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What defines a private placement market?
The limited number of investors
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In a private placement market (both
debt and equity), what does an investment banker do?
- Acts as finder
- matches buyers with sellers
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What are the two types of organized private markets?
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What is a private equity market?
where small, unseasoned firms seek first outside investment
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What is a venture capitalist?
- initial outside investor in a business
- operates in both private markets (equity and debt)
- high risk high return business
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What does unseasoned mean?
firm has not sought outside financing before
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Why do small, unseasoned firms need venture capitalists?
- 1) no one else wants to invest in small, unseasoned firms
- 2) firms have no historical records of operating results
- 3) firms have extremely uncertain growth projection
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Why do venture capitalists invest in unseasoned companies?
- 1) to keep or acquire intellectual capital
- 2) to keep or acquire new technology
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In the private equity market, where does the money come from?
venture capitalists
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What do venture capitalists get in return for the investment (besides monetary reasons)?
seats on the Board of Directors of the company they invest in
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Besides individuals, who else can be a venture capitalist?
large seasoned companies usually have a venture capital subsidiary
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What usually happens when venture capitalists get on the Board of a small unseasoned company?
minority position, but take over as soon as firm stumbles
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Is venture capital money related to the US economy?
Yes - it is directly related
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What is a primary market?
where securities are sold for the very first time
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What is a secondary market?
where securities are bought and sold for the second and subsequent time
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What does a money market deal with?
financial instruments with a maturity of less than 1 year
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What does a capital market deal with?
financial instruments with a maturity of more than 1 year
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Except organized exchanges, all financial markets are ___
over the counter markets
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What does ECN stand for and what is it?
- electronic communication network
- telecommunication network without physical location
- provides information (quotes), but there is no trading
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What is the disadvantage of over the counter markets?
not as continuous as organized exchanges, trades happen less often
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What is a broker?
finder of buyers and sellers, does not hold securities in own account
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What is a dealer?
finds buyers and sellers, does hold inventories of securities
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Where are over the counter markets located?
wherever the dealer or broker is, not one set physical location
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What are the characteristics of organized exchanges (3)?
- 1) they have a physical location
- 2) they are registered with the SEC
- 3) they are auction markets (must have buyers and sellers, which have to be matched)
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What are the benefits of organized exchanges (3)?
- 1) continuous market = securities trade more often
- 2) establish and publish relatively fair security prices (prices consider all public information available)
- 3) they are extremely helpful in helping firms raise new capital
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What are some listing requirements for organized exchanges?
- profitability
- size of the firm (assets, revenue, etc)
- market value
- public ownership
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What is an investment banker?
financial specialist who serves as intermediary in the selling of securities, can be individual or firm (Goldman-Sachs, Merill-Lynch)
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What are the 3 functions of an investment bank(er)?
- 1) to underwrite a security's issue (buy from firm then sell to first buyer on primary market)
- 2) to distribute securities (syndicate is wholesaler, dealer's organization is retailer)
- 3) to advise buyers and sellers
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What is a syndicate in relation to financial markets?
group of investment bankers
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When and why is a syndicate formed?
when issuing new securities to spread the risk between the investment bankers
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