13_Equity - Organization and Functioning of Securities...

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Organization and Functioning of Securities Markets: - A good market for goods and services has the following characteristics: o Timely and accurate information o Liquidity o Low Transaction Costs – Internal Efficiency o Prices that rapidly adjust to new information – External Efficiency - Primary Capital Markets: The primary market is where new issues of bonds, preferred stock or common stocks are sold by government units, municipalities, or companies to acquire new capital. o Government Bond Issues: T-bills o Municipal Bond Issues: Sold by one of three methods: Competitive Bid: These sales typically involve sealed bids Negotiated Bid: This involves contractual agreements between underwriters and issuers wherein the underwriter helps the issuer prepare the bond issue and set the price and has the exclusive right to sell the issue. Private Placement: This involves the sale of a bond issue by the issuer directly to an investor or a group of small investors. o Corporate Bonds: Always sold through negotiated arrangements. o Corporate Stock Issue: Seasoned equity issues and IPOs Shelf Registration: After they are registered, the issues lie on the shelf and can be taken down and sold on short notice whenever it suits the issuing firm. - Underwriter provides three services to the issuer: o Origination o Risk Bearing o Distribution - Secondary Financial Markets: Prevailing market prices of the securities (price discovery) is determined by transactions in the secondary market. o Secondary Bond Markets o Financial Futures: Chicago Board of Trade and Chicago Mercantile Exchange o Secondary Equity Markets: Pure Auction Market Dealer Market o Call vs. Continuous Markets: In call markets, the intent is to gather all the bids and asks for a stock at a point in time and attempt to arrive at a single price where the quantity demanded is as close as possible to the quantity supplied. Call markets are generally used during the early stages of development of an exchange. In continuous markets, trades occur at any time the market is open wherein stocks are priced either by auction or by dealers. A compromise between a pure dealer and pure auction market is a combination structure wherein the market is basically an auction market, but there exists an intermediary who is willing to act as a dealer if the pure auction market does not have enough activity. These intermediaries who
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act as both brokers and dealers provide temporary liquidity to ensure the market will be liquid and continuous. -
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13_Equity - Organization and Functioning of Securities...

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