Issuing Securities Flashcards
What is an Initial Public Offering (IPO)?
The first offering of stock to the general public
Who is the Underwriter and what does it do?
A firm (often investmentfirm) that buys an issue of securities from a company and resells it to the public
What is the Spread?
It is the difference between the public offering price and the price that the price paid by the underwriter
What is the Prospectus?
A formal summary that provideds information on an issue of securities
What is Underpricing?
It is issuing securities at an offering price that is set below the true value of the security (closing price on the first trading day)
What ways can shares in an IPO be sold?
Fixed price offerings (UK)
Bookbuilding method (most IPOs in the US and Europa)
Auctions (rarely used, google IPO)
What is the Bookbuilding method?
The underwriter builds a book of likely orders from potential investors. The orders are not binding but helps setting the issue price
What is the Forward market (Grey market)?
It is a place to trade in shares of the IPO before the shares become available
Underpricing formula
(Closing price - offering price)/(offering price)
What is the “Winner’s curse”?
We have two types of traders that apply for shares, uninformed and informed traders. The uninformed will apply to any shares if they expect a return of atleast 0 and informed traders apply if they know the post issue price will be high. Shares are assigned pro rata. Uninformed traders get all shares in bad IPOs and not all the shares they apply for in good IPOs.
What is a Seasoned equity offering (SEO)?
An equity offering of a firm that has gone public before
What is a Rights issue?
Issue of securities is offered only to the current stockholders. Every existing share gives one subscription right. These subscription rights are traded
How many subscription rights are needed to buy one share?
The ratio between the number of old shares N and the new shares M.
M for N rights offering
Why rights issues?
This protects existing shareholders against wealth transfer
Why is cash from investors always expensive?
Issuance costs
Underwriting fees
Underpricing of securities
