Chapter 3: How Securities Are Traded Flashcards
What are privately Held firms?
Don’t have public securities in the market. Small # of shareholders (<2000), fewer obligation to release financial statements, raise funds through private placement, lower liquidity shares
What is private placement?
Primary offering in which shares are sold directly to a small group of institutional or wealthy investors
What is the primary market?
Market for newly issued securities, securities issued through underwriter to public, issuer receives the proceeds from the sale. (Seller is the company!)
What is an IPO?
An Initial public offering, primary company going public.
What is the secondary market?
Investors trade previously issued securities among themselves. The issuing firm doesn’t receive proceeds and is not directly involved.
Who are public offerings marketed by? What do they do?
Underwriters (IPOs, seasoned equity offering). Registration must be filed with the provincial securities commission in Canada, securities exchange commission in US.
They specialize in the sale of new securities to the public. Also known in Canada as investment dealers (primarily the major banks).
How do initial public offerings work with underwriters?
- Road shows to publicize new offering
- Bookbuilding to determine demand
-degree of investor interest provides valuable pricing information
-Underwriters purchase the shares from the issuing company (at a lower price) and then resell them to the public. - underwriter bears price risk
What are bought deals?
When investment banker buys all stocks and sells them to potential investors. The spread = the profit.
What is the Shelf Registration rule?
Allows firms to register securities and gradually sell them to the public for three years
-sold on short notice and in small amounts
What are the four types of markets?
Direct search - buyers and sellers seek each other
Brokered markets - an intermediary (broker) offers search services to buyers and sellers (ex. Real estate)
Dealer markets - dealers have inventories of assets from which they buy and sell (ex. Used cars)
Auction markets - traders meet at one place to trade (ex. NYSE)
What are the two types of orders?
Market Order: executed immediately at the current market price, a large order may be filled at multiple prices
Price-contingent order: Traders specify buying or selling price, a collection of limit orders waiting to be executed is call a limit order book
Explain the price-contingent orders?
Check notebook
What are the two trading costs?
Brokerage Commision: Explicit cost of trading, full service versus discount brokerage, discretionary accounts, wrap accounts (full-service brokers charge % of asset under management)
Spread: Implicit cost of trading (bid-ask spread)
What is buying on margin?
Borrowing part of the total purchase price of a postion using a loan from a broker. Investor contributed remaining portion.
Margin refers to the percentage or amount contributed by the investor.
What are the positives or negatives of buying on margin?
- You profit when the stock rises!
- You also expose yourself to greater downside risk
