FIN355_Chapter5

FIN355_Chapter5 - Chapter 5 McGrawHill/Irwin The Stock...

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Chapter McGraw-Hill/Irwin 5 The Stock Market
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Learning Objectives Take stock in yourself. Make sure you have a good understanding of: 1. The difference between primary and secondary stock markets. 2. The workings of the New York Stock Exchange. 3. How NASDAQ operates. 4. How to calculate index returns. 5-2
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5-3 The Stock Market Our goal in this chapter is to provide a “big picture” overview of: Who owns stocks How a stock exchange works, and How to read and understand the stock market information reported in the financial press.
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5-4 The Primary Market for Common Stock, I. The Primary market is the market where investors purchase newly issued securities. Initial public offering (IPO): An initial public offer occurs when a company offers stock for sale to the public for the first time. Seasoned equity offering (SEO): If a company already has public shares, an SEO occurs when a company raises more equity.
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5-5 The Primary Market for Common Stock, II. An IPO (and an SEO) involves several steps. – Company appoints investment banking firm to arrange financing. – Investment banker designs the stock issue and arranges for fixed commitment or best effort underwriting . – Company prepares a prospectus (usually with outside help) and submits it to the Securities and Exchange Commission (SEC) for approval. Investment banker circulates preliminary prospectus ( red herring ). Upon obtaining SEC approval, company finalizes prospectus. Underwriters place announcements ( tombstones ) in newspapers and begin selling shares.
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5-6 The Secondary Market for Common Stock, I. The Secondary market is the market where investors trade previously issued securities. An investor can trade: Directly with other investors. Indirectly through a broker who arranges transactions for others. Directly with a dealer who buys and sells securities from inventory.
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5-7 The Secondary Market for Common Stock, II. Dealer A trader who buys and sells securities from inventory. A dealer maintains an inventory and stands ready to buy and sell at any time. Broker An intermediary who arranges security transactions among investors. A broker brings buyers and sellers together but does not maintain an inventory.
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5-8 The Secondary Market for Common Stock, III. The bid price: The price dealers pay investors. The price investors receive from dealers The ask price: The price dealers receive from investors. The price investors pay dealers. The difference between the bid and ask prices is called the bid-ask spread , or simply spread .
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5-9 The New York Stock Exchange NYSE Euronext The New York Stock Exchange traces its origins to 1792, when 24 New York City stockbrokers and merchants signed the Buttonwood Agreement. For 200 years, the NYSE was a not-for-profit New York State
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FIN355_Chapter5 - Chapter 5 McGrawHill/Irwin The Stock...

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