University:
California State University, Northridge
Course:
FIN 502 | Managerial Finance
Academic year:

2024
Views:

149

Pages:

11
Author:

leikfimirw2

Chapter 6 ORGANIZATION AND FUNCTIONING OF SECURITIES MARKETS Part 1 What is a market? The means through which buyers and sellers are brought together to aid in the transfer of goods and services Does not require a physical location “The market” itself does not have to own the goods and services involved Buyers and sellers benefit from the market Characteristics of a Good Market Availability of past transaction information  must be timely and accurate Liquidity: sell quickly at a good price    marketability price continuity depth Transaction cost are low (Internal efficiency) Prevailing market prices reflect all relevant information (External efficiency) Organization of the Securities Market Primary markets  New issues Secondary markets  Outstanding securities are bought and sold Primary Capital Markets Government Bonds Sold regularly through auctions Treasury bills: one year maturity or less Treasury notes: maturities of two to ten years Treasury bonds: original maturities of more than ten years Primary Capital Markets Municipal Bonds Sold by three methods    Competitive bid sales: sealed bids Negotiated sale: contractual arrangements, underwriter helps prepare, price, and sell the issue Private placements: Issuer sells directly to investors Underwriters services    Origination: design of the issue Risk-bearing: purchase the issue, risk reselling Distribution: selling the issue Primary Capital Markets Corporate Bonds Negotiated arrangement with an investment banking firm who maintains a relationship with the issuing firm Underwriting firm often organizes a syndicate for distribution Primary Capital Markets Common Stock New issues are divided into two groups Seasoned new issues  New shares offered by firms that already have stock outstanding Initial public offerings (IPOs)  Firms selling their stock to the public for the first time New issues normally underwritten by investment banking firms Relationships with Investment Bankers 1. Negotiated   Most common Full services of underwriter 2. Competitive bids   Corporation specifies securities offered, then seeks bids Reduced costs but also reduced services of underwriter 3. Best-efforts  Investment banker acts as broker, selling all it can at a specified price Introduction of Rule 415 Shelf registration: Allows firms to register securities and sell them piecemeal over the next two years Increased flexibility for timing issues Reduces registration fees and expenses Mostly used for bond sales Private Placements and Rule 144A Firms sells to a small group of institutional investors, with some assistance of an investment banker Lower issuing costs than public offering Extensive registration not required Issues can trade among large, sophisticated investors

Organization and Functioning of Securities Markets, Part 1

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