II: Equities I 6: Primary Equity Markets 7: Secondary Equity Markets.

II: Equities I

6: Primary Equity Markets

7: Secondary Equity Markets

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012

Introduction

Introduction to Stock Market Investment designed for people who suspect that the

New York Stock Exchange is in New York www.business.illinois.edu/finance_dev/

http://www.business.illinois.edu/finance_dev/


Begin With A Business

Discovery Café Use the Surveying Building as a Cyber Café

Dean’s permission I need $$

or Partner with $$


Partnership

Two equal Partners Joe W. Partner ($10,000) Elisabeth Entrepreneur ($10,000)

Two equal shares

Par Value


Potential Buyer

Price? Par Value Book Value

Assets – Liabilities = Shareholders Equity Earnings Earnings per Share (EPS)


Price – Note 1

I am using information from the past to make educated guesses about what will happen in the future. You can't just graph all the past data and draw a straight line though it. A lot will depend on how I evaluate the company's ability to grow and change over an uncertain future.


Price – Note 2

Price really is irrelevant unless someone wants to buy or sell.


Share Prices

Decreasing Prices Dean gets food poisoning


Share Prices

Increasing Prices Dean schedules the Faculty meetings in the

Discovery Café


Expansion

Opportunity to expand to three new sites on campus.

We need $$$or another partner with $$$


Private Equity

Accredited Investors: investors sophisticated enough to analyze the risks of a new business and who control enough money to be able to take these risks.

Angel: one venture capitalist as opposed to a group or consortium

Finance 423: Financing Emerging Businesses


Venture Capitalist

Negotiates 40% partnership for the $50,000 we need to expand to three new sites.


Pricing

What is my share worth? What is the company worth?

(Market Capitalization)


Success at Last

Opportunity to expand to other campuses We need $$$$$

or more partners with $$$$$


Public Equity Market

Individual Investors: smaller investors who would normally not have the opportunity to invest in businesses

IPO: Initial Public Offering


Investment Banking

Underwriter: financial advisers, lawyers, and marketers all rolled into one. The Underwriter takes us through the procedure of carving out a piece of the company to sell and making sure we do so legally and advantageously.


Going Public

We decide to issue 300,000 shares. The original investors retain 180,000 shares. The other 120,000 shares will be offered to the

public.


SEC

Securities Exchange Commission to ensure that all investors have equal access

to the information they need to make informed investment decisions,

and to administer the federal securities laws and

regulate firms that provide investor services


EDGAR

Electronic Data Gathering And Retrieval

sec.gov/edgar/searchedgar/webusers.htm

Annual and Quarterly Filings made available to the investing public.

http://sec.gov/edgar/searchedgar/webusers.htm







SEC Registration Statement

Prospectus Red Herring


SEC

Registration Statement Prospectus Red Herring

Road Show Registration becomes “Effective”


Setting the Price

Too High (?%$^#*&) Investors may not buy all the shares we offer.

Then the underwriter will be stuck with shares it can not sell,- or at least not at a profit.

Too Low (?%$^#*&) We will not generate as much money as we

might have done to finance our expansion.


Setting the Price

$50/share


IPO: Hot

By 9:30 all 120,000 shares are sold. Secondary market Prices rise.


Hot IPO: Netscape (NSCP) Netscape Communications

(NSCP) was the classic hot issue. It went public August 9, 1995 at an offer price of $28. On the same day it hit a high of $74¾ and closed at $58¼. Netscape hit an all time high of $174 in December 1995 and split 2:1 February 7, 1996.

A year later NSCP was trading at $30

Merged with AOL in March 1999


Cold IPO: Cyberian Outpost (COOL)

was the classic cold issue. It went public July 31, 1998 at an offer price of $26. It closed the same day at $20 1/4. This represents a drop of 20% in one day. In September it hit a low of $5 5/16 before closing at $10 7/16 at the end of the month.

Acquired by Fry’s Electronics in November 2001 for 25c per share


Ice Cold IPO

Underwriter cannot sell all the shares offered

Underwriter can not sell enough shares to make the issue worth while and the offering may be pulled.


Discovery Café

Price hovers right around the offer price of $50


Discovery Café

What is my share worth? What is the Market Capitalization? How much money did we raise?


Pricing

IPO at $50$15,000,000

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012

Secondary Markets


Stock Exchanges

Exists to bring buyer and seller together in a two sided auction.


Auction

Buyers Bid . . . . . 10 @ $50.40 1 @ $50.35 10 @ $50.30 90 @ $50.25 120 @ $50.20

Sellers Ask 60 @ $50.65 10 @ $50.60 95 @ $50.55 50 @ $50.50 . . . . . .

Bid Ask Spread =10₵

Tick =5 ₵


Discovery Café

Over The Counter NASDAQ NYSE


OTC: Over The Counter

Stocks not listed on an exchange trade over-the-counter.

OTC stocks are generally smaller companies that trade infrequently


OTC

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café.


OTC: Pink Sheets


OTC

The Pink Sheets brings buyers and sellers together by providing a contact of the dealers in the stock.

http://www.OTCmarkets.com/home

http://www.otcmarkets.com/home


NASD

National Association of Securities Dealers self regulating organization oversees the OTC market administers rules of fair practice and governs

the rules of how securities are traded, delivered, and settled.


NASDAQ

National Association of Securities Dealers Automated Quotation

Began as a computerized network to link traders of OTC issues that traded more frequently.

Filed for status as an exchange under the name NASDAQ


NASDAQ

Has no trading floor network of computer and telephone lines

that link the members of the NASD Works through a system of competing

Market Makers


Brokers, Dealers, Market Makers

Suppose that Bill Gates writes a book entitled "The Secrets of My Success - The Microsoft Story".

Bill is a good friend* and I can get copies of this book autographed by the author.

*Actually, Bill doesn’t know me from Eve


Broker

Agent When you want to buy a book I can buy it for

you. I charge you what I paid for the book (plus commission).

When you want to sell a book I can sell it for you. I give you what I get for the book (minus commission).


Dealer

Manages an Inventory When you want to buy a book I sell it to you

from my inventory of books. I charge you my quoted ask price plus a small markup for handling.

When you want to sell a book I buy it from you for my inventory of books. I pay you my quoted bid price less a small markup for handling.


Market Maker

Must always stand ready to buy/sell When you want to buy a book, whenever you

want to buy a book, I must sell you one from my inventory of books.

When you want to sell a book, whenever you want to sell a book, I must buy it from you.


Market Maker

Bid $50 If you want to sell a

book, I will buy it from you for $50

Ask $53 If you want to buy a

book, I will sell it to you for $53


Market Maker

Bid $40 Discourage book

sellers by lowering the price to $40

Ask $42 Encourage book

buying by lowering the price at which I sell to $42


NASDAQ: Example

Discovery Café applies for listing in NASDAQ Assigned the ticker symbol CAFE (all

NASDAQ stocks have 4 character symbols – or they used to anyway.)


NASDAQ

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café


NASDAQ: Example


NASDAQ

NASDAQ does not bring buyers and sellers together; it uses a system of wholesellers to ensure that you can always buy and sell


New York Stock Exchange


NYSE

Has a trading floor Uses a specialist system

Specialist: one and only market maker for a particular stock.

The specialist is situated at one of the seventeen specialist posts on the floor of the exchange. There are 482 Specialists employed by 21 firms.


NYSE: Example

Discovery Café decides to list its shares on the NYSE

Our ticker symbol must change DVC


NYSE

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café


NYSE: Example

Specialist Bid $50 Broker Joe gets $1 per share more for his shares

Specialist Ask $52 John’s broker can buy

directly from the specialist at $52ohn pays $1 per share less


NYSE:

The specialist system brings buyers and sellers together by bringing everyone to the same place on the floor of the exchange

If there is an insufficiency of buyers then there is a market maker at hand

Specialist keeps the limit order book

Gosh, I can hardly wait to find out what a limit order is…. maybe I’ll read chapter 8

II: Equity Markets I

II: Equities I 6: Primary Equity Markets 7: Secondary Equity Markets.

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Transcript of II: Equities I 6: Primary Equity Markets 7: Secondary Equity Markets.