Slide3 - Chapter3 SecurityMarket 3.:es Primaryvs. Primary...

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Chapter 3 Security Market
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3.1 How Firms Issue Securi:es
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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 invesAng public – Private offerings: not registered, and sold to only a limited number of (insAtuAonal) investors, with restricAons on resale – Private placement of bond is typically held unAl maturity • Secondary – ExisAng owner sells to another party – Issuing firm doesn’t receive proceeds and is not directly involved
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Primary vs. Secondary Equity Sales Equity Primary Secondary IPO Seasoned GCO (UnderwriMen) CompeAAve NegoAated GCO (UnderwriMen) Best Efforts Rights AucAon Standby & Take‐up Dealer 4th NYSE ASE Regionals NASDAQ OTC Pink Sheet 3 rd market What is the difference between IPO and seasoned equity offerings?
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Investment Banking Arrangements UnderwriFen vs. “Best Efforts” UnderwriFen: banker makes a firm commitment on proceeds to the issuing firm Best Efforts: banker(s) helps sell but makes no firm commitment Nego:ated vs. Compe::ve Bid Nego:ated: issuing firm nego:ates terms with investment banker Compe::ve bid: issuer structures the offering and secures bids
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Figure 3.1 RelaAonship Among a Firm Issuing SecuriAes, the Underwriters and the Public
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Shelf Registra:ons SEC Rule 415 Security is preregistered and then may be offered at any :me within the next two years . 24 hour no3ce, any part or all of the preregistered amount may be offered, li;le addi3onal paperwork Can be sold in small amount Introduced in 1982 Allows 3ming of the issues
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Private Placements Private placement: sale to a limited number of sophis:cated investors not requiring the protec:on of registra:on Allowed under SEC Rule 144A Dominated by ins3tu3ons Very ac:ve market for debt securi3es Not ac:ve for stock offerings Lower price than in public offerings
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Ini:al Public Offerings IPO Process Issuer and banker put on the “Road Show” Purpose: Book building and pricing Underpricing Post iniAal sale returns average about 10% or more Easier to market the issue
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Figure 3.2 Average First Day Returns for European and Non‐European IPOs
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3.2 How Securi:es are Traded
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Types of Markets Direct Search Markets Buyers and sellers locate one another on their own Brokered Markets 3 rd party assistance in searching buyer or seller Dealer Markets 3 rd party acts as intermediate buyer/seller Auc:on Markets Brokers & dealers trade in one loca:on, trading is more or less con:nuous
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Types of Orders InstrucAons 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 beMer 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+_ ____.
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Limit Order Book for Intel on Archipelago
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