Investments Chapter 2
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– forums that allow suppliers and demandersof securities to make financial transactions; they include both themoney market and the capital market.
– market where short term securities are bought & sold.
– market where long term securities likestocks and bonds are bought and sold.
– the market where new issues of securitiesare sold to the public.
Initial Public Offering (IPO)
– the first public sale of aco's stock.
Seasoned new issues
– new securities for co's that are alreadypublic.
Securities and Exchange Commission (SEC)
- federal agency that regulatessecurities offerings & markets.
the sale of a firm's securities to the general public.
- anoffer of new shares of stock to existing stockholders on a pro rata basis.
-the sale of new securities directly to selected groups of investors,without SEC registration.
The IPO Process
- 1. obtain approval of current shareholders.
- 2. Co's auditors & lawyers certify all documents for the co. are legit.
- 3. Co finds an investment bank willing to underwrite the offering. The underwriter is responsible for promoting the stock & facilitating the sale of the IPO shares.
- 4. Co files a registration statement w/the SEC.
- 5. After SEC approves, the investment community analyzes the co's prospects.
- 6. The co observes a quiet period, at least 1 mo after the IPO is complete, where co officials are restricted on what they can say about the co., so all investors have the same info.
- 7. Investment bankers & co. execs promote the stock thru a “road show”, a series of presentations.
- 8. The underwriter sets terms and prices the issue.
- 9. The SEC must approve the offering.
– a portion of a security registration statement that describes thekey aspects of the issue, the issuer, and its management and financial position.
– a preliminary prospectus made available toprospective investors during the waiting period b/t the registrationstatement's filing w/the SEC and its approval.
–financial intermediary that specializes in selling new securityissues and advising firms w/regard to major financial transactions.
– the role of the investment banker in bearing the risk ofreselling, at a profit, the securities bought from an issuing corp.at an agreed-on price.
Underwriting Syndicate –
a group formed by an investment banker to share the financial risk associated with underwriting new securities.
Selling Group –
a large number of brokerage firms that join theoriginating invesment bankser(s); each accepts responsibility forselling a certain portion of a new security issue.
Secondary Market (aftermarket) –
the market in which securities are traded after they have been issued.
Organized Securities Exchanges
– centralized institutions wheretransactions are made in already outstanding securities.
Over-the-Counter (OTC) Market
– widely scattered telecommunications newtorkthru which transactions are made in both initial public offeringsand already outstanding securities.
– stock exchange member who specializes in making transactions in one or more stocks.
–listing of a firm's shares on more than one exchange.
Regional Stock Exchanges
– as a group, they handle 4% of the dollarvolume of all shares traded on organized US exchanges. Best knownare the Chicago, Pacific, Philadelphia, Boston, and Cincinnati exchanges.
– allow holders to sell or buy another securityat a specified price over a given period of time. The dominantoptions exchange is the Chicago Board Options Exchange (CBOE). Alsotraded on the AMEX, the NYSE, the Pacific Stock Exchange, andPhiladelphia Stock Exchange.
– Dominant exchange is Chicago Board of Trade(CBT). CBT is broad, others specialize in certain commodities &financial instruments: NY Mercantile Exchange, the ChicagoMercantile Exchange, the Deutsche Terminboerse, the LondonInternational Financial Futures Exchange, the NY Coffee, Sugar &Cocoa Exchange, the Kansas City Board of Trade, and the MinneapolisGrain Exchange.
Over the Counter Market
- not a specific institution, is another way of trading securities; sellers and buyers linked by a telecommunications network. Dominant; Nasdaq (54% of the total dollar volume of domestic shares traded).
- Securities traded here aka unlisted securities.
– the public sales of large blocks ofpreviously issued securities held by large investors.
– traders who “make markets” by offering to buy or sell certainOTC securities at stated prices.
– the highest price offered by a dealer to buy agiven security.
– the lowest price at which a dealer is willing tosell a given security.
Nasdaq (National Association of Securities Dealers Automated Quotation) system
– an automated system that provides up to date bidand ask prices on certain selected, highly active OTC securities.
Nasdaq National Market
– a list of national or international Nasdaq stocks that meet certain qualification standards of financial size, performance, and trading activity.
– over the counter transactions made in securities listed on the NYSE, the AMEX, or one of the other organized exchanges.
– transactions made directly b/t large institutional buyers and sellers of securities.
Electronic Communications Networks
– privately owned electronic trading networks that automatically match buy and sell orders that customers place electronically.
– favorable markets normally associated w/rising prices, investor optimism, economic recovery, and government stimulus.
– unfavorable markets associated w/falling prices,investor pessimism, economic slowdown, and government restraint.
International Investment Performance
– high returns, doing better than the US.
Ways to Invest in Foreign Securities
- – directly or indirectly.
- Indirect; buy shares of US based
- multinational w/substantial foreign ops.
- Directly; buy from foreign exchanges, buy securities of foreign co's that trade on US exchanges, or buy American depositary receipts.
– dollar-denominated debt securities issued by foreign governments or corporations and traded in US securities markets.
American depository receipts (ADRs)
– dollar-denominated negotiable receipts for the stocks of foreign co's that are held in the vaults of banks in the co's home countries.
Risk of Investing Internationally
– changes in trade policies,labor laws, taxation may affect operating conditions, government might not be stable, may be hard for foreigners to get their $ out, dividends may be taxed, accounting standards may differ, foreign currency.
Currency Exchange Rate
– the relationship b/t 2 currencies on a specified date.
Currency Exchange Risk
– the risk caused by the varying exchange rates b/t the currencies of 2 countries.
Trading Hours and Regulation of Securities Markets
– US exchanges &Nasdaq 9:30am-4pm Eastern for regular trading, but Nasdaq & ECNs offer extended trading sessions before & after hours.
Regulation of Securities Markets –
protect investors/participants in the financial marketplace; state & federal laws require adequate & accurate disclosure of info.
Blue Sky Laws
– state laws that control the sale of securities within state borders, prevent investors from being sold nothing but“blue sky”.
Securities Act of 1933
– full disclosure of info; requires issuer of new security to file registration statement w/the SEC, cant sell til the SEC approves it. SEC can not only decline it but sue the issuer for fraud.
Securities Exchange Act of 1934
– established the SEC as the agency in charge of federal securities laws. Gives power to regulate organized securities exchanges & OTC market by extending disclosure requirements to outstanding securities. The stock exchanges have to register w/SEC, too.
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