Chapter 03_Hand-out 2

Chapter 03_Hand-out 2 - CHAPTER 3 HOW SECURITIES ARE TRADED...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 3 HOW SECURITIES ARE TRADED 3.1 HOW FIRMS ISSUE SECURITIES 1. Investment Banking and Underwriting When firms need to raise capital they may choose to sell or float new securities. These new issues of stocks, bonds, or other securities typically are marketed to the public by investment bankers in what is called the primary market. Purchase and sale of already-issued securities among private investors takes place in the secondary market. There are two types of primary market issues of common stock. Initial Public Offerings (IPO) are stocks issued by a formerly privately owned company selling stock to the public for the first time. Seasoned new issues (SEO) are offered by companies that already have floated equity. We also distinguish between two types of primary market issues: a public offering , which is an issue of stocks or bonds sold to the general investing public that can then be traded on the secondary market; and a private placement , which is an issue that is sold to a few wealthy or institutional investors at most, and, in the case of bonds, is generally held to maturity. Public offerings of both stocks and bonds typically are marketed by investment bankers, who in this role are called underwriters . More than one investment banker usually markets the securities. A lead firm forms an underwriting syndicate of other investment bankers to share the responsibility for the stock issue. The bankers advise the firm regarding the terms on which it should attempt to sell the securities. In a typical underwriting arrangement, the investment bankers purchase the securities from the issuing company and then resell them to the public. The issuing firm sells the securities to the underwriting syndicate for the public offering price less a spread that serves as compensation to the underwriters. This procedure is called a firm commitment . The underwriters receive the issue and assume the full risk that the shares cannot in fact be sold to the public at the stipulated offering price (see the Figure 3.1 in the textbook). An alternative to firm commitment is the best-efforts agreement. In this case the investment banker agrees to help the firm sell the issue to the public but does not actually purchase the securities. The banker simply acts as an intermediary between the public and the firm and does not bear the risk of not being able to resell the securities at the offering price. The best-efforts procedure is more common for IPOs of common stock, for which the appropriate share price is less 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
certain. Corporations engage investment bankers either by negotiation or by competitive bidding . Negotiation is far more common. Besides being compensated by the spread between the purchase price and the public offering price, an investment banker may receive shares of common stock or other securities of the firm. 2. Shelf Registration
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 12

Chapter 03_Hand-out 2 - CHAPTER 3 HOW SECURITIES ARE TRADED...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online