chapter 4
Secondary markets provide investors with a
Mechanism for trading existing securities.exist for the trading of common and preferred stock, bonds, and derivative securities
NASDAQ is well known as the home of numerous prominent technology companies.
NASDAQ's Global Market includes Apple (AAPL), Google (GOOG), Adobe Systems (ADBE), and Intel (INTL). Note that each of these stock symbols (in parentheses) consists of four letters, which is common for NASDAQ listed stocks.
Tracing its history back to 1792, the New York Stock Exchange (NYSE) is the
OLDEST and most prominent secondary market in the United States and the world's largest and most valuable equity market. (The major secondary market for the trading of U.S. equity securities) -A historic change occurred in 2005 when the NYSE announced that it and the Archipelago Exchange (ArcaEx) had entered a definitive merger agreement. The combined entity, called the NYSE Group, Inc., represented a merger of the world's leading equity market with the most successful, totally open, fully electronic exchange (an ECN).
A prospectus
Provides information about an initial public offering of securities to potential buyers. summarizes this information, officially offers the securities for sale.
what is a seasoned issue?
The issuance of common stock by a publicly traded company
Underwrite
The process by which investment bankers purchase an issue of securities from a firm and resell it to the public
Listed Securities
The securities of companies meeting specified requirements of exchanges and marketplaces
WHAT KIND OF COMPANIES does the NYSE List?
a range of companies, including "blue‐chip" companies as well as younger, high‐growth companies. It also lists several hundred non‐U.S. companies.
investment bankers are compensated for their efforts by
a spread. which is the difference between what they pay the issuer for the securities and what they sell them for to the public (i.e., the securities are purchased from the issuer at a discount).
investment bankers protect themselves by forming
a syndicate. which consists of a group of investment banks. This allows them to diversify their risk. One or more investment bankers oversee the underwriting syndicate. This syndicate becomes part of a larger group that sells the securities.
over‐the‐counter (OTC) securities
a term which refers to an equity security not listed or traded on a national securities exchange or market.
The NASDAQ Stock Market has called itself
"the largest electronic screen‐based equity securities market in the United States." This electronic trading system provides instantaneous transactions as its market makers compete for investor orders. NASDAQ is the primary market for trading NASDAQ‐listed stocks. In addition, it claims that it routes more share volume to the floor of the NYSE than any other member.
What are the LISTING REQUIRMENTS for the NYSE?
-In considering an application to be listed, the exchange pays particular attention to the degree of national interest in the company, its relative position and stability in the industry, and its prospects for maintaining its relative position. -Companies pay substantial annual fees to be listed.
Two major conclusions on IPO's that research shows:
1. First, IPO stocks generally skyrocket on their first day of trading, which suggests that they are underpriced at initial offering. 2. on average, the long‐run performance of IPO stocks is not particularly attractive. Dr. Jay Ritter at the University of Florida, an authority on IPOs, finds that the average three‐year returns of IPO stocks lags that of similar non‐IPO stocks by a significant margin. He attributes this result to fads and irrational optimism on the part of investors. Thus, if you are lucky enough to obtain an initial allocation of an IPO you are likely to do well, but you probably shouldn't make it a habit to purchase recent IPO stocks in the secondary market.
Before a company goes public, what must it do?
A company must file a registration statement with the Securities and Exchange Commission before it goes public. This statement, called an S‐1, often contains useful information about the company. In particular, investors may spot warning signals or troublesome issues that will affect the company's performance.
Electronic Communication Network (ECN)
A computerized trading network for buying and selling securities electronically. -The role of the ECN is to match buy and sell orders, thereby completing trades. Basically, ECNs are simply order‐matching systems. -ECNs allow investors to trade after regular exchange hours, which primarily means 4 to 8 p.m. EST, and sometimes early morning. However, Instinet, one of the largest ECNs, usually operates around the clock.
the chief function of a capital market is to
allocate resources optimally.
options contract
an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price. Options contracts are often used in securities, commodities, and real estate transactions.
futures contracts
an agreement traded on an organized exchange to buy or sell assets, especially commodities or shares, at a fixed price but to be delivered and paid for later.
the NASDAQ Stock market is
an electronic market of dealers who make a market in each of the NASDAQ stocks.
Initial Public Offering (IPO)
common stock shares of a company being sold for the first time.
what is a primary market
A primary market is one in which an issuer seeking new funds issues securities in exchange for cash from an investor (buyer). New sales of Treasury bonds, or Apple stock, or California bonds all take place in the primary markets. The issuers of these securities—the U.S. government, Apple, and the state of California, respectively—receive cash from the buyers of these new securities, who in turn receive new financial claims on the issuer.
Investment Banker
Firm specializing in the sale of new securities to the public, typically by underwriting the issue
what do investment banker firms do
In the course of selling new securities, issuers often rely on an investment banker for the necessary expertise as well as the ability to reach widely dispersed suppliers of capital. Along with performing activities such as helping corporations in mergers and acquisitions, investment banking firms specialize in the design and sale of securities in the primary market while operating simultaneously in the secondary markets.
Trading on the NYSE:
Institutional investors often trade in blocks, which are defined as transactions involving at least 10,000 shares. The average size of a trade on the NYSE has grown sharply over the years, as has institutional participation by block volume on both the NYSE and the NASDAQ National Market. -Program trading: IS defined by the NYSE as the purchase or sale of a basket of at least 15 stocks valued at $1 million or more. It is used to accomplish certain trading strategies, such as portfolio accumulation and liquidation and arbitrage against futures contracts. Program trading volume often accounts for approximately 30 percent of total NYSE volume. For January 2012, the NYSE share of U.S. stock trading fell to approximately 24 percent, a record low. This reflected a shift of more trading to private electronic markets.
what do investment bankers act as
Investment bankers act as intermediaries between issuers and investors. Typically, the issuer sells its securities to investment bankers, who in turn sell the securities to investors. For firms seeking to raise long‐term funds, the investment banker can provide important advice to their clients during the planning stage preceding the issuance of new securities. This advice includes providing information about the type of security to be sold, the security's features, the price, and the timing of the sale.
The secondary market, also called the aftermarket, is the
financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.
disadvantages of private placements:
include a higher interest cost because the buyer usually charges more in interest than would be offered in a public subscription. In addition, privately placed securities commonly contain restrictive provisions on the borrower's activities.
what are brokers?
intermediaries who represent both buyers and sellers and attempt to obtain the best price possible for either party in a transaction. Brokers collect commissions for their efforts and generally have no vested interest in whether a customer places a buy order or a sell order for the applicable asset.
in both NYSE and NASDAQ,
investors are represented by brokers. BROKERS
THE OTC (OVER‐THE‐COUNTER) MARKET
market is not an organized marketplace or exchange. Instead, it offers a forum for equity securities not listed on a U.S. exchange. OTC securities are issued by companies that either are unable to meet the standards for listing or that choose not to be listed on an exchange.
Orders on NASDAQ come from
market makers (dealers) who make markets in NASDAQ stocks, ECNs, and online brokers such as TD Ameritrade. These participants compete freely with each other through an electronic network of terminals. Dealers conduct transactions directly with each other and with customers. In effect, NASDAQ links together all of the liquidity providers for a particular stock, allowing them to efficiently compete with each other. The NASDAQ market gathers the quotes and orders from these participants and consolidates them into one tape (which is, effectively, the NASDAQ market).
In recent years, an increasing number of corporations have executed private placements, whereby
new securities issues (typically, debt securities) are sold directly to financial institutions, such as life insurance companies and pension funds, bypassing the open market.
Better Alternative Trading System (BATS).
now the third largest securities exchange in the world (the NYSE and NASDAQ are the two largest). BATS accounts for about 11 percent of daily trading in U.S.‐listed shares. BATS appeals to hedge funds and others who trade often and for whom speed of trading is critically important.
The NYSE involves a
physical location in new york
where are new securities sold?
primary markets
Investment bankers underwrite new issues by
purchasing the securities and assuming the risk of reselling them to investors. -Investment bankers provide a valuable service to the issuers at this stage. The issuer receives its check and can spend the proceeds for the purposes for which the funds are being raised. The investment bankers own the securities until they are resold. Although many issues are sold out quickly (e.g., the first day they are offered to the public), others may not be sold for days or even weeks.
many OTC issuers are
small companies facing financial difficulties or perhaps have a limited operating record. Many of these companies are high‐risk investments that often lead to a complete loss for the investor. -OTC equity securities can be quoted on the Pink Sheets Electronic Quotation Service, and/ or if the securities are registered with the SEC and their issuers are current in their reporting obligation, on the OTC Bulletin Board.
Since 2005, Securities and Exchange rules allow "well‐known seasoned issuers" to file shelf registration statements with the SEC. This allows the issuer to
speed up the process by filing a preliminary "base prospectus." At a later time, the issuer can take the issue off the shelf and sell the securities quickly and easily. Large issuers generally find this procedure to be the most efficient method to issue securities.
Asian firms have become increasingly active in
the IPO Market. For example, Alibaba, the Chinese e‐commerce giant, became one of the largest technology companies in the world with its $25 billion IPO, which occurred in the U.S. financial market in September 2014.
one advantage of private placements:
the firm does not have to register the issue with the SEC, thereby saving both time and money.6 Investment bankers' fees also are saved because they are not typically required in private placements, and even if investment bankers are used as managers of the issue, the underwriting spread is saved.
A loss, however, may be much preferred to having no cash at all if
the securities cannot be readily sold
define arbitrage
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
Program Trading invovles...
the use of computer‐generated orders to buy and sell securities based on arbitrage opportunities between common stocks and index futures and options
the world leader of IPO's?
united states (having pioneered/developed the concept) but other countries have made substantial gains in recent years.