But this market helps the primary market mobilize

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but this market helps the primary market mobilize savings and allocate capital. without secondary market, there are some people who won’t buy securities bc they don’t want to hold them forever – secondary market helps this issue. w/o secondary market, it would cost more to raise funds in primary market bc people would have to be compensated for lack of liquidity. secondary market also helps w price discovery. Which helps the primary market by helping securities on secondary market to find correct price for primary market. c. Suppose the answer to part b were negative. Would secondary markets then be of no value? Consider the stock market. no secondary market is a market for ownership. allows for restructuring, and privatizations. still a market for ownership, facilitates mergers and acquisitions still can make money sets prices ensuring quality investments B. Read “Bankers need more skin in the game” (Item 11.1) and “Into the whirlwind” (Item 11.3) and answer the following questions.
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1. Securities firms have traditionally been organized as partnerships rather than corporations. What are the advantages and disadvantages of the former relative to the latter? Partnerships o Advantage- individual members of firm have strong stake in success, incentives strong unlimited liability and inability to cash out or diversify focus attention more sensible risk taking, lower leverage ratios o Disadvantage- less risk = less profit liability has been unlimited balance sheets not as big bc not trying to leverage themselves as much Corporation o Advantage- being able to sell shares to outsiders rather than relying only on retained profits can allow firm to increase capital more quickly when need arises enhanced ability to raise capital w ability to buy and sell ownership in firm make M and A easier ownership stake is much more liquid: can cash out more easily, borrow against it, diversify their wealth liability is now limited to their stake in the firm o Disadvantage- incentives of members are diluted 2. How did the change in organization of securities firms affect the nature of what they did? (and vice versa) Why did they incorporate in the 1980s and not earlier? as partnerships, they are much more risk averse because partners face liabilities that extend to their personal assets. as corporations, they can engage in much riskier behavior because they spread risk/liability to the shareholders. Deregulation. '80s answer: volatility of exchange rates and interest rates; also, institutional investors became the customers, so they cared less about not trusting a corporation over a partnership o before 80s, investors were wealthy individuals. after 80s more institutional investors. individuals more trying to protect their wealth so they want less risk taking (prefer partnerships). institutional investors want to see high returns so they prefer corporations. institutional investors are handling OPM (other people’s money) so they aren’t as risk averse.
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