STOCK EQUITY MARKETS

1
STOCK EQUITY MARKETS

• CHAPTER 10

2
PRIVATE EQUITY

• Venture Capital
• Financing for high risk start-up ventures
• Dollars for Equity position
• VC profits when venture goes public (IPO)
• Secondary registration required

3
PUBLIC EQUITY COMMON STOCK

• Corporate Charter shareholder rights
• Elect directors
• Amend the charter
• Raise capital
• Approve mergers
• Preemptive rights
• Classes Of Common
• Voting
• Non-Voting
• Weak voting

4
PUBLIC EQUITY COMMON STOCK

• Lettered stock
• Privately issued to investors resale
• Covered by SEC rules (i.e., 144a)
• D. Rights Offerings
• Right granted by the corporate charter
• New shares must be offered to current holders
  (rights)
• Rights (R) may be exercised or sold to public

5
PREFERRED STOCK

• Hybrid Security
• Fixed payouts like bonds
• An equity investment like common
• Attributes Of Preferred Stock
• Par value meaningful in bankruptcy or
  liquidation
• Cumulative Features missed dividends must be
  made up
• Participating in years of high profits, an extra
  dividend
• Non-Voting except as provided in corporate
  charter
• Convertibility typically into common

6
NEW ISSUES OF STOCK (IPOS)

• Typically below current market prices
• Process
• Developing Prospectus
• Price the issue
• Distribute the issue
• Transaction Costs Spread, fees
• Shelf Registrations
• Corporation can plan issues up to two years to
  completion
• Permits issuer to time issuance for best price
  action

7
SECURITY MARKETS

• Organized Exchanges
• NYSE, AMEX, Tokyo (TSE), London (LSE), etc
• Restricted participation, trading rules strictly
  specified
• Traders (members) hold seats (Specialists, Floor
  traders) except NYSE buy license to trade
• Sale of seats must be approved (Pre-qualifications
  must be met)
• Transactions tend to be centralized advantageous
  for price discovery

8
SECURITY MARKETS

• Over-The-Counter (OTC) NASDAQ,
• Government Sec, Money Markets, Foreign Exchange
• Transactions tend to be decentralized price
  discovery less efficient
• Liquidity more expensive in terms of bid-ask
  spreads
• Bulletin Board price listing for "penny" stocks
• Pink Sheets teeny-tiny fractional price low
  volume stocks

9
SECURITY MARKETS

• Stock Market Information
• Ticker Symbol
• 52-Week Price Range (Hi-Lo)
• Dividend
• Dividend Yield
• Price-Earnings Ratio (TTM)
• Volume (in hundreds round lots)
• Closing Price, change from previous close
• Indexes (DJIA, SP500, NASDAQ)

10
SECURITY MARKETS

• Auction Markets
• Orders of traders are directly matched
• NYSE Members may act as dealers (specialists) or
  brokers (traders)
• E. Cost of Liquidity Services BidAsk Spread
• Bid highest unexecuted price to buy
• Ask lowest unexecuted price to sell

11
MARKET MONITORING

• SEC reporting requirements
• www.sec.gov/edgar (web site for SEC reports)
• Sarbanes-Oxley (2002)
• Cannot audit books of firm any one of whose CEO
  or CFO formerly worked for the auditing firm
• Require outside directors to be on audit
  committee
• Members of audit committee may not receive
  special compensation
• Require CEO / CFO certification of correctness
• Failure to comply draws fines and imprisonment

12
HOMEWORK QUESTIONS

• What characteristic of preferred stock causes
  sensitivity to interest rate changes?
• What does it mean when a preferred stock is
  cumulative participating?
• What are preemptive rights and why are they
  important to common stockholders?
• How do we measure the cost of liquidity?
• How does an auction market differ from a dealer
  market?
• What has been the major impact of Sarbanes-Oxley
  on the stock markets?