FIN 3244 CH.8
OTCBB (over-the-counter bulletin board) :
- An electronic quotation system that links the market makers who trade the shares of small companies
OTCQX Best market:
- Biggest and best of OTC firms. - 370 US and international firms - well established, reputable, and investor focused corporations -meet financial requirements and have audited financial statements
Continuous markets except for at opening
- NYSE - NASDAQ
The OTC market trades on either the:
- OTCBB bulletin board or - the OTC market group (formally "pink sheets")
OTC pink no information
- These firms haven't submitted any information in the last six months - raises questions about their corporate dealings
OTC markets group (pink sheets):
- Trades small high-risk firms - organized into 3 markets based on level of disclosure
ATS
- are businesses - vary in the rules they impose on their subscribers -Most operate using ECN's - most trade firms that are listed on exchanges - most involved or large institutional investors and Block trades
After-hours sessions :
- are riskier and the price quotes offered by participants may be more volatile than in regular sessions - these markets having less liquidity than that of regular-hours trading.
To be listed on the NYSE the firm must have:
- at least 400 stockholders owning 100 or more shares - a minimum of 1.1 million shares of publicly held stock outstanding
ATS alternative trading system
- electronic platform Purchased by the OTC market group - gives them a major advantage over the OTC bulletin board
OTC pink current information:
- firm provides regular quarterly and annual report's - developing firms, shell firms - firms may be legitimate or illegitimate so it's important to do research
OTCBB (over-the-counter bulletin board) :
- is highly regulated by the SEC which requires all companies traded on this market to file audited financial statements and comply with federal securities law
Why might issuing companies accept lower IPO prices?
- it draws attention to their firm which may make it easier raise funds through add additional share offerings at a later date - Accepting an underwriter's offer may also be the only way for a young firm to raise the capital needed for growth
Lead underwriter
- lead investment banker - Typically buys entire issue at an agreed on price -Eliminates risk to issuing firm
NASDAQ
- lower listing fees than NYSE - faster order execution
FINRA
- private firm, not a government agency - self regulates member brokerages & exchanges - overseen by the SEC
OTC bulletin board:
- provides only price quotations, is not execute orders - regulated by FINRA
ATS alternative trading system
- provides real-time quotes AND electronic trading - commonly employ ECN's in the trading of stock
DMM
- required to hold inventories of their stocks - obligated to maintain a continuous, fair, and orderly market - negotiate large trades as a broker
Routine decline
- roughly a drop of 5% or more in a major market Index
What factors might contribute to the huge first-day returns on IPOs?
- significant amount of hype that surrounds new issues and underpricing by underwriters
Institutional investors
- tend to receive most of the shares of IPOs that are in demand ('good IPOs'.) - Their concern about overpaying for shares may contribute to underpricing.
The main disadvantage of the NYSE:
- the cost of being listed on it - also has strict listing requirements that firms must meet
Main advantage of listing on the NYSE
- the perception of greater prestige and public awareness of the firm
OTC pink limited information
- these firms have file quarterly or annual reports within the last six moths AKA NOT current - could be an indication the firm is distressed
Designated market maker (DMM)
A member in the BROKER market who specializes in making transactions in one or more stocks for the NYSE. - can only have one DMM for each firm listed in the NYSE.
Capital markets are classified as either:
A primary market Or A secondary market
ECN's (electronic communication network)
A type of ATS trading system that requires a membership to use them - let crossed orders be executed automatically
DMM
Agents of financial firms that trade individual stocks on behalf of their customers
American Depositary Receipts (ADRs):
Dollar denominated receipts for the stock of foreign firms held in vaults of home-country banks
Capital markets
Market where long-term securities (with maturities of more than one) year, such as stocks and bonds are bought and sold. - used by investors to buy and sell long-term securities
Money markets
Market where short term-debt securities (with maturity is less than one year) are bought and sold. - used by investors for short term borrowing and lending
IPO (initial public offering)
Marks the first public sale of a company stock in results in the company's taking on a public status
Seasoned equity issues
New stock issues in the primary market by an already publicly trading firms
An American investor believes that the U.S. dollar will rise in value relative to the Japanese yen. The Japanese yen investment will have returns that convert to U.S. dollars to spend. Should the investor purchase the Japanese yen investment?
No. The investor will lose money in the currency exchange if the U.S. dollar gains strength relative to the Japanese yen.
First step in the IPO process:
Obtain the approval of its current shareholders and investors who own it's privately issued stock
Bid/ask spread is a transaction cost to?
the investor
Quiet period
Specific time period from the time the company files it's preliminary registration statement until at least one month after the IPO is complete. -during this time, there are restrictions on what can be said about the company
Private placement
rather than issue shares publicly, shares are sold directly to investors who can purchase large volumes of shares such as insurance companies and pension funds. - don't require SEC registration.
A firm has three choices when choosing how to sell their securities in the primary market:
1.) IPO 2.) Rights offering 3.) private placement
Dealer market consist of:
1.) NASDAQ MARKET - (NASDAQ global market) - (NASDAQ global select market) - (NASDAQ capital market) 2.) OTC MARKET - OTC bulletin board - OTC market group
Broker market consist of:
1.) NATIONAL EXCHANGES - (new York Stock Exchange) - (NYSE AMEX) 2.) REGIONAL EXCHANGES (chicago, Pacific, Philadelphia, Boston, national)
Three levels of the OTC markets group:
1.) OTCQX best market 2.) OTCQX venture market 3.) the pink open market
When stocks are classified by the "trading process" they're divided into two categories
1.) broker markets 2.) dealer markets
Markets are classified in three different ways:
1.) by maturity 2.) by who gets the money 3.) by the trading process
When socks are classified by "maturity" they are divided into two categories:
1.) money markets 2.) Capital markets
when stocks are classified by "who gets the money" they're divided into two categories:
1.) primary markets 2.) secondary markets
Market makers in a dealer's market:
Can have multiple dealers, the more the better.
Three categories of the pink open market:
Categories are not based Quality or riskiness of the firm 1.) OTC pink current information 2.) OTC pink limited information 3.) OTC pink no information
Gross spread
Consist of the lead underwriters management fee, the syndicate underwriters discounts, and the selling groups selling concession
All OTC markets are:
Dealer-driven markets but not nasdaq Listed of firms
FINRA
Financial industry regulatory Authority
Securities markets
Forums that allows suppliers and Demanders of securities to make financial transactions. Their goal is to permit such transactions to be made quickly and at a fair price.
The ability to make securities transactions quickly and at a fair price in secondary market provide securities traders with _____________
Liquidity
Dealers are:
Market Makers- create the trading market for firms by supplying the stock shares that are bought and sold by investors AKA - provide liquidity for transactions to occur
NYSE is now a:
Hybrid market
The most significant transaction in the primary market is the:
IPO (initial public offering)
Bull market
Involve rising prices in the stock market - accompanied by investor optimism, economic recovery, and government stimulation.
Pink open market
Largest of the OTC market group - 10,000 firms - no filing or financial requirements - further divided into three categories based on level of disclosure
Selling group
Lead investment banker and syndicate members responsible for selling a certain portion of the issue and is paid a commission on the securities it sells
OTC bulletin board market:
Links market makers trading shares of small firms - no buy/sell order matching
Fair market
One in which a price is agreed to by a willing buyer & seller who freely enter into a transaction
Orderly market
One in which a stocks price moves in relatively small steps
Continuous market
One in which orders are immediately executed upon receipt
Prospectus
One portion of the registration statement that describes the key aspects of the securities to be issued, the issuers management, and the issuers financial position.
crossed orders
Orders that can be directly traded without a broker or dealer -occur when the bid and ask price are the same
OTCQX Venture market:
Predominantly young ent. growth firms - 3,000 US and International firms -they voluntarily meet filing requirements but there is no financial threshold to be a part of this tier
Red herring (preliminary prospectus)
Preliminary version of the prospectus that prospective investors may receive while waiting on SEC's approval of registration statements. - a notice is printed in RED on the front cover that indicates the tentative nature of the offer
In a brokers market:
Profit is made by commission
In a dealers market:
Profit is made by the bid-ask spread
OTCQX Best market:
Roche, Nestlé, and Adidas - these firms could be listed on an exchange but as a member of the OTC market they save money on the cost of filing with the SEC and in their own home countries where they must file. -they file with FINRA- less costly
Road show
Takes place during the registration period and prior to the actual IPO date.
Secondary market can be divided into two segments which are:
The broker market and the dealer market
Third step in the IPO process:
The company finds an investment bank willing to underwrite the offering. This bank is the lead underwriter and is responsible for the promoting the company stock and facilitating the sale of the company's IPO shares. - under writer also assisted company and filing a registration statement with the SEC that must be approved
Second step in the IPO process:
The company is auditors and lawyers must certify that all financial disclosure documents for the company are legitimate
Bid price (buying):
The dealers buying price and The sellers selling price (looking for the highest)
Ask Price (selling):
The dealers selling price and The buyers buying price (looking for lowest)
IPO (initial public offering)
The firm offers at securities for sale to public investors
Rights offering:
The firm offers shares to existing shareholders on a pro rata basis
Private placement
The firm sell securities directly without SEC regulation to select groups of private investors such as insurance companies, investment management funds, and pension funds.
The primary market
The market in which new issues of securities are sold to investors - trade is between the firm and investor
Gross spread
The price paid by the original investment banker to the issuing firm - the Price the underwriting syndicates will sell to the selling group
OTC market group (pink sheets)
The unregulated segment of the market where the companies are not even required to file with SEC
In a dealers market:
There are three sides to the transaction. The buyer and seller are never brought together directly but their orders are executed by a "market maker" (dealers)
In a broker market:
There are two sides to the transaction, the BUYER and the SELLER. - broker facilitates the deal but is not actively involved.
OTC markets:
These non-NASDAQ issues include mostly small companies that either cannot or do not wish to comply with NASDAQ's listing requirements.
Secondary market (aftermarket)
These transactions do not involve the corporation that issued the securities, instead they permit an investor to sell his or her holdings to another investor.
Purpose of the quiet period:
To make sure that all potential investors have access to the same information about the company (presented in the preliminary prospectus) but not to any unpublished data that might provide an unfair advantage
Purpose of IPO's
To raise capital for the firm
In a dealers market:
Trade takes place in virtual computer networks (there is no physical location)
In a broker market:
Trade takes place on a trading floor (physical location) -EX. NYSE
Dealer's profit?
buy/ask spread
Compensation
Usually comes in the form of a discount to be expected sale price of the new securities
NASDAQ
Virtual electronic network with no physical location
Bear market
Where stock prices are going down - accompanied by pessimism, economic slowdown, and government restraint - decrease by 20%
Underwriting syndicates:
additional investment bankers brought in by lead to share financial underwriting risk if needed
Listing requirements :
are intended to ensure the liquidity of stocks
After-hours orders are typically filled only :
if they can be matched with identical opposing orders at the desired price, called crossing orders
In 2006, the SEC formally recognized ______ as an exchange.
nasdaq
Road show
presentations made by investment bankers and company executives to potential investors to promote the company stock offerings. - help the investment bankers gauge the demand for the offering and set an expected price range