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FNCE4030 Fall 2012 ch03 Handout Part 1 Class - 3

FNCE4030-fall-2012-ch03-handout-part-1-class_3

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9 views

FNCE4030 Fall 2012 ch03 Handout Part 1 Class - 3

FNCE4030-fall-2012-ch03-handout-part-1-class_3

Uploaded by

fbektasmas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 22

CHAPTER 3

How Securities are Traded

INVESTMENTS | BODIE, KANE, MARCUS


McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
3-2

How Firms Issue Securities


• Primary Market
– Firms issue new securities through
underwriter to public
– Investors get new securities; firm gets
funding
• Secondary Market
– Investors trade previously issued securities
among themselves
– Ownership is transferred, no new securities
INVESTMENTS | BODIE, KANE, MARCUS
3-3

How Firms Issue Securities (Ctd.)

• Stocks
– IPO
– Seasoned offering
• Bonds
– Public offering
– Private placement

INVESTMENTS | BODIE, KANE, MARCUS


3-4

Investment Banking

• Underwriting: investment bank helps the


firm to issue and market new securities
• Prospectus: Describes the issue and the
prospects of the company.
– Pre-file with SEC - Red herring
– Once registration is final and accepted by
SEC - Red Herring turns into Prospectus
– Registration does not mean approval
INVESTMENTS | BODIE, KANE, MARCUS
3-5

Figure 3.1 Relationship Among a Firm Issuing


Securities, the Underwriters, and the Public

INVESTMENTS | BODIE, KANE, MARCUS


3-6

Investment Banking
• Firm commitment
– investment bank purchases securities
from the issuing company and then
resells them to the public
– investment bank carries price risk

• Shelf Registration
– SEC Rule 415 (1982): Allows firms to
register securities, and then gradually sell
them to the public for two years

INVESTMENTS | BODIE, KANE, MARCUS


3-7

Investment Banking (Ctd.)

• Private placements
– Firm uses underwriter to sell securities
to a small group of institutional or
wealthy investors.
– Cheaper than public offerings
– Suitability concerns
– Not traded in secondary markets

INVESTMENTS | BODIE, KANE, MARCUS


3-8

Initial Public Offerings (IPOs)


• Process
– Road shows to publicize new offering
– Bookbuilding to determine demand for
the new issue
– Degree of investor interest in the new
offering provides valuable pricing
information
– IPO Shares allocated based on interest
• Caveats: high ethics are required
during IPO process
INVESTMENTS | BODIE, KANE, MARCUS
3-9

INVESTMENTS | BODIE, KANE, MARCUS


3-10

Figure 3.3 Long-term Relative Performance


of Initial Public Offerings

INVESTMENTS | BODIE, KANE, MARCUS


3-11

How Securities are Traded

Types of Markets:

• Direct search
– Buyers and sellers seek each other

• Brokered markets
– Brokers search out buyers and sellers

INVESTMENTS | BODIE, KANE, MARCUS


3-12

How Securities are Traded


Types of Markets:
• Dealer markets
– Dealers buy for their own account
– Dealers have inventories of assets from
which they buy and sell
– Example: Corporate bonds
• Auction markets
– traders converge at one place to trade
INVESTMENTS | BODIE, KANE, MARCUS
3-13

Bid and Asked Prices


Bid Price Ask Price
• Bids are offers to buy • Asked prices represent
• In dealer markets, the offers to sell
bid price is the price at • In dealer markets, the
which the dealer is asked price is the price
willing to buy at which the dealer is
• Investors “sell to the willing to sell
bid” • Investors must pay the
• Bid-Ask spread is the asked price to buy the
profit for making a security
market in a security
INVESTMENTS | BODIE, KANE, MARCUS
3-14

Types of Orders

• Market Order: Executed immediately


– Trader receives current market price
• Price-contingent Order:
– Traders specify buying or selling
price
• A large order may be filled at multiple
prices

INVESTMENTS | BODIE, KANE, MARCUS


3-15

Limit and Stop orders


• Limit order
– Order to buy/sell X shares at price P or better
– “Sell X shares of Facebook at 25 (or better)”
– “Buy X shares of Apple at 600 (or better)
– Guarantees price but not execution

• Stop order
– Order to sell X shares once a stock hits a price trigger
– “Sell X shares of FB at stop price of 15”
– “Buy X shares of Apple at stop price of 700”
– Once price trigger is hit, it guarantees execution, as it
turns into market order, but does not guarantee price
INVESTMENTS | BODIE, KANE, MARCUS
3-16

Figure 3.5 Price-Contingent Orders

INVESTMENTS | BODIE, KANE, MARCUS


3-17

Price-Contingent Orders: Sell-Stop

INVESTMENTS | BODIE, KANE, MARCUS


3-18

Price-Contingent Orders: Sell-Stop

INVESTMENTS | BODIE, KANE, MARCUS


3-19

Price-Contingent Orders: Buy-Stop

INVESTMENTS | BODIE, KANE, MARCUS


3-20

Price-Contingent Orders: Buy-Stop

INVESTMENTS | BODIE, KANE, MARCUS


3-21

Price-Contingent Combined Orders:


Sell-Stop-Limit

INVESTMENTS | BODIE, KANE, MARCUS


3-22

Price-Contingent Combined Orders:


Sell-Stop-Limit

INVESTMENTS | BODIE, KANE, MARCUS

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