Tài chính doanh nghiệp - Chapter 3: How securities are traded

Chapter 3How Securities are TradedPrimary vs. Secondary Security SalesPrimaryNew issueKey factor: issuer receives the proceeds from the sale.SecondaryExisting owner sells to another party.Issuing firm doesn’t receive proceeds and is not directly involved.Investment Banking ArrangementsUnderwritten vs. Best EffortsUnderwritten: firm commitment on proceeds to the issuing firm.Best Efforts: no firm commitment.Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms with investment banker.Competitive bid: issuer structures the offering and secures bids.Public OfferingsPublic offerings: registered with the SEC and sale is made to the investing public.Shelf registration (Rule 415, since 1982)Initial Public Offerings (IPOs)Evidence of underpricingPerformancePrivate PlacementsPrivate placement: sale to a limited number of sophisticated investors not requiring the protection of registration.Dominated by institutions.Very active market for debt securities.Not active for stock offerings.Organization of Secondary MarketsOrganized exchangesOTC marketThird marketFourth marketOrganized ExchangesAuction markets with centralized order flow.Dealership function: can be competitive or assigned by the exchange (Specialists). Securities: stock, futures contracts, options, and to a lesser extent, bonds.Examples: NYSE, AMEX, Regionals, CBOE.OTC MarketDealer market without centralized order flow.NASDAQ: largest organized stock market for OTC trading; information system for individuals, brokers and dealers.Securities: stocks, bonds and some derivatives.Most secondary bonds transactionsThird MarketTrading of listed securities away from the exchange.Institutional market: to facilitate trades of larger blocks of securities.Involves services of dealers and brokersFourth MarketInstitutions trading directly with institutionsNo middleman involved in the transactionOrganized information and trading systemsECN DevelopmentInternational Market StructuresLondon Stock ExchangeDealer market similar to NASDAQStock Exchange Automated Quotation Greater AnonymityTokyo Stock ExchangeNo market making serviceSartori provides bookkeeping serviceFeature a floor and electronic tradingGlobal Market AlliancesCosts of TradingCommission: fee paid to broker for making the transactionSpread: cost of trading with dealerBid: price dealer will buy from youAsk: price dealer will sell to youSpread: ask - bidCombination: on some trades both are paidTypes of OrdersInstructions to the brokers on how to complete the orderMarketLimitStop lossUsing only a portion of the proceeds for an investment.Borrow remaining component.Margin arrangements differ for stocks and futures.Margin TradingMaximum marginCurrently 50%Set by the FedMaintenance marginMinimum level the equity margin can beMargin callCall for more equity fundsStock Margin TradingX Corp $7050% Initial Margin40% Maintenance Margin1000 Shares PurchasedInitial PositionStock $70,000 Borrowed $35,000 Equity $35,000Margin Trading - Initial ConditionsMargin Trading - Maintenance MarginStock price falls to $60 per shareNew PositionStock $60,000 Borrowed $35,000 Equity $25,000Margin% = $25,000/$60,000 = 41.67%Margin Trading - Margin CallHow far can the stock price fall before a margin call?(1000P - $35,000)* / 1000P = 40%P = $58.33* 1000P - Amount Borrowed = EquityShort SalesPurpose: to profit from a decline in the price of a stock or security.MechanicsBorrow stock through a dealer.Sell it and deposit proceeds and margin in an account.Closing out the position: buy the stock and return to the party from which it was borrowed.Short Sale - Initial ConditionsZ Corp 100 Shares50% Initial Margin30% Maintenance Margin$100 Initial PriceSale Proceeds $10,000Margin & Equity 5,000Stock Owed 10,000Short Sale - Maintenance MarginStock Price Rises to $110Sale Proceeds $10,000Initial Margin 5,000Stock Owed 11,000Net Equity 4,000Margin % (4000/11000) 36% Short Sale - Margin CallHow much can the stock price rise before a margin call? ($15,000* - 100P) / (100P) = 30% P = $115.38 * Initial margin plus sale proceeds Regulation of Securities MarketsGovernment RegulationSelf-Regulation Circuit BreakersInsider TradingECNs and Fragmentation