Initial Public Offering (IPO) First public sale of a companys Requires SEC approval

Three

stock

Choices to Market Securities in Primary Market

Public offering Rights offering Private Placement

Underwriting the offering: promoting the stock and facilitating the sale of companys shares
Prospectus: registration statement describing the issue and 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 and 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 and 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

Organized Securities Exchanges: centralized institutions in which transactions are made in already outstanding securities Over-the-counter (OTC) Market: widely scattered telecommunications network in which transactions are made in both initial public offerings and already outstanding securities

Third Market

Large institutional investors go through market makers on the OTC market Institutional investors (mutual funds, life insurance companies, pension funds) receive reduced trading costs due to large size of transactions

Fourth Market

Large institutional investors deal directly with each other to bypass OTC market makers Electronic Communications Networks (ECNs) allow direct trading ECNs account for about a third of all Nasdaq transactions

Bull Market

Favorable markets Rising prices Investor/consumer optimism Economic growth and recovery Government stimulus Unfavorable markets Falling prices Investor/consumer pessimism Economic slowdown Government restraint

Bear Market

 Long

Purchase

Investor buys and holds securities Buy low and sell high

Make money when prices go up

Margin Trading
Uses borrowed funds to purchase securities Currently owned securities used as collateral for margin loan from broker Margin requirements set by Federal Reserve Board

Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement, investor puts up $2,222.50 and broker will lend remaining $2,222.50

Can be used for common stocks, preferred stocks, bonds, mutual funds, options, warrants and futures

Advantages

Allows use of financial leverage Magnifies profits

Disadvantages
Magnifies losses Interest expense on margin loan Margin calls

 Short

Selling

Investor sells securities they dont own Investor borrows securities from broker Broker lends securities owned by other investors that are held in street name Sell high and buy low Investors make money when stock prices go down

 Advantages

Chance to profit when stock price declines

Disadvantages

Limited return opportunities: stock price cannot go below $0.00 Unlimited risks: stock price can go up an unlimited amount If stock price goes up, short seller still needs to buy shares to pay back the borrowed shares to the broker Short sellers may not earn dividends

1.

Position Trading- involves purchases of large blocks of securities on the expectation of a favorable price move. Pure Arbitrage- entails buying an asset in one price and selling it immediately in another market at a higher price. Risk Arbitrage- involves buying securities in anticipation of some information releasesuch as a merger or takeover announcement on a Federal Reserve interest rate announcement.

2.

3.

Private placement
A securities issue placed with one or a few large institutional investors.

Cash Management Accounts

Money market mutual fund sold by investment banks that offer check-writing privileges.

4.

Program Trading- a type of pure arbitrage trading in that it is often associated with seeking to profit from differences between the cash market price and the futures market price of a particular instrument.
Stock Brokerage- involves the trading of securities on behalf of individuals who want to transact in the money or capital markets. Electronic Brokerage- offered by major brokers, involves direct access, via the Internet, to the trading floor therefore bypassing traditional brokers.

5.

6.

Venture capital
A professionally managed pool of money used to finance to finance new and often highrisk firms.

Institutional Venture Capital Firms

Business entities whose sole purpose is to find and fund the most promising new firms.

Angel Venture Capitalist (angel)

Wealthy individuals who make equity investments.

Merger
the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger.

Consolidation
the combination of two or more firms to form a completely new corporation. Holding Company- A corporation that has voting control of one or more other corporations.

Subsidiaries
the companies controlled by a holding company.

Acquiring company
the firm in a merger transaction that attempts to acquire another firm.

Target company
the firm in a merger transaction that the acquiring company is pursuing.

Friendly Merger
a merger transaction endorsed by the target firms management approved by its stockholders, and easily consummated.

Hostile Merger
a merger transaction that the target firms management does not support, the acquiring company to try to gain control of the firm buying shares in the marketplace.

Strategic merger
a merger transaction undertaken to achieve economist of scale

Financial merger
a merger transaction undertaken with the goal of restructuring the acquired company to improve its cash flow and unlock its hidden value.

 Horizontal

merger- a merger of two firms in the same line of business. Vertical merger- a merger in which a firm acquires a supplier or a customers. Congeneric merger- a merger in which one of the firm acquires another firm that is in the same general industry but neither in the same line of business nor a supplier or customer. Conglomerate merger- a merger combining firms in unrelated businesses.

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