Primary vs' Secondary Security Sales

1
Primary vs. Secondary Security Sales

• Primary Market
• New issue
• Issuer receives the proceeds from the sale
• Secondary Market
• Existing owner sells to another investor
• Issuing firm receives nothing is not involved

2
Investment Banking and Underwriting

• Investment bankerspecialist in issuing
  securities
• adviceconcerning market conditions
• underwritingtake risk of issuing securities
• distributionsyndicates (diversification)
• Prospectusdocuments the new issue indicates the
  terms of the issue, use of funds, and so forth

3
Investment Banking Arrangements

• Types of Arrangements
• Negotiated purchaseissuing firm negotiates terms
  with investment banker
• Competitive bid purchaseinvestment bankers bid
  on the issue
• Best Effortsinvestment banker sells on a
  contingency basis gives a best effort to sell
  the issue, but there is no firm commitment that
  the entire amount will be sold

4
Public Versus Private Placements

• Public placements (offerings)must register with
  the SEC sold to the public
• Initial Public Offerings (IPOs)first time a
  sells stock to the investing public
• IPOs generally are underpriced
• Investment bankers generally are involved in the
  market after the initial offering of the stock
• Private placementssell to a limited number of
  sophisticated investors not registered
• Institutional investors
• Market is more active for debt than equity

5
Stock (Bond) Markets

• Organized exchangesphysical locations
• NYSE
• AMEX
• OTC marketelectronic network
• NASDAQ
• Third markettrading exchange-listed stocks on
  the OTC
• Institutional investors with large blocks
• Fourth marketdirect trades of exchange-listed
  stocks
• Institutional investors with large blocks
• Electronic Communications Networks (ECNs)

6
Types of Orders

• Orders represent instructions to brokers (agents)
  as to how to execute transactions
• Market ordertransact at the best possible price
  when the order reaches the market
• Limit orderexecute the order only if a specified
  price, or a better price, exists
• Stop loss orderinitiate a market order when a
  specifies price is reached
• Time orderestablish time limits
• day orderthe order dies (expires) at the end
  of the day
• good 'til canceled (GTC)the order stays alive
  until canceled

7
Stock Market ParticipantsExchange Seats

• Commission Brokerworks for a company with a seat
  on the exchange
• Floor Brokerindependent, freelance broker
  farms out to others
• Registered (floor) Tradertrades only for his or
  her own private account
• Specialistmarket maker specializes in certain
  types of stocks (industries)

8
Margin Trading

• Borrow to purchase financial assets
• Important computations

9
Margin Trading

• Example An investor wishes to buy 100 shares of
  IBM, which currently is trading at 100. The
  brokerage firm imposes a margin requirement equal
  to 60, with a maintenance margin of 35.

• The market value of the purchase is 10,000
  100 100
• The investor must have 6,000 10,000 0.60 of
  funds to purchase 100 shares of IBM
• 4,000 10,000 - 6,000 10,000 0.40 is the
  amount borrowed from the brokerage firm.

10
Margin Trading

• A margin call will be issued if the price of IBM
  drops below 61.54