Corporate Finance 1.5

Corporations engage in two types of primary market transactions:

Public offerings and private placements.

By law, public offerings of debt and equity must be registered wit the Securities and Exchange Commission (SEC).

Registration requires the firm to disclose a great deal of information before selling any securities. The accounting, legal, and selling costs of public offerings can be considerable.

Dealer markets in stocks and long-term debt are called

Over-the-counter (OTC) markets.

Generally speaking, dealers buy and sell for themselves, at their own risk.

A car dealer, for example, buys and sells automobiles. In contrast, brokers and agents match buyers and sellers, but they do not actually own the commodity that is bout or sold. A real estate agent, for example, does not normally buy and sell houses.

Auction markets differ from dealer markets in two ways:

1). An auction market or exchange has a physical location (like Wall Street). 2). In a dealer market, most of the buying and selling is done by the dealer. *The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those who wish to buy. Dealers play a limited role.

There are two kinds of secondary markets:

1). auction markets 2). dealer markets

To be listed, firms must meet certain minimum criteria concerning, for example,

Asset size and number of shareholders. These criteria differ form one exchange to another.

The fact that OTC markets have no physical location means that national borders do not present a great barrier, and there is now a huge international OTC debt market.

Because of globalization, financial markets have reached the point where trading in many investments never stops; it just travels around the world.

The NYSE has the most stringent requirements of the exchanges in the United States.

For example, to be listed on the NYSE, a company is expected to have a market value for its publicly held shares of at least $100 million. There are additional minimums on earnings, assets, and number of shares outstanding.

Stocks that trade on an organized exchange are said to be

Listed on that exchange.

There are many large and important financial markets outside the United States, of course, and U.S. corporations are increasingly looking to these markets to raise cash.

The Tokyo Stock Exchange and the London Stock Exchange (TSE and LSE, respectively) are two well-known examples.

Most trading in debt securities take place over the counter.

The expression over the counter refers to days of old when securities were literally and sold at counters in offices around the country. Today, a significant fraction of the market for stocks and almost all of the market for long-term debt have no central location; the many dealers are connected electronically.

Financial markets function as both primary and secondary markets for debt and equity securities.

The term primary market refers to the original sale of securities by governments and corporations. The secondary markets are those in which these securities are bought and sold after the original sale. Equities are, of course, issued solely by corporations. Debt securities are issued by both governments and corporations.

A secondary market transaction involves one owner or creditor selling to another.

Therefore, the secondary markets provide the means for transferring ownership of corporate securities.

Partly to avoid the various regulatory requirements and the expense of public offerings,

debt and equity are often sold privately to large financial institutions such as life insurance companies or mutual funds. Such private placements do not have to be registered with the SEC and do not require the involvement of underwriters (investment banks that specialize in selling and securities to the public).

Although a corporation is directly involved only in a primary market transaction (when it sells securities to raise cash),

the secondary markets are still critical to large corporations. The reason is that investors are much more willing to purchase securities in a primary transaction when they know that those securities can later be resold if desired.

In a primary market transaction, the corporation is the seller, and..

the transaction raises money for the corporation.

The equity shares of the most of the large firms in the United States trade in organized auction market.

The largest such market is the New York Stock Exchange (NYSE). There is also a large OTC market for stocks. In 1971, the National Association of Securities Dealers (NASD) made available to dealers and brokers an electronic quotation system called NASDAQ (stood for NASD Automated Quotation system). NASDAQ-listed companies tend to be smaller and trade less actively. There exceptions, of course. Both Microsoft and Intel trade OTC, for example. Nonetheless, the total value of NASDAQ stocks is much less than the total value of NYSE stocks.

A public offering, as the name suggests, involves...

selling securities to the general public, whereas a private placement is a negotiated sale involving a specific buyer.