Week 5

Topics: Stock market, Stock, Financial markets Pages: 12 (1689 words) Published: April 1, 2013

Debt & Equity Capital
• Capital: Long term funds of a firm

Topic 10 part 1
Share valuation

Based on slides prepared By
Alex Proimos, John Wiley & Son

Debt & Equity Capital

• Debt Capital: Long term borrowing incurred by
the firm (loans, bonds etc).
• Equity Capital: Long term funds provided by the
firm’s shareholders (preference and ordinary).
Can be raised internally (retained earnings) or
externally (selling of shares).

The market for shares
Basic facts
 Equity securities are a company‟s certificates of
 At the end of June 2009, more than $1.10 trillion worth

of public equity securities were outstanding
 44% of the adult population who shares either directly

of indirectly (majority of the holdings are through
superannuation funds)

Issuing Ordinary Shares

• Ordinary shares can be sold to the primary market via:
– A Public Offering
– A Rights Offering
– A Private Placement

The market for shares
Secondary markets
 Outstanding shares of a company are bought and sold
among investors.
 From investor‟s perspective, secondary markets

provide marketability at a fair price for shares of
securities they own
 Active secondary market enables companies to sell

their new debt or equity issues at lower funding costs
than can companies without secondary markets that
sell similar securities



The market for shares
Secondary markets and their efficiency
 Virtually all secondary equity market transactions in
Australia take place on the ASX
 In terms of total volume of activity and total
capitalisation of companies listed, NYSE is world‟s
largest and NASDAQ is second largest
 There are four types of secondary markets

The market for shares
Secondary markets and their efficiency
 Secondary markets farthest from our ideal of complete
price information are those in which buyer and seller
must seek each other out directly.
 A thorough search among all possible partners is

seldom done to locate the best price.

 Each differs according to amount of price information

available to investors, which in turn, affects market‟s

The market for shares
Secondary markets and their efficiency
 Securities that sell in direct search markets are
usually bought and sold infrequently:
Thus no third party (broker or dealer) has incentive to
serve the market
 Good examples of direct search markets:

Sales of small private companies‟ ordinary shares
and private placement transactions
 Direct search is the least efficient type of secondary

The market for shares
 Market efficiency is improved if someone in
marketplace can provide continuous bidding (selling or
buying) for the security
 Dealers provide this service by holding inventories of

securities, which they own, then buying and selling
from inventory to earn profit

The market for shares
 Brokers bring buyers and sellers together to earn a
fee, called a commission
 Brokers‟ extensive contacts provide a pool of price

information that individual investors could not
economically duplicate themselves
 By charging a commission less than cost of direct

search, they give investors incentives to utilise
information by hiring them as brokers

The market for shares
 Advantage of dealer over brokered market is that
brokers cannot guarantee an order will be executed
- Dealers can offer guarantee, because they have
inventory of securities
 A dealer market eliminates need for time consuming

search for fair deal by buying and selling immediately
from dealers‟ inventory of securities



The market for shares
 NASDAQ is best-known example of dealer market

The market for shares
 In an auction market, buyers and sellers confront each other directly and bargain over price.
 The ASX originally operated as an „open out-cry‟ market

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