Chapter 3 In Class Notes Flashcards
Primary vs. Secondary Market Security Sales
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Primary
New issue created/sold
Key factor: Issuer receives proceeds from sale
Public offerings: Registered with SEC; sale made to investing public
Private offerings: Not registered; sold only to limited number of investors with restrictions on resale
Secondary
Existing owner sells to another party
Issuing firm doesn’t receive proceeds, is not directly involved
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Why aren’t private offerings not registered.
Because they don’t need to because we will never see them as small people. Only bigger people buy them. People do private because they are cheaper and don’t have to register.
First sale of stock by a formerly private company�
IPO
Purchase securities from issuing company and resell them. They give a lot of advice to the company. This person is an investment banker. What’s another name. This person takes the risk.
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Underwriter
Description of firm and security being issued.
The SEC looks at this and within 20 days they will get back and tell the company if they can sell the stock or not, depending on if they disclosed the property right. The SEC makes sure the company knows all the risk.
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prospectus
When a company first issues stock where does it go to.
The lead underwriter. The underwriter may not want all the risk so they might have other people help invest.
SEC Rule 415
Security is preregistered and then may be offered at any time within the next two years
24-hour notice: Any or all of preregistered amount may be offered
Introduced in 1982
Allows timing of issues
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shelf registration
Most public offerings are underpriced?
True. They usually go up way more after they are first offered. The average is about 10% in the day they are offered.
Functions of Financial Markets
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Main purpose is to allow people to get capital to startup a business or to improve business.
Overall purpose: Facilitate low-cost investment
Bring together buyers and sellers at low cost
Provide adequate liquidity by minimizing time and cost to trade and promoting price continuity
Set and update prices of financial assets
Reduce information costs associated with investing
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4 Types of markets
Direct Search Markets
Brokered Markets
Dealer Markets
Auction Markets
example of dealer market
Nasdaq. Market where there are many people ready to.
Example of auction market
NYSE. All the transactions happen in one place.
Direct Search Markets
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Buyers and sellers locate one another on their own
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Brokered Markets
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Third-party assistance in locating buyer or seller
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Brokered Market
Where somebody wants to sell a big block of stock the brokered market sells it for them in one block all together for a fee.
