quiz 2 - Primary vs. Secondary Market Security Sales...

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Primary vs. Secondary Market Security Sales Primary: New issue is created and sold. Key factor: issuer receives the proceeds from the sale. Public offerings: registered with the SEC and sale is made to the investing public. Private offerings: not registered, and sold to only a limited number of (institutional) investors, with restrictions on resale. Private placement of bond is typically held until maturity. Secondary: Existing owner sells to another party. Issuing firm doesn’t receive proceeds and is not directly involved. Investment Banking Arrangements Underwritten vs.“Best Efforts” Underwritten: banker makes a firm commitment on proceeds to the issuing firm. Best Efforts: banker(s) helps sell but makes no firm commitment. Negotiated vs Competitive Bid Negotiated: issuing firm negotiates terms with investment banker. Competitive bid: issuer structures the offering and secures bids. Shelf Registrations SEC Rule 415 Security is preregistered and then may be offered at any me within the next two years (24 hour notice, any part or all of the preregistered amount may be offered, little additional paperwork. Can be sold in small amount). Introduced in 1982 . Allows ti ming of the issues Private Placements sale to limited number of sophisticated investors not requiring the protection of registration (Allowed under SEC Rule 144A . Dominated by ins ti tu ti ons . Very active market for debt securities . Not active for stock offerings . Lower price than public offerings) Initial Public Offerings ( IPO Process ) Issuer and banker put on the “Road Show”. Purpose: Book building and pricing. Under pricing: Post initial sale returns average about 10% or more. Easier to market the issue. How Securities are Traded: Types of Markets Direct Search Markets Buyers and sellers locate one another on their own. Brokered Markets 3rd party assistance in searching buyer or seller. Dealer Markets 3rd party acts as intermediate buyer/seller.• Auction Markets Brokers & dealers trade in one location, trading is more or less continuous. Types of Orders Instructions to the brokers on how to complete the order. Market order : execute immediately at the best price. Limit order : Order to buy or sell at a specified price or better (On the exchange the limit order is placed in a limit order book kept by an exchange official or computer. E.G.: Stock trading at $50, could place a buy limit at 50 or a sell limit order at 50+ . Stop loss order: Becomes a market sell order when the trigger price is encountered ( E.G.: You own stock trading at $40. You could place a stop loss at 38 . The stop loss would become a market order to sell if the price of the stock hits 38 or below .) Stop buy order: Becomes a market buy order when the trigger price is encountered ( E.G.: You shorted stock trading at $40. You could place a stop buy at 42 . The stop buy would become a market order to buy if the price of the stock hits 42 or higher .) Discretionary order: gives the broker the power to buy and sell for your account at the broker's discretion. Time dimension on orders (other than
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This note was uploaded on 05/12/2011 for the course FIN 300 taught by Professor Wang during the Spring '11 term at UChicago.

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quiz 2 - Primary vs. Secondary Market Security Sales...

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