Chapter 4 -Securities Markets - Securities Markets Markets...

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Securities Markets Chapter 4 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University 4-1
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The Role of Financial Markets Help firms and governments raise cash by selling claims against themselves Provide a place where investors can act on their beliefs Help allocate cash to where it is most productive Help lower the cost of exchange 4-2
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Markets in New Securities New securities are issued in a primary market ¾ Initial public offerings versus seasoned new issues Issue facilitated by investment banker ¾ Specialists in advice, design, and sales ¾ Intermediaries between issuer and investor 4-3
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Investment Banking Client advice includes type and features of security, offer price, and timing of sale Underwriting services: Risk of selling to investors assumed from issuer Coordinates marketing by helping issuer register securities issue issuer register securities, issue prospectus, and sell securities 4-4
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Investment Banking Rule 415 (shelf rule) allows certain issuers to sell new securities over time after filing a single registration ¾ Reduces issuance cost A private placement means new securities are sold directly to investors, bypassing the open market ¾ Registration not required 4-5
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Secondary Markets Markets where investors trade previously issued securities Auction markets involve bidding in a specific physical location ¾ Brokers represent investors for a fee ¾ Others trade for their own account Negotiated markets consist of decentralized dealer network 4-6
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Stock Exchanges NYSE is a secondary auction market in NYSE is a secondary, auction market in equity shares ¾ Not-for-profit organization of members Not for profit organization of members ¾ Listing requirements for traded firms ¾ “Specialists” assigned to each traded equity Specialists assigned to each traded equity to make a market in that stock AMEX and regional exchanges list smaller firms, have less volume than NYSE 4-7
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NASDAQ Network of competing dealers trading listed securities Automated quotation system with no fixed number of participants ¾ NASDAQ National Market ¾ NASDAQ SmallCap Market More firms listed than NYSE Network connects to other trading systems 4-8
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Over-the-Counter Markets Network of dealers standing ready to either buy or sell securities at specified prices ¾ Dealers profit from spread between buy and sell prices ¾ Handle unlisted securities OTC Bulletin Board ECNs: Additional trading mechanism ECNs: Additional trading mechanism, especially after exchanges close 4-9
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Foreign Markets US equity markets account for a decreasing share of world’s stock market capitalization ¾ Many different equity markets exist Emerging market: Stable political system, low regulation, low standardization in trading activity ¾
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