all rights reserveddr. david p echevarria1 stock [equity] markets chapter 10

Dr. David P Echevarria 1All Rights Reserved

STOCK [EQUITY] MARKETS

CHAPTER 10


PRIVATE EQUITY

A. Venture Capital1. Financing for high risk start-up ventures

2. Dollars for Equity position

a. Receive lettered stock (SEC Rule 144a)

b. Provide [managerial] assistance

3. VC profits when venture goes public (IPO)a. After a 90 to 180 day lockup period

b. Secondary registration required


PUBLIC EQUITY: COMMON STOCK

A. Corporate Charter; shareholder rights1. Elect directors2. Amend the charter3. Raise capital4. Approve mergers5. Preemptive rights

B. Classes Of Common1. Voting2. Non-Voting3. Weak voting


PUBLIC EQUITY: COMMON STOCK

C. Lettered Stock1. Private issue to investors

a. May be privately resold to qualified investors

2. Covered by SEC rules (i.e., 144a)

D. Rights Offerings3. Right granted by the corporate charter

4. New shares must be offered to current holders (rights)

5. Rights (R) may be exercised or sold to public


PREFERRED STOCK

A. Hybrid Security1. Fixed payouts like bonds

2. An equity investment like common

B. Attributes Of Preferred Stock1. Par value; meaningful in bankruptcy or liquidation

2. Cumulative Features; missed dividends must be made up

3. Participating; in years of high profits, an extra dividend

4. Non-Voting; except as provided in corporate charter

5. Convertibility; typically into common


NEW ISSUES OF STOCK (IPOS)

A. Typically below current market pricesB. Process

1. Developing Prospectus2. Price the issue3. Distribute the issue4. Transaction Costs: Spread, fees

C. Shelf Registrations1. Corporation can plan issues up to two years to

completion2. Permits issuer to time issuance for best price action


SECURITY MARKETS

A. Organized Exchanges1. NYSE, AMEX, Tokyo (TSE), London (LSE), etc

2. Restricted participation, trading rules strictly specified

3. Traders (members) hold seats (Specialists, Floor traders) except NYSE – buy “license” to trade

4. Sale of seats must be approved (Pre-qualifications must be met)

5. Transactions tend to be centralized; advantageous for price discovery


SECURITY MARKETS

B. Over-The-Counter (OTC) NASDAQ, 1. Government Sec, Money Markets, Foreign Exchange

2. Transactions tend to be decentralized; price discovery less efficient

3. Liquidity more expensive in terms of bid-ask spreads

4. Bulletin Board: price listing for "penny" stocks

5. Pink Sheets: teeny-tiny fractional price low volume stocks

Dr. David P Echevarria 9

SECURITY MARKETS

An electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary.

C. Electronic Trading Platforms

1. Scottrade

2. TradeMonster

3. OptionsHouse

4. TradeKing

5. Motifinvesting

6. MerrillEdge

7. NYSE Arca

8. Fidelity ATP

All Rights Reserved

http://en.wikipedia.org/wiki/Financial_intermediary


SECURITY MARKETS

D. Stock Market Information1. Ticker Symbol 2. 52-Week Price Range (Hi-Lo)3. Dividend4. Dividend Yield5. Price-Earnings Ratio (TTM)6. Volume (in hundreds = round lots)7. Closing Price, change from previous close8. Indexes (DJIA, SP500, NASDAQ)


SECURITY MARKETS

D. Auction Markets 1. Orders of traders are directly matched

2. NYSE Members may act as dealers (specialists) or brokers (traders)

E. Cost of Liquidity Services: Bid–Ask Spread3. Bid = highest unexecuted price to buy

4. Ask = lowest unexecuted price to sell


MARKET MONITORING

A. SEC: reporting requirements1. www.sec.gov/edgar (web site for SEC reports)

B. Sarbanes-Oxley (2002)1. Cannot audit books of firm any one of whose CEO or

CFO formerly worked for the auditing firm

2. Require outside directors to be on audit committee

3. Members of audit committee may not receive special compensation

4. Require CEO / CFO certification of correctness

5. Failure to comply draws fines and imprisonment

http://www.sec.gov/edgar


HOMEWORK QUESTIONS

A. What rights do common stockholders have in the Corporate Charter?

B. What characteristic of preferred stock causes sensitivity to interest rate changes?

C. What does it mean when a preferred stock is cumulative & participating?

D. What are preemptive rights and why are they important to common stockholders?

E. How do we measure the cost of liquidity?F. What is the major requirement of Sarbanes-Oxley

on the company’s management?

all rights reserveddr. david p echevarria1 stock [equity] markets chapter 10

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