Boys R Buzzin
providers of private capital
-Institutional investors--are entities which pool $ to purchase securities, real property, and other investment assets or originate loans. •Examples: banks, credit unions, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds.
Primary Market
-the market for the initial sale of securities -The proceeds from the sale of securities to investors go to the issuers of the securities •Primary market provides businesses with funds to operate and expand •Primary market provides governments with means to carry on their activities •Underwriter facilitated
market quality components
1. Market efficiency-refers to the degree to which market prices reflect all available and relevant information A.Transaction costs-all costs (direct and indirect) that are related to trading in securities B.Price discovery-is the overall process of setting the proper price of an asset that depends on market structure, liquidity, and information flow. Essentially, it is finding where supply meets demand
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1. Market integrity-refers to market fairness, that is, all participants have equal access to the market and relevant information A.Insider trading (trading ahead of price-sensitive announcements) B.Market manipulation (rumors, etc.) C.Broker-agency conflict (front-running, etc.)
equity: where is it traded?
1.Dealer markets •Over-the-counter market where 35k securities are traded by dealers who quote prices at which they are willing to buy/sell •NASDAQ used to be this way, now it allows for electronic trading 2.Electronic communication networks (ECNs) •True trading systems that can automatically execute orders without human presence •Low cost & high speed of execution, anonymity, LOB •Example: BATS 3.Specialist markets •Exchange assigns a specialist to every stock for trading •Maintain a"fair and orderly market" •Have been largely replaced by ECNs •Example: NYSE
2 types of transaction costs
1.Explicit costs (aka direct)-easily observable and quantifiable •Itemized separately and investors pay for these just like any other expenses •Example: investment banker or broker fees; costs of acquiring information; taxes; and transfer fees
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2.Implicit costs (aka indirect or execution costs)-not easy to observe and quantify •Example: •the difference b/w the price at the time the decision to buy/sell is made and the price actually paid (called price impact or market impact); •the bid-ask spread; •market timing costs (when the stock price moves in response to factors unrelated to the particular transaction); •opportunity cost (loss in profits from trades that are missed or not executed) •Can be more than 3x the size of explicit costs
ALTERNATIVE METHOD OF RAISINGFUNDS: CROWDFUNDING
Crowdfunding--is a method of raising capital through the collective effort of friends, family, customers, and individual investors. •Taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure •Crowdfunding platforms: Kickstarter, Indiegogo, Patreon, Crowdrise •Investor-focused CF portals: Wefunder and Startengine
organizing trading
Dealer markets are the markets in which liquidity is supplied by professionals •Dealers, or market makers, electronically display the prices at which they are willing to "make the market," that is, to buy or sell a security. •Dealers make money on the bid-ask spread and incur costs from hiring staff, purchasing equipment, etc. •Examples: bonds and foreign exchanges trade primarily int he dealer markets; while stock trading on the NASDAQ is a prime example of an equity dealer market •Limit Order Book-is a record of outstanding limit orders (price and quantities) •These orders cannot be executed immediately b/c there are no counter parties willing to trade at the limit order P •In 2000, the SEC created a centralized LOB that keeps track of limit orders on exchanges electronically •Automatically matches the best pair of orders in the system
benefits of secondary markets
Liquidity-the ease with which an asset, or security, can be converted into cash without affecting its market price •Liquidity is a valuable component of an asset price •Higher(lower) liquidity results in lower(higher) transaction costs •Liquidity measures: spread, price impact, trading volume ,order depth
Aftermarket
Once the shares begin to trade in the aftermarket •The quiet period begins and lasts until 40 days after the stock starts trading. •During this time, the company must not issue any new info that is not already contained in the registration statement •Its purpose is to create a level playing field for all investors by ensuring that everyone has access to the same information at the same time. •The lockup provision becomes effective •Large investors and employees cannot sell the stock in the aftermarket for 180 days to prevent depressing the stock P •If the trading in the aftermarket goes well, the underwriters sometimes remove this restriction
Trading markets
Primary Market-A market where new securities are bought and sold for the first time (a "new issues"market) •SecondaryMarket-A market for existing (used)securities rather than new issues •Traditional trading markets such as NYSE, Nasdaq •Private Markets-a market that enables private companies to effectively conduct complex fin.transactions (including buying/selling private stock)and better communicate with their stakeholders •Limited to large "accredited investors" •Examples:Second Market, Nasdaq Private Market
other ways public companies raise funds
The fee that the underwriter earns will be the initial price paid to the issuer for taking on the corporate bond, minus the price at which the corporate bond is offered to the public. •Evidence suggests that companies issue more debt, more debt relative to investment spending, and more debt compared to equity when interest rates are low relative to historical rates
SEC Filing
The next step is to file the registration statement with the SEC •Includes information on •Financials •Use of proceeds •Business and strategy •Risk factors •...but no pricing information •SEC reviews the document and can either accept it or send it back for additional work
Aftermarket
Underwriters typically sell more shares to investors at the offering price than it buys from the issuer •Once the security starts trading in the secondary market... •If demand is high and the price goes up, the underwriter will cover its short with shares from exercising the Greenshoe (or over allotment) option •Limited to 15% of the offering •If demand is low and the price goes down, the underwriter will cover its short with shares purchased in the market •Price stabilization bids(have to be flagged so that they are transparent and must be at the offer price or less)
Secondary Market
the market for trading assets among investors •Issuers do not get any proceeds from the sale of securities in this market •Traditional trading markets such as NYSE,Nasdaq
crowdfunding
•Advantages: •Reach-access to 1000s of accredited investors •PR & Marketing-promote through social media and email newsletters •Feedback on how to improve your product •Efficiency-streamlines your fundraising efforts by building a comprehensive profile •Fees-low fees •Disadvantages: •Scrutiny and rejection-many platforms have very detailed rules as to what's accepted •Competition-CF platform shave 1000s of campaigns •Leakage of valuable info-If your product is not patented, risk of someone stealing your idea •Risk of failure-hard to recover if your campaign fails
Road Show
•After SEC finishes the review with major comments, issuer can set file range(expected offer price) •Cannot market issue without a price •Usually $2 wide •Prints red herring •Also known as preliminary prospectus •Includes a legend in red ink on the cover stating that the registration statement has not yet become effective
latency
•All exchanges are concerned about the speed at which the orders are executed, which is governed by the venue's latency •Latency is any delay or lapse of time between a request and a response •For example, BATS Exchange executes trades in less than 250 microseconds on average! •Co-location is important •Traders co-locate their computers near exchanges so that the information can travel as fast as possible •Some use microwave networks to exchange signal between venues •In 2011, the latency b/w Chicago and NY exchanges dropped from 7.5 to 2.5 millisecond because of the new microwave network
ATS
•Alternative Trading Systems-bring buyers and sellers together electronically via crossing networks •Many exchanges like IEX or BATS started as ATS •Two types: ECN and Dark Pools
providers of private capital
•Angel investor-a HNW person who provides financial backing for small startups at their early stage in exchange for ownership stake and in hopes to obtain a higher rate of return than would be given by more traditional investments. •focused on helping startups take their first steps, rather than the possible profit they may get from the business. •Example of firms:DoorDash, PayPal, LinkedIn
private capital markets
•Benefits •Less disclosure •Small group of investors •May be a faster way to obtain $ •CEOs of public firms are too focused on quarterly earnings and not enough on LT value creation, unlike managers of private firms •Costs •Little to no liquidity •You commit your investment for many years •Private investment is more labor intensive •Restrictions on type of investor that can participate
broker agency conflicts
•Broker-agency conflicts-arise from a broker failing to honor its duty to customers •Front-running-is the illegal practice of a broker trading ahead of a client order to take advantage of the anticipated price impact of the client's trade
direct costs of trading
•Commissions-fees charges by brokers/dealers for facilitating the trade •Vary significantly depending on financial instrument and the brokerage firm •Commissions on options, futures, and ETFs are usually higher •Competition and tech advances drove fees down to zero*(*-limitations include # of trades, type of assets (OTC vs exchange traded; domestic vs int'l, etc.) •For large customers, commissions are negotiable
consequences of NMS
•Critics argue that by mandating that orders be routed immediately to the trading venue with the lowest price, despite the cost, there has been a proliferation of trading venues •Referred to as market fragmentation •In order to attract order flow, exchanges and ATS shave incentive programs and innovative order types •All of this makes trading environment complex and difficult to regulate
Dark Pools
•Dark pools--Private exchanges run by either major brokers, exchanges, or private firms •Named so for their complete lack of transparency •Trade execution details are released with a delay •Used by large institutional investors wishing to conceal their trading intentions •Why? •Prices seen by investors on exchanges may not reflect real market prices •Easy prey for predatory HFTs, since pool owners secretly sell them access to their dark pool •Pool participant may not get the best price
private placement offering steps
•Deal launch--initiates the window of time from which the issue is offered to investors, to when a decision must be made (1-3 weeks) •Negotiations step kicks off discussions between the issuer and the investor on the specifics involved with the investment, such as pricing or legal terms. •Information Gathering--the investor will complete their due diligence on the company, which often involves the following: Reviewing fin. statements;Meeting with the mgmt; Assessing LT outlook and market position; Industry analysis
other ways public companies raise funds
•Debt •The issuance of bonds essentially creates a loan between a group of investors and the corporation. •The issuing process is very similar to the IPO and SEO process •The issuer hires an underwriter(s) that helps with the filing process, buys the bonds from the issuer and sells them to interested investors (often large institutional investors that are polled to determine the appropriate coupon and maturities)
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•Disclosure regulations-focus on ensuring that market participants fully disclose information so that investors can make informed decisions •In the US, the SEC does not decide how much investors should pay for shares •Instead, they require corporations to disclose information that allow investor to make informed decisions
dealer vs market spread
•Each dealer has their own quoted spread, called the dealer spread •Dealers make money by buying low and selling high •Thanks to the spreads offered by all of the dealers, we get the market spread, which is simply the best ask and the best bid prices selected from all available quotes
NBBO
•Each exchange maintains its own Limit Order Book •They all are connected to the Consolidated Tape system that analyzes the data from each exchange and disseminates the official NBBO •RegNMS' Order Protection Rule ensures that orders are executed at the NBBO or better •If an exchange receives an order and is not able to execute it at the NBBO, the order must be sent to another exchange that is posting the NBBO (unless an exception applies) •If an exchange executes at an inferior to NBBO price, it will be fined
Types of Underwriting
•Firm Commitment •Underwriter guarantees the sale of all shares by purchasing the security for resale to the public •Investment bank risks more, the issuer risks less •Buy at one price, resell at higher price (∆ in$ is called underwriting spread) •In US, the sale price is stated in the offering documents and is firm; but inSingapore, Portugal, and Japan price discrimination is allowed (employees and domestic investors, for example) •Best Efforts •Underwriter agrees to use only their best efforts to sell the issuer's securities. No commitment to purchase any unsold securities •Banker offers the issue continuously until the issue is successful or terminated •Typical for smaller or less reputable firms •All-or-none •Unless the entire issue is sold at the offering price, the deal is voided, and the underwriter will not receive any compensation.
other ways public companies raise funds
•Follow-on offers (aka SEOs)-refers to any issuance of shares that follows a company'sIPO •Reasons for SEO: •Raise new money to fund operations •Grow the business •Buy new equipment and machinery •Purchase land or buildings •Pay down debt •Make mergers and acquisitions •Recapitalize the business •Increase working capital
Other ways public companies raise funds
•Follow-on offers (aka SEOs)-refers to any issuance of shares that follows a company'sIPO •SEO is any issuance of shares to the public post-IPO, whereas aSecondary Offering is the sale of shares from existing share holders (founders, for example) .•An IPO and a Follow On Offering can both consist ofPrimary Offerings (shares sold by the company) andSecondary Offerings (shares sold by existing shareholders).While these two terms are sometimes used interchangeably, they are in fact different things
other ways public companies raise funds
•Follow-on offers (aka SEOs): •Evidence suggests that firms that conduct SEOs are overpriced •Evidence also suggests that offering firms experience poor stock price and earnings performance in the 3 year period subsequent to the offering.
Costs of Going Public
•High offering expenses •Legal and accounting fees for preparing the registration statement •Underwriting fees (gross spread) for placing the issue and making a market in the securities •Most IPOs are underpriced •Have a large price increase on the first day •Takes a lot of management time that could be used for building the company •Includes post-IPO compliance with securities laws •New investor base may shorten horizon of firm's decision-making •Have to tell the world (and your competitors) all about your business
secondary market process
•If you want to buy/sell a security, you will do so through a brokerage firm (MerillEdge, Charles Schwab, Fidelity, Vanguard, etc.) •Then, brokers have several avenues by which they can execute a trade •There are three such avenues-or trading systems-in the U.S.: dealer markets, ECNs, and specialist markets
ECN
•In 1998, the SEC authorized the creation of ECNs •BaxterFX; Hotspot FX; Fastmatch; Track ECN; Brut ECN; Chi-X ECN •ECNs operate like exchanges, often having a limit order book, but deal with institutional clients •Provide anonymity
trade reporting
•In the US, exchanges report trades to the Consolidated Trade System and quotes to the consolidated Quotation System •Both parts of the consolidated Tape System. •Non-exchanges (like ECNs) report their trades to trade Reporting Facility
providers of private capital
•Individual (retail) investors-are non-professional investors who invest much smaller amounts •In contrast to institutional investors, individual investors have smaller influence and impact on the market and the companies they invest in; they do not have the advantage of professional research, traders, and portfolio managers
direct costs of trading
•Information costs-the costs associated with obtaining information necessary to trade. Examples: •time, effort, and energy to learn how to use the online trading tool offered by E*Trade •Costs of learning about the fin instrument you wish to trade(financial reports, analyst recommendations) •Banks, pensions funds, and mutual funds make significant investments to forecast economic and industry conditions and predict which assets would perform best in those conditions •Some products (like commodities) require an advice of a lawyer, accountant, financial advisor
insider trading
•Informed traders are interested in collecting information others might not have •A commodities futures trading firm in NYC employs a meteorologist to forecast weather in South America •Brokerage firm employs analysts to study specific firms ,industries, regions and countries to forecast stock Ps •Observation of client order flow can provide brokers with valuable information on the state of the market
IPO
•Initial Public Offering-is the first time a private firm raises capital in the "public" market by selling stocks for the first time
Facebook IPO
•Initial listing price was set to $38, but within the following few months the price was steadily falling down to $17until underwriters stepped in to trade. Investors lost $40bil in a few months •Reasons of the failure •Underwriters changed the listing price range of $28-$35 to $35-$38 a few days before the IPO-bad •Prior to the IPO, underwriters expanded its # of shares offered by 25%-bad •Technical glitches on NASDAQ on the 1st day-bad •"Zuckerberg's hoodie"-bad
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•Insider traders-traders that have non-public, material information about the stock for any reason •An individual who has access to insider information would have an unfair edge over other investors, who do not have the same access, and could potentially make larger, unfair profits than their fellow investors. •For example: A company lawyer has confidential info about the firm and uses it to buy/sell stocks or even shares this information with her relatives •However, someone who overheard a conversation at a nearby table at lunch would not normally be barred from trading on that info
private placement offering steps
•Investment Risk Analysis--the investors will determine a credit rating •The lender will ask questions such as: •How stable are the company's revenues and earnings?•How stable are input costs and operating expenses?•Who are the company's main competitors and what are the competitive dynamics of the industry? •Who are the main customers, and is there any significant customer concentration? •Is the company profitable? Why or why not? •What is their track record for paying creditors? •What is the company's long-term growth strategy?
regulations of market equality
•Investors are concerned about market quality •What do we mean by this term? •Components of market quality 1.Market efficiency A.Transaction costs B.Price discovery 2.Market integrity A.Insider trading (trading ahead of price-sensitive announcements) B.Market manipulation (rumors, etc.) C.Broker-agency conflict (front-running, etc.)
PUBLIC OFFERINGS: IPO PROCESS
•Issuing firm selects investment bankers(underwriters) •"Beauty contest," pitch books, track record, reputation •Investment bank that invests its own $ in addition to raising capital from the public is called a merchant bank •Due diligence •Underwriters and lawyers inspect financial statements, research industry/market/future potential, draft registration statement. Customers, legal and industry experts, accountants are involved •Registration statement is filed with the SEC •A shorter version, prospectus, is distributed among investors (describes the offering and finances) •Syndication •Formation of the group of underwriters along with the lead underwriter(usually when the issue is too large for one firm to handle)that will purchase the securities from the issuer and sell to investors in the future
private offering regulations
•Limitations of SEC Regulation D (Reg D): •The benefits of Reg D are only available to the issuer of the securities, not to affiliates of the issuer or to any other individual who might later resell them. •What is more, the regulatory exemptions offered under RegD only apply to the transactions, not to the securities themselves.
Road Show
•Management meetings with investors •Must only discuss information available in the red herring •Underwriters gather interest in the offering after the road show •Uses information to adjust offer price
market manipulation
•Market manipulation-is an intentional act of creating an artificial price for a security defrauding the investors. Some examples: •Runs-create rumors to drive prices up or down •Guinness stock scandal in the 1980s •Twitter bots •Quote stuffing-HFTs overwhelm exchanges with numerous quotes to gain advantage over slow traders
types of regulations
•Merit regulations-require certain actions deemed to be in the public interest or prohibit certain actions that are deemed contrary to the public interest •Certain financial products may be banned; the makeup of the board of directors may be specified; specific securities may be reviewed and rejected for sale b/c they are too risky. •SEC has prohibited stock exchanges from enforcing fixed commissions (each brokerage firm is free to set its own commissions and commissions are negotiable)
other ways public companies raise funds
•Once the price of the bond issue is determined, the underwriter will submit the pricing info to TRACE •The Trade Reporting and Compliance Engine is the FINRA-developed vehicle that facilitates the mandatory reporting of over-the-counter transactions in eligible fixed income securities. •The under write then files paper work with the DepositoryTrust and Clearing Corporation. •Once this paperwork has been filed, the underwriter will commence with the public sale of the corporate bond issue
Determining Share Price
•Once the underwriters decide on the type of underwriting, they then have to decide how the company's share price will be determined. •Setting IPO price is challenging: •No existing market price •Firms often have short operating history •Forecasting is difficult (limited info, sometimes new industries)
Determining Share Price
•Once the underwriters decide on the type of underwriting, they then have to decide how the company's share price will be determined. There are two methods: •Dutch Auction •Underwriter accepts a series of bids from investors that include number of shares and price per share •The market-clearing price is the highest price that will result in all shares being sold •Book-building •Lead underwriter determines a price range through frequent contact with investors and their own valuations •During the "roadshows"process orders for shares are taken (Q&P) •Based on these orders, the price is determined •Popular, but very biased methods (as underwriters have an incentive to maximize the underwriting fees they collect)
indirect: price impact
•Order executions has a potential to move market prices, beyond the bid-ask spread •This effect is called the price (or market) impact •Prices move upward when buying and downward when selling •Relevant mostly to large institutional investors that trade in large quantities
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•Price discovery-the identification of the equilibrium price of an asset through the process of trading •Helps firms determine the market's valuation of the firm's investments •The process looks at a # of factors like the arrival of new information on the market or forces of supply and demand ,etc. that help determine a fair price for an asset •Not the same as valuation or intrinsic value!
private placement offering steps
•Pricing--the investor determines what interest rate is needed to compensate for the associated risk. •Private placements (PPs) are priced similarly to public securities, where pricing is typically determined by adding a credit risk premium (or spread) to the corresponding U.S.Treasury rate. •Rate Lock--when the PP investor and the firm agree to lock-in the int. rate (or coupon) at a specific day and time. •Closing-when actual transfer (security for $) takes place between the company and the lender
PRIVATE PLACEMENT (OFFERING)STEPS
•Private Placement-is a sale of securities to a pre-selected number of individuals and institutions. •Private placements are relatively unregulated compared to sales of securities on the open market. •Private sales are now common for startups as they allow the company to obtain the money they need to grow while delaying or foregoing an IPO
private companies
•Private companies are wholly owned privately by private investors, management, or founders •Have higher control level by owners •Very few regulations and not required to register with theSEC •No requirement to make information public •Exceptions may occur during capital raising •Do not have freely tradable security •Restrictions on capital raising •Very difficult to valuate due to the lack of information
providers of private capital
•Private equity firms--are groups of investors that use collected pools of capital from wealthy individuals, pension funds, insurance companies, endowments, etc. to invest in businesses (buying ownership interest). •PE make money from •a) convincing capital holders to give them large pools of money and charging a % on these pools and •b) generating returns on their investments. They are investors, not advisors.
Public Company
•Public companies sell all or part of shares to the public •Have lower control level by owners •Registration with the SEC •Requirement to file periodic reports •10Q, 10K, 8K, etc. •Offer a publicly-traded security •May or may not trade on a national exchange (Nasdaq, NYSE, BATS, etc.) •If a stock is not traded on an exchange, where is it traded? Why? •Easy to evaluate due to the abundance of information
order protection rule
•Reg NMS consists of several important rules: •Order protection rule (akaTrade-through Rule) •Requires that the best bid and offers---top of book—to be displayed in all markets. •If the best price is a displayed price, it cannot be "traded through",or in other words, it cannot be ignored .•Aims to create a level playing field for all investors by providing equal access to prices and mandating trades be executed at the best price. •Access rule •A trading center receiving an incoming order cannot "trade through" a better-priced quotation displayed by another automated trading center (NBBO)—it must instead immediately route all incoming orders to the market displaying the best price. •The goal is to create an environment in which there is fair and efficient access to quotes throughout the National Market System(NMS)
private offering regulations
•Regulation D-the SEC regulation that governs private placement exemptions •Reg D is good for firms & entrepreneurs b/c funding can be obtained faster and cheaper than with a public offering. •The regulation allows capital to be raised through the sale of equity or debt securities without the need to register those securities with the SEC. However, many other state and federal regulatory requirements still apply. •While Reg D makes raising funds easier, investors still enjoy the same legal protections as other investors, since these securities are not exempt from antifraud, civil liability, or other provisions of federal securities laws
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•SEC Regulation A+--is intended (a) to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of a normal SEC registration and (b) to allow nonaccredited investors to participate in the offering. •Two tiers •Tier 1: Offering size limited to $20 million •No ongoing disclosure •State securities regulations (blue sky laws)-state-level, anti-fraud regulations •Tier 2: Offering size up to $50 million •Ongoing disclosure of 10K, 10Q, and 8K •No state securities regulation
private offering regulations
•SEC Regulation CF--enables eligible companies to offer and sell securities through crowdfunding •All transactions must to take place online through an SEC-registered intermediary (broker-dealer or a funding portal) •Permit a company to raise a maximum of $1,070,000 through crowdfunding offerings in a 12-month period •Limit the amount individual investors can invest across all crowdfunding offerings in a 12-month period and •Require disclosure of information in filings with the SEC and to investors and the intermediary facilitating the offering •Securities purchased in a crowdfunding transaction generally cannot be resold for one year. •Reg CF offerings are subject to"bad actor"disqualification provisions: •Disqualify offerings if the issuer or other "covered persons"have experienced a disqualifying event, such as being convicted of, or subject to court or administrative sanctions for, securities fraud or other violations of specified laws.
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•Taxes, transfer fees and the like can have a substantial impact on the cost of trading •ST capital gains tax is a tax on profits from the sale of an asset held for1yr or less. The same as your usual tax bracket. •LT capital gains taxis a tax on profits from the sale of an asset held for 1yr+. LT capital gains tax rates are 0%, 15% or20% depending on your taxable income and filing status. •Taxes on dividends: the tax rate on ordinary (non qualified) dividends is the same as your regular income taxbracket; while tax rate on qualified dividends is 0%, 15% or 20% depending on your taxable income and filing status
IPO Process
•Terms of offering (domestic/int'l, etc.) •Terms of IPO are not tailored to the needs of a particular group of investors •Typically, a large # of investors •Decide on type of underwriting •Firm commitment •Best efforts •All or none
indirect costs of trading
•The bid-ask spread-the difference b/w the ask price and the bid price for an asset in the market •All financial securities have the bid-ask spread! •More liquid securities have lower BAS than less liquid ones •BAS is a compensation to suppliers of liquidity for... •Order processing costs(dealer's time, paperwork costs, transfer taxes and other expenses incurred in providing immediacy) •Cost of financing of dealer's inventory •Inventory holding costs-dealers may suffer losses from fluctuations in the price of an asset held in inventory
transaction costs
•The cost of buying and selling an asset (transaction costs) is an important determinant of investment returns •It is easier to reduce costs, say, by reducing portfolio turnover, than to increase the portfolio's returns to pay for higher transaction costs! •Transaction costs are all the costs associated with the management of investments, including the time involved in making investment decisions
stock trading
•The same asset can be traded on multiple exchanges •Many firms are simultaneously listed on exchanges in the UK, US, and Japan, for example •Even within the US, a given stock may trade on many exchanges
equity: how is it traded?
•There are also special types of orders and instructions when placing an order with your broker: •Stop (or stop-loss) order: you specify as top price and your order gets executed once the stock P reaches your stop P •A sell stop order is entered at a stop P below the current market price. Used to limit a loss or to protect a profit on a stock that they own. A buy stop order is entered at a stop P above the current market P. Used to limit a loss or to protect a profit on a stock that they have sold short. •Day orders, Good-Til-Cancelled Orders, and Immediate-Or-Cancel Orders--represent timing instructions •Fill-Or-Kill and All-Or-None Orders--represent quantity instructions
Ways to raise capital
•There are several ways in which public companies can raise money: 1.IPO(Initial Public Offering)-initial sale of stock to the public(private company goes public for the first time) 2.Follow-on offerings(aka Seasoned Equity Offerings (SEO)-any. issuance of shares following IPO (Why?) •Different from Secondary Public Offering(SPO)-the sale of shares from existing shareholders •Dilutive vs non-dilutive offerings: •Dilution occurs when a firm increases # of shares outstanding-unless an existing sh.holder buys new shares, her ownership share decreases after dilutive offerings •Non-dilutive offerings (like SPO) occur when existing investors (usually large institutional ones) sell their ownership share to the public so the total # of shares outstanding does not change 3.Debt
SPACs
•There's another way startups can get funding-SPAC •Special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. •SPACs are formed by investors with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. •The money from the is placed in an interest-bearing trust account. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. •ASPAC generally has 2years to complete a deal or face liquidation. •After an acquisition, a SPAC is usually listed on one of the major stock exchanges.
exchanges and ATS
•Trading in secondary markets occurs in two markets: •Exchanges-organizations whose members or participants trade securities among themselves at a fixed location (computer or trading floor) •Alternative Trading Systems-bring buyers and sellers together electronically via crossing networks
crowdfunding
•Types of crowdfunding: 1.Donation-based: there is no financial return to the investors or contributors (disaster relief, charities, nonprofits, and medical bills) 2.Rewards-based: investor receives a "reward," typically a form of the product or service the campaign offers.Closely related to donation-based as there is no financial or equity return 3.Equity-based: allows contributors to become part-owners of your company by trading capital for equity shares. As equity owners, your contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.
Determining Share Price
•Underwriters typically underprice the securities (P increases from the offering price in the short run)... •To encourage investors to reveal their true interest in the firm. As a reward, underwriters will underprice so that investors could make $after selling the securities •Cheaper prices makes it easier to sell •May make it easier to sell follow-on offerings •May protects the firm from lawsuits •Need to underprice just right: if too underpriced-firm doesn't raise enough $ and bank's reputation is ruined; •ifnot enough underpriced or overpriced-investors will be disappointed, stock P↓, banks reputation is ruined.
regulation NMS
•Used to be that trading occurred only where companies are listed •NYSE-listed company could only be traded on NYSE •But it is not the case anymore •Who determines where the trade will take place then when you place an order to buy/sell a security? •The answer can be found in Regulation NMS that was adopted in 2005 by the SEC •The goal is to improve market efficiency and fairness
providers of private capital
•Venture capitalist-private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake •Do not usually fund startups from the onset •Rather, they seek to target firms that are at the stage where they are looking to commercialize their idea. •In exchange for the highrisk that VCs assume, VCs usually get significant control over company decisions and ownership. •VCs often provide strategic advice and marketing strategies •Example of firms: Facebook, Groupon, Google, Twitter, Spotify, Dropbox
stock prices
•We know why investors care about stock prices, but why do companies care about their stock prices?•Financing: increasing stock P is a sign of strong earnings, strong earnings mean that the firm will be able to meet debt obligations. Safer company results in low interest on debt •Managerial compensation is tied to stock performance •"Wrath of shareholders"if mgmt doesn't produce gains•Takeover threat •Ego: the larger the market share, the larger the analyst coverage •Positive press results in greater product demand
equity: how is it traded?
•When you go to your broker to buy/sell stocks, you will get quoted two different prices: a bid P and an ask P •Bid price--is the price at which the dealer is willing to buy a stock from you .•So if you want to sell, you will get the bid price •Ask price-is the price at which the dealer is willing to sell you a stock •So if you want to buy a stock, you will get the ask price •Usually ask P > bid price •The difference b/w the bid and ask Ps is called the bid-ask spread •This spread is the profit that the dealer makes on securities; the larger the spread, the larger the profit. •The lowest bid and the highest ask prices across all of the exchanges in the US make up the NBBO(National Best Bid and Offer) •RegNMS ensures that when you submit your limit order, it is executed at the NBBO (unless you submit an ISO (Intermarket Sweep Order) that requires to be executed at a particular exchange)
trading particulars
•When you want to buy/sell a stock through your broker, there are two main types of orders that you can place: •Market order: executed immediately at the prevailing(current, latest) market price •Limit order: you set the price you want and your order gets executed IF the stock price hits your limit or better. •Marketable limit order-executed immediately fully or in part •Limit buy-purchase at or below a specified P •Limit sell-sell at or above a specified P •Your order may never get executed though •Collection of such orders is called the limit order book
