Lecture 6 Security Markets Security Markets There are

Lecture 6 Security Markets

Security Markets There are two types of security markets Primary markets Secondary markets Primary market: a market for new issues of securities • Secondary market: Trading of already issued securities among investors occurs in the secondary market • •

Primary Market • All of the following are example of primary issues: • 1. IPO: (initial public offering) refers to stock of company being offered to general public for the first time • 2. Seasoned issue: new issues are offered by companies that already have floated equity

Primary issues • Companies may choose to sell securities either through public offering or private placement • In private placement, the securities are offered to a some wealthy individuals of selected financial institutions

Advantages of Private Placement • They cost less, typical registration and legal costs of IPOs are $20000 in US • Registration of the securities with SECP is not required • Funds can be quickly raised with private placements, IPOs takes up to 4 months • However, PP cannot be traded on stock exchange and thus have less liquidity • Because of illiquidity, higher rate of return is paid to investors

How securities are sold in IPOs • Securities are sold to general public with the help of investment banker • Investment banker helps companies in IPOs with their advice, underwriting and distribution of securities • Investment banker underwrites the new securities by purchasing the securities from the issuing company and assumes the risk of selling to general public. Such agreement is called firm commitment • An alternative to firm commitment is best effort agreement where the IB does not purchase the securities, rather tries his best to sell securities at good price

Secondary Market • The trading of already issued securities takes place in secondary market • Secondary markets helps the primary markets as they increase the liquidity of existing securities • Secondary markets exists for trading of common stocks, bonds, and puts and calls, • Secondary markets include brokers market, dealers markets

Brokers market • This is also called stock exchange or • It is an association of brokers and works like an auction market • All investor must deal through brokers • No investors is allowed to directly buy or sell shares from/to other investors • Brokers charge commission on transactions they make for their clients

NASDAQ • National Association of Security Market Dealers is a dealers market • Unlike brokers, dealers(also called market makers) buy and sell securities for themselves • Every market maker deals in number of securities and keeps a specific quantity of a given security • He stands to buy and sell a given security at the same time