FINA 3315 CH. 3 Part 1

What is a secondary sale?

1- Existing securities are sold by an owner to another party 2- The original issuing firm is not involved and does not receive the proceeds from the sale Example: Jim sold 100 shares of Texas Instruments

What is NYSE Euronext?

1- In 2007, the NYSE merged with Euronext, Europe's leading exchange. 2- Earlier, in 2006, the NYSE had merged with Archipelago, an electronic exchange operator. 3- They are all a part of the NYSE Group, a publicly traded for-profit company. 4- NYSE Group, Inc. also operates NYSE Arca. NYSE Arca is an all-electronic stock exchange. It is also an exchange for trading equity options.

What are primary sales of stock?

1- Initial Public Offering (IPO): First sale of stock in a company. 2- Seasoned Equity Offering (SEO): Sale of stock by a company that has already sold shares.

What is a limit order?

1- It is a buy (or sell) order to be executed at a specific price called the "limit price". 2- A limit order to buy shares would be executed only at the limit price or below it. 3- A limit order to sell shares would be executed only at the limit price or above it. 4- Thus, a limit order is not certain to be executed.

What is a market order?

1- It is a buy (or sell) order to be executed immediately at the current market price. 2- It is also certain to be executed but there is uncertainty about the price at which the order will be executed. 3- The broker has a "best-efforts obligation" to obtain the best possible price for the investor.

What are the types of orders to a broker?

1- Market order 2- Limit order 3- Stop-loss order and Stop-buy order

U.S. Securities Markets: An Overview...

1- NASDAQ is the most important dealer market in the U.S. 2- The New York Stock Exchange (NYSE) is the most important specialist market in the U.S. 3- NYSE and NASDAQ compete with one another to attract stock listings. 4- NYSE and NASDAQ have certain listing requirements that companies must meet in order to be listed. Listing requirements on the NYSE are more stringent. 5- The largest ECN today is NYSE Arca

What is a primary sale?

1- New securities are issued 2- The issuing firm receives the proceeds from the sale Example: Shares of Facebook were sold to investors in May 2012.

What are primary sales of bonds?

1- Public Offering: An issue of bonds sold to the general investing public that can then be traded on the secondary market. 2- Private Placement: An issue that is usually sold to a few institutional investors, who usually hold it to maturity.

What are the costs related to an initial public offering?

1- The explicit costs of an IPO are around 7% of the funds raised. 2- However, there is often "money left on the table", as the IPO is often found to be underpriced. The underpricing is reflected in the substantial increase in the stock price on the first day of trading in the newly issued stock. 3- In contrast to their short term performance, shares purchased at the IPO price have generally performed poorly in the long term.

What are characteristics related to public offerings?

1- The issue is registered with the SEC (Securities and Exchange Commission). 2- "Shelf Registration" allows firms to issue securities for up to two years after initial registration. 3- Investment banks (such as Merrill Lynch, Goldman Sachs, and Morgan Stanley) usually assist the issuing firm.

What is the NYSE?

1- Unlike an OTC market such as Nasdaq, there is a central physical location where the trading takes place. 2- Each stock is assigned one specialist; each specialist is assigned more than one stock. 3- All orders involving a given stock must be taken to the specialist's trading post. The trade may occur with another broker/trader or the specialist.

What are the rules with selling short?

1- You are not allowed to short sell penny stocks. 2- After the great crash of 1929, the SEC implemented an "uptick" rule that stocks falling in prices cannot be short-sold. This rule was recently repealed in June 2007.

What is a stop-buy order?

A order that specifies that the stock is to be purchased if the price reaches above a specified price. Such an order often accompanies a short sale (to be discussed later), to limit losses from rising price.

What is an electronic communication network (ECNs)?

ECNs allow participants to place orders over computer networks. Buy and sell orders are matched with one another, without the need for dealers and specialists.

What is a specialist market?

Each security is managed by one specialist assigned responsibility for that security. Brokers wanting to buy or sell a security bring the trade to the specialist and trade with either the specialist or another trader.

What is a stop-loss order?

It is intended to stop losses beyond a certain point. A stop-loss order specifies that the stock is to be sold if the price falls below a specified price.

What is the NASDAQ market?

It is the largest organized stock market for OTC (over the counter) trading. It includes: 1- National Market System 2- Nasdaq SmallCap Market for smaller companies For even smaller companies, it has OTC Bulletin Board

What is the "Maintenance Margin"?

It is the minimum percentage margin needed in your account. The NYSE and NASD have set it at 25%. Brokers may set it higher. If your percentage margin falls below the maintenance margin, you will get a "margin call" from your broker, requiring you to deposit additional cash (or securities such as T-bills).

What is the "Margin" in your account?

It is the net worth of your contribution; the rest is borrowed from the broker. Your initial margin is what you contributed (your initial equity in account).

What is buying stocks on margin?

It is the practice of borrowing part of the money from your broker to buy a stock and using your investment as collateral. You must have a margin account with your brokerage firm. For your borrowing, the brokers charge you an interest rate somewhat higher than the "call money rate" at which they borrow from banks.

What is selling short?

It refers to the sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan. You short sell a share if you expect its price to go down.

What is best efforts?

No firm commitment by the investment bank, who simply assists the issuing firm in selling the securities. This procedure is common for IPOs of common stock.

What is a dealer market?

Securities dealers quote prices at which they are willing to buy and sell securities. A broker executes a trade by contacting a dealer listing an attractive quote.

What is firm commitment?

The investment bank purchases the securities from the issuing firm and resells them to the public. The underwriter guarantees the proceeds to the firm from the sale, thereby in effect taking ownership of the securities.

What is a private placement?

The sale of stocks, bonds, or other investments directly to a limited number of institutional investors. There is no need for SEC registration if the securities are purchased for investment as opposed to resale. This saves on costs. Fairly common in debt market but not so in stock market.