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Investment Chapter 3

How Securities are Traded

QuestionAnswer
Disadvantage of private held firm vs public corporation Do not trade in secondary market such as a stock exchange, and this greatly reduces their liquidity and reduces prices for them.
Advantage of private held firm? Less obligations to release financial statements and other information to public which saves money and prevents competitors from using information that may be valuable to them. Some firms believe they have more flexibility for pursuing long-term goals.
How many shareholders may a private firm have? up to 499, but considering changing this.
How do companies get around the max amount of shareholders for private own firms? They form partnerships and this partnership may count as one shareholder.
Private Placement? when private firms wish to raise funds, they sell directly to a small number of institutional or wealthy investors.
Initial Public Offering (IPO) First issue of shares to the general public.
Seasoned Equity Offering sale of additional shares in firms that already are publicly traded
Underwriters Investment bankers who market public offerings of both stocks and bonds
Prospectus When the preliminary registration statement is accepted by the Securities Exchange Commission
Firm commitment When the issuing firm sells the securities to the underwriting syndicate for the public offering price less a spread that serves as compensation.
Shelf registration Since 1982 the SEC approved rule 415, which allows firms to register securities and sell them to the public for 2 years following the initial registration.
Road Shows investment bankers organize them to publicize the imminent offering. Serves two purposes, to generate interest and provide information about the price.
Book Indications of interest from investors about the IPO
Bookbuilding process of polling potential investors
Why are IPOs commonly underpriced? Because they must be offered to investors at a lower price for them to show interest and bookbuild properly.
Explicit costs of an IPO? tend to be around 7%, but we must consider the underpricing cost as well.
Four types of markets? Direct search markets, brokered markets, dealer markets, and auction markets.
Direct search market? Least organized, buyers and sellers must seek each other out directly, craigslist
Brokered Market Trading in a good is active, brokers find it profitable to offer search services to buyers and sellers. Eg: Real estate market, primary market
Dealer Market Dealers specialize in various assets, purchase these assets for their own accounts, and later sell them for a profit from their inventory.
Created by: 581435404
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