How Securities Are Traded? Essay

976 WordsOct 18, 20114 Pages
CHAPTER 3 How Securities are Traded Investments, 8th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. How Firms Issue Securities • Primary – New issue – Key factor: issuer receives the proceeds from the sale • Secondary – Existing owner sells to another party – Issuing firm doesn’t receive proceeds and is not directly involved 3-2 How Firms Issue Securities Continued • Investment Banking • Shelf Registration • Private Placements • Initial Public Offerings (IPOs) 3-3 Investment Banking • Underwritten: firm commitment on proceeds to the issuing firm • Red herring • Prospectus 3-4 Figure 3.1 Relationship Among a Firm Issuing Securities, the Underwriters and the Public 3-5 Shelf Registrations • SEC Rule 415 • Introduced in 1982 • Ready to be issued – on the shelf 3-6 Private Placements • Sale to a limited number of sophisticated investors not requiring the protection of registration • Allowed under Rule 144A • Dominated by institutions • Very active market for debt securities • Not active for stock offerings 3-7 Initial Public Offerings • Process – Road shows – Bookbuilding • Underpricing – Post sale returns – Cost to the issuing firm 3-8 Figure 3.2 Average Initial Returns for IPOs in Various Countries 3-9 Figure 3.3 Long-term Relative Performance of Initial Public Offerings 3-10 How Securities are Traded • Types of Markets – Direct search • Least organized – Brokered • Trading in a good is active – Dealer • Trading in a particular type of asset increases – Auction • Most integrated 3-11 Types of Orders • Market—executed immediately – Bid Price – Ask Price • Price-contingent – Investors specify prices – Stop orders 3-12 Figure 3.4 The Limit Order Book for

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