Chapter 3
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Chapter 3






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Chapter 3 Chapter 3 Presentation Transcript

  • Primary vs. Secondary Security Sales
    • Primary Market
      • New issue
      • Issuer receives the proceeds from the sale
    • Secondary Market
      • Existing owner sells to another investor
      • Issuing firm receives nothing; is not involved
  • Investment Banking and Underwriting
    • Investment banker—specialist in issuing securities
      • advice—concerning market conditions
      • underwriting—take risk of issuing securities
      • distribution—syndicates (diversification)
    • Prospectus—documents the new issue; indicates the terms of the issue, use of funds, and so forth
  • Investment Banking Arrangements
    • Types of Arrangements:
      • Negotiated purchase—issuing firm negotiates terms with investment banker
      • Competitive bid purchase—investment bankers bid on the issue
      • Best Efforts—investment banker sells on a contingency basis; gives a “best effort” to sell the issue, but there is no firm commitment that the entire amount will be sold
  • Public Versus Private Placements
    • Public placements (offerings)—must register with the SEC; sold to the public
      • Initial Public Offerings (IPOs)—first time a sells stock to the investing public
        • IPOs generally are underpriced
        • Investment bankers generally are involved in the market after the initial offering of the stock
    • Private placements—sell to a limited number of sophisticated investors; not registered
      • Institutional investors
      • Market is more active for debt than equity
  • Stock (Bond) Markets
    • Organized exchanges—physical locations
      • NYSE
      • AMEX
    • OTC market—electronic network
      • NASDAQ
    • Third market—trading exchange-listed stocks on the OTC
      • Institutional investors with large blocks
    • Fourth market—direct trades of exchange-listed stocks
      • Institutional investors with large blocks
      • Electronic Communications Networks (ECNs)
  • Types of Orders
    • Orders represent instructions to brokers (agents) as to how to execute transactions
    • Market order —transact at the best possible price when the order reaches the market
    • Limit order —execute the order only if a specified price, or a better price, exists
    • Stop loss order —initiate a market order when a specifies price is reached
    • Time order —establish time limits
      • day order—the order “dies” (expires) at the end of the day
      • good 'til canceled (GTC)—the order stays alive until canceled
  • Stock Market Participants—Exchange Seats
    • Commission Broker —works for a company with a seat on the exchange
    • Floor Broker —independent, freelance broker; “farms out” to others
    • Registered (floor) Trader —trades only for his or her own private account
    • S pecialist —market maker; specializes in certain types of stocks (industries)
  • Margin Trading
    • Borrow to purchase financial assets
    • Important computations:
  • Margin Trading
    • Example: An investor wishes to buy 100 shares of IBM, which currently is trading at $100. The brokerage firm imposes a margin requirement equal to 60%, with a maintenance margin of 35%.
    • The market value of the purchase is $10,000 = $100 × 100
    • The investor must have $6,000 = $10,000 × 0.60 of funds to purchase 100 shares of IBM
    • $4,000 = $10,000 - $6,000 = $10,000 × 0.40 is the amount borrowed from the brokerage firm.
  • Margin Trading
    • A margin call will be issued if the price of IBM drops below $61.54: