Selling Securities

3 Key excerpts on "Selling Securities"

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  eBook - ePub

  The Forbes / CFA Institute Investment Course

  Timeless Principles for Building Wealth

  • Vahan Janjigian, Stephen M. Horan, Charles Trzcinka(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Commercial paper is an unsecured, short-term debt instrument issued by a corporation. It generally matures within 270 days. Instead of paying a regular coupon like a bond, commercial paper is sold at a discount to reflect current market rates. In other words, the inferred interest is deducted from the price of the security at purchase.

  The securities markets are where securities are bought and sold. The role of these markets is to bring those who need capital (corporations) together with those who have capital (investors). The securities markets enable investors to buy the securities of numerous companies. They also give corporations a practical way to raise money for their operations.

  To understand the role of the securities markets, let us first examine how common stock comes into being. This is called the primary market . Then we will look at how a stock trades after it is created. This is called the secondary market .

  Suppose you own a growing enterprise and you need money to expand. If you need a little money, you might try to borrow some from a bank. However, if you need a substantial amount of money, an adviser might suggest that you contact an investment bank . The financial crisis of 2008 decimated the investment banking industry, and many previously major investment banks no longer exist as independent entities. JPMorgan Chase acquired Bear Stearns, Bank of America acquired Merrill Lynch, and Barclays acquired what remained of Lehman Brothers. The survivors, including Goldman Sachs, registered as commercial banks, making them subject to greater regulatory scrutiny. Even though the investment banking industry has undergone a transformation, corporations still need investment banking services. Therefore, we continue to use the term investment bank .

  After examining your company, the investment bank might recommend that the best way to expand your business is for it to underwrite a public issuance of your company’s stock. This is referred to as an initial public offering (IPO).

  Suppose the investment bank agrees to purchase your company’s stock at a fixed price and sell it to the public at a slightly higher price. The difference, or spread , is the investment bank’s compensation for handling the transaction. In this case, the investment bank is acting as a dealer

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  eBook - ePub

  Personal Finance and Investments

  A Behavioural Finance Perspective

  • Keith Redhead(Author)
  • 2008(Publication Date)
  • Routledge

    (Publisher)

  Third, stock exchanges provide maturity transformation. Companies need to obtain funds for the long term, whereas investors typically want immediate access to their money.A stock exchange provides a means of reconciling these two objectives. A firm may sell securities with distant maturities (or, in the case of ordinary shares, with no maturity date) whilst the buyers of such securities can obtain quick access to their money by selling the securities (securities include shares and bonds).

  Another function of a stock exchange, which is performed as a byproduct of the financial intermediation, is to communicate information about the companies whose securities are being traded. The prices of stocks and bonds reflect the evaluation of investors and dealers (some of whom carry out very detailed analyses of the firms) of the performance of the firms. Share prices, and their changes, can communicate information of value to those inside as well as those outside the companies whose shares are being traded.

  PRIMARY AND SECONDARY MARKETS

  When stocks and bonds are initially issued they are said to be sold in the primary market. Subsequent to their initial sale they are traded in the secondary markets. Primary trading involves buying and selling newly created securities, whereas secondary trading involves shares and bonds that are already in existence.The fact that financial investments can be sold in a secondary market renders them more liquid, and hence more attractive. This enhanced liquidity makes investors more willing to buy in the primary market, and causes them to be less demanding in terms of required rates of return.An active secondary market improves the operation of the primary market and allows companies to raise money easily and on favourable terms. Secondary-market trading volume far exceeds the level of primary-market dealing.

  The secondary market is the market in which previously issued securities are traded. It is the means by which stocks or bonds bought in the primary market can be converted into cash. The knowledge that assets purchased in the primary market can easily and cheaply be resold in the secondary market makes investors more prepared to provide borrowers with funds by buying in the primary market. A successful primary market depends upon an effective secondary market.

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  eBook - ePub

  Understanding Company Law

  • Alastair Hudson(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Therefore, this chapter will not consider private companies until the very end, because the principal focus of securities law is on issues of securities to the public at large by public limited companies. First, however, we shall consider what is meant by a ‘security’ by examining the use of bonds and shares in raising money from investors. (For a more detailed discussion of these regulations you should refer to Alastair Hudson, Securities Law, 2013a generally, or Alastair Hudson, The Law of Finance, 2013b.) The mechanics of securities markets in raising capital for companies There are two ways in which a company can raise money: it can borrow it or it can issue shares. Borrowing money can be done by means of an ordinary loan or it can be done by issuing bonds. Bonds are a form of security that can be bought and sold like shares. In a bond issue, the company issues a large number of bonds of equal value and carrying equal rights; investors buy those bonds by paying the purchase price of the bond to the issuing company. The company is then obliged to pay interest periodically to the investors and is obliged to repay the purchase price of the bond at the end of the life of the bond. As a result, the company acquires a loan provided collectively by all of the investors, it pays interest (just like an ordinary loan) and it is required to repay the loan at the end of the contractual term (just like an ordinary loan). Significantly, the investors acquire securities in the form of the bonds: the important part about a security is that it can be sold. Therefore, the investors may be speculating on the movements in the value of the bonds on the open market, instead of simply waiting to receive interest on their ‘loan’ to the company. Usually there is a ‘trustee’ appointed over the bond issue to ensure that payment is made and to activate the default provisions in the documentation if the issuing company breaches any of its obligations

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