $500 of Nike • Buy $600 of Oracle • Buy $900 of Intel • Returns: • Nike: 5% • Oracle: -6% • Intel: 3% • What is the return on your portfolio?

  35. Example • Weight in Nike: -50% • Weight in Oracle: 60% • Weight in Intel: 90% • Return = -.5(.05) + .6(-.06) +.9(.03)= -.034%

More Related