Case Study

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•Money Markets: the market where short-term securities are bought & sold•Capital Market: the market where long-term securities such as stocks & bonds are bought & sold•Primary Market: the market in which new issues of securities are sold to the public•Secondary Market: the market in which securities are traded after they have been issued•Initial Public Offering (IPO)–First public sale of a company’s stock–Requires SEC approval•3 Choices to Market Securities in Primary Market–Public offering–Rights offering–Private Placement •Underwriting the offering: promoting the stock & facilitating the sale of the company’s shares•Prospectus: registration statement describing the issue & the issuer•Red Herring: preliminary prospectus available during the waiting period•Quiet Period: time period after prospectus is filed when company must restrict what is said about the company•Road Show: series of presentations to potential investors•Underwriting the Issue: purchases the security at agreed-on price & bears the risk of reselling it to the public•Underwriting Syndicate: group formed by investment banker to share the financial risk of underwriting•Selling Group: other brokerage firms that help the underwriting syndicate sell issue to the public•Tombstone: public announcement of issue & role of participants in underwriting process•Investment Banker Compensation: typically in the form of a discount on the sale price of the securities•Secondary Market: the market in which securities are traded after they have been issued Role of Secondary Markets–Provides liquidity to security purchasers–Provides continuous pricing mechanism•Securities Exchanges: forums where buyers & sellers of securities are brought together to execute trades•Nasdaq Market: employs an all-electronic trading platform to execute trades•Over-the-counter (OTC) Market: involves trading in smaller, unlisted securities•Broker Markets: consists of national & regional securities exchanges–60% of the total dollar volume of all shares in U.S. stock market trade here–New York Stock Exchange (NYSE) is largest & most well-known–Trades are executed when a buyer & a seller are brought together by a broker & the trade takes place directly between the buyer & seller•NYSE:Largest stock exchange—over 2,700 companies–Over 350 billion shares of stock traded in 2005–Accounts for 90% of stocks traded on exchanges–Specialists make transactions in key stocks–Strictest listing policies •NYSE Amex (formally American Stock Exchange)–More than 500 companies listed–Major market for Exchange Traded Funds–Typically smaller & younger companies who cannot meet stricter listing requirements for NYSE•Regional Stock Exchanges–Typically lists between 100–500 companies, usually with local & regional appeal–Listing requirements are more lenient than NYSE–Often include stocks that are also listed on NYSE or NYSE Amex–Best-known: Midwest, Pacific, Philadelphia, Boston, & Cincinnati•Options Exchanges–Allows trading of options–Best-known: Chicago Board Options Exchange (CBOE)•Futures Exchanges–Allows trading of financial futures–Best-known: Chicago Board of Trade (CBT)•Dealer Markets: consists of both the Nasdaq market & the OTC market–Trades are executed with a dealer (market maker) in the middle. Sellers sell to a market maker at a stated price. The market maker then offers the securities to a buyer. •No centralized trading floor; comprised of market makers linked by telecommunications network Both IPOs & secondary distributions are sold on OTC–40% of the total dollar volume of all shares in U.S. stock market trade here–Both IPOs & secondary distributions are sold on OTC•Bid Price: the highest price offered by market maker to purchase a given security•Ask Price: the lowest price at which a market maker is willing to sell a given security•Nasdaq–Largest dealer market–Lists large companies (Microsoft, Intel, Dell, eBay) & smaller companies•Over-the-counter (OTC) Bulletin Board–Lists smaller companies that cannot or...
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