Ch. 8

Secondary Market

The market in which previously issued securities are traded among investors.

Effects of Staggering

1. Staggering makes it more difficult for a minority to elect a director because there are fewer directors to be elected at a time. 2. Staggering makes takeover attempts less likely to be successful because it makes it more difficult to vote in a majority of new directors. Staggering provides "institutional memory" - continuity on the board of directors. Important for long range plans and projects.

Dividends

Payments by a corporation to shareholders, made in either cash or stock. - A corporation cannot default on an undeclared dividend - Dividends are not tax exempt - Dividends received are taxable. (Corporations that own other corps. stocks may exclude 70% of the dividend amounts.)

NYSE (Big Board)

- Largest stock market in the world. - Has 1,366 exchange members. - Merged with Euronext in 2007 and became the first "Global Exchange" - Acquired by the Intercontinental Exchange (ICE) in 2013 - Goal is to generate as much liquidity as possible. - Fundamentally, the business of the NYSE is to attract and process order flow.

Shareholder rights

- One share, one vote - Only shareholders can vote - elect directors (control corporation) - The right to share proportionally in dividends paid. - The right to share proportionally in assets remaining after liabilities have been paid in a liquidation. - The right to vote on stockholder matters of great importance, such as a merger. Voting is usually done at the annual meeting or a special meeting. - Preemptive right (sometimes)

Broker

An agent who arranges security transactions among investors. Brings buyers and sellers together but does not hold inventory.

Dealer

An agent who buys and sells securities from inventory. Stands ready to buy and sell at any time.

2 different voting procedures

Cumulative Voting Straight Voting

Constant Growth

D1=D0 * (1+g) D2=D1 * (1+g) or D0 * (1+g)^2 Dt=D0 * (1+g)^t

3 different types of license holders

Designated Market Maker (DMMs), Floor Broker, and Supplemental liquidity providers (SLPs).

EPS

Earnings per share

Bid price

Price dealer is willing to pay

Ask price (Offered, Offering price)

Price the dealer is willing to sell

Price at time t

Pt = Benchmark PE ratio * EPSt

PV of series of cash flows

Pt=(Dt * (1+g))/(R-g) or D(t+1)/(R-g)

Pt of 2 stage growth

Pt=(Dt+1)/(R-g2) Pt=[D0 * (1+g1)^t / (1+g2)]/(R-g2)

Proxy Fight

When an outside group of shareholders try and obtain votes via proxy in an attempt to replace management by electing enough directors.

Common Stock

Equity without priority for dividends or in bankruptcy

DMM's post

A fixed place on the exchange floor where the DMM operates.

Proxy

A grant of authority by a shareholder allowing another individual to vote his or her shares.

Cumulative Voting

A procedure in which a shareholder may cast all votes for one member of the board of directors. All directors are elected at once. Number of votes is determined by number of shares owned multiplied by the number of directors to be elected.

Dividend Yield (D1/P0)

A stocks expected cash dividend divided by its current price.

growing perpetuity

An asset with cash flows that grow at a constant rate forever.

Staggered elections

Only a fraction of the directorships are up for an election at a particular time (often 1/3). Staggered boards are often called classified boards.

NASDAQ

- 2nd largest stock market in the U.S. - Introduced in 1971 - Computer Network, has no physical location where trading occurs - Has a multiple market maker system rather than a DMM system - OTC market - Operates on three levels of information access. - Level 1 - timely, free prices available over the internet. - level 2 - Allows users to view price quotes from all Nasdaq market makers, usually for a small fee. - Level 3 - is for market makers only. Allows Nasdaq dealers to enter or change their price quote information. - Nasdaq has 3 markets. Global Select, Global, and Capital Market. Ranging from biggest companies to smallest.

Member

As of 2006, a member is the owner of a trading license on the NYSE. Prior to 2006, exchange members were said to own seats. Members of the exchange were also owners. Now instead of seats, companies must purchase trading licenses. (The NYSE bought all the seats and basically leases them now) They have 1366 licenses.

Straight Voting

Directors are elected one at a time. If you control 51 percent of shares, you can guarantee each seat.

Cumulative dividends

Dividends carried forward as an arrearage. Usually all past and present cumulative divs. on preferred stock must be paid before any divs. are paid to common stock

Supplemental Liquidity Providers (SLPs)

Investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market (offering to either buy or sell). They trade purely for their own accounts. Essentially investment firms that agree to be active participants in stocks assigned to them. They do not represent customers. They are given a small rebate on their transactions, thus encouraging them to be aggressive. Unlike DMMs and floor brokers, they do not operate on the floor of the stock exchange.

Designated Market Maker (DMM)

NYSE members who act as dealers in particular stocks. Formerly known as specialists. Maintains a two sided market, ensuring that there is always a buyer and seller available, thereby promoting market liquidity.

Floor Brokers

NYSE members who execute customer buy and sell orders. They try to get the best possible price. The relationship between floor brokers and DMMs is the key to non electronic trading on the NYSE.

PV equation

P0=(D1+P10/(1+R)

Zero Growth Stock

P0=D/R

Present Value of Stock when knowing future value and dividend payments.

P0=D1/(1+R) + D2/(1+R)^2 + D3/(1+R)^3 + P3/(1+R)^3

Present Value of 2 stage growth

P0=D1/(R-g1) * [1-((1+g1)/(1+R)^t] + P1/(1+R)t

Present Value of cash flow

PV=C1/(R-g) or C0(1+g)/(R-g) C = cash flow

Required rate of Return (R)

R=D1/P0 + g

Over the counter (OTC) market

Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.

Classes of Stock

Some firms have more than one class of common stock. These stocks of unequal voting rights. Primary reason for creating this different classifications has to do with managements control of the firm. Not too common in the U.S. (very rare in the NYSE) but very common in U.K. and elsewhere.

Preferred Stock

Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights. - Has a stated liquidation value (usually $100) - Dividends are either cumulative or non cumulative - If divs. aren't paid for long enough, then preferred stock holders may get voting rights. - Often callable

Preemptive right

Stockholders sometimes have the right to share proportionally in any new stock sold. Purpose of this is to protect stockholders proportionate ownership in the corporation.

Spread

The difference between the bid and ask price. (The basic source of dealer profits)

Capital Gains Yield (g)

The dividend growth rate, or the rate at which the value of an investment grows.

Order Flow

The flow of customer orders to buy and sell securities.

Inside Quotes

The highest bid quotes and the lowest ask quotes for a security.

Primary Market

The market in which new securities are originally sold to investors.