Chapter 2.docx - Security Markets Markets that allow buyers...

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Security Markets: Markets that allow buyers and sellers of securities to make financial transactions. Types of Securities Markets - Money Market; The market where short-term debt securities are bought and sold. - Capital Market: The market where long-term securities, such as stocks and bonds, are bought and sold; classified as primary or secondary. - Securities and Exchange Commission (SEC): Federal agency that regulates the securities markets. The Primary Market - Primary Market: The market in which new issues of securities are sold to investors. - Initial Public Offering (IPO): The first public sale of a company’s stock. - Public Offering: Securities offered for sale to public investors. - Rights offering; Shares are offered to existing shareholders on a pro rata basis. - Private placement: Securities sold directly to select groups of private investors - Going Public: IPO Process o Underwriting: Promoting the stock and facilitating the sale of the company’s shares. o Prospectus: Registration statement describing the issue and the issuer. o Quiet period: Is the time period after prospectus is filed when company must restrict what is said about the company. o Red Herring: Preliminary prospectus available during the waiting period. o Road show: Series of presentations to potential investors. - The Investment Banker’s Role o Investment Banker: Financial intermediary that specializes in assisting companies in issuing new securities and advising firms with regard to major financial transactions. o For IPOs’ their main role is underwriting. Underwriting: Purchases the security at agreed-upon price and bears risk of selling it to the public. o For large security issues, forms an underwriting syndicate. Underwriting Syndicate: Group formed to share the financial risk of underwriting. Selling Group: Other brokerage firms that help the underwriting syndicate sell the issue to the public. o Compensation typically in the form of a discount on the sale price of the securities. Types of Securities Markets - The Secondary Market o Secondary market (aftermarket): The market in which securities are traded after they have been issued. Role: Provide liquidity to security purchasers Provides continuous pricing mechanism Major segments:
National Securities Exchanges: Markets in which the buyers and sellers of listed securities come together to execute trades. Over-the-counter (OTC) Market: Involves trading in smaller, unlisted securities. Securities Markets - Broker Markets and Dealer Markets o Broker Market: Consists of national and regional securities exchanges. Trades are executed when a buyer and a seller are brought together by a broker and the trade takes place directly between the buyer and seller. o Dealer Market: Made up of the Nasdaq OMX and OTC trading venues. Trades are executed with a dealer (market maker) in the middle. Seller sell to a market maker at a stated price. The market maker then offers the securities to a buyer.

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