STOCK [EQUITY] MARKETS CHAPTER 10 All Rights Reserved Dr. David P Echevarria

PRIVATE EQUITY Venture Capital Financing for high risk start-up ventures Dollars for Equity position Receive lettered stock (SEC Rule 144a) Provide [managerial] assistance VC profits when venture goes public (IPO) After a 90 to 180 day lockup period Secondary registration required All Rights Reserved Dr. David P Echevarria

PUBLIC EQUITY: COMMON STOCK Corporate Charter; shareholder rights Elect directors Amend the charter Raise capital Approve mergers Preemptive rights Classes Of Common Voting Non-Voting Weak voting All Rights Reserved Dr. David P Echevarria

PUBLIC EQUITY: COMMON STOCK Lettered Stock Private issue to investors May be privately resold to qualified investors Covered by SEC rules (i.e., 144a) D. Rights Offerings Right granted by the corporate charter New shares must be offered to current holders (rights) Rights (R) may be exercised or sold to public All Rights Reserved Dr. David P Echevarria

PREFERRED STOCK Hybrid Security Attributes Of Preferred Stock Fixed payouts like bonds An equity investment like common Attributes Of Preferred Stock Par value; meaningful in bankruptcy or liquidation Cumulative Features; missed dividends must be made up Participating; in years of high profits, an extra dividend Non-Voting; except as provided in corporate charter Convertibility; typically into common All Rights Reserved Dr. David P Echevarria

NEW ISSUES OF STOCK (IPOS) Typically below current market prices Process Developing Prospectus Price the issue Distribute the issue Transaction Costs: Spread, fees Shelf Registrations Corporation can plan issues up to two years to completion Permits issuer to time issuance for best price action All Rights Reserved Dr. David P Echevarria

SECURITY MARKETS Organized Exchanges NYSE, AMEX, Tokyo (TSE), London (LSE), etc Restricted participation, trading rules strictly specified Traders (members) hold seats (Specialists, Floor traders) except NYSE – buy “license” to trade Sale of seats must be approved (Pre-qualifications must be met) Transactions tend to be centralized; advantageous for price discovery All Rights Reserved Dr. David P Echevarria

SECURITY MARKETS Over-The-Counter (OTC) NASDAQ, Government Sec, Money Markets, Foreign Exchange Transactions tend to be decentralized; price discovery less efficient Liquidity more expensive in terms of bid-ask spreads Bulletin Board: price listing for "penny" stocks Pink Sheets: teeny-tiny fractional price low volume stocks All Rights Reserved Dr. David P Echevarria

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. Electronic Trading Platforms Scottrade TradeMonster OptionsHouse TradeKing Motifinvesting MerrillEdge NYSE Arca Fidelity ATP All Rights Reserved Dr. David P Echevarria

Fidelity Active Trader Pro Version 10.3 All Rights Reserved Dr. David P Echevarria

Fidelity Active Trader Pro Version 10.3 All Rights Reserved Dr. David P Echevarria

Fidelity Active Trader Pro Version 10.3 All Rights Reserved Dr. David P Echevarria

SECURITY MARKETS Stock Market Information Ticker Symbol 52-Week Price Range (Hi-Lo) Dividend Dividend Yield Price-Earnings Ratio (TTM) Volume (in hundreds = round lots) Closing Price, change from previous close Indexes (DJIA, SP500, NASDAQ) All Rights Reserved Dr. David P Echevarria

SECURITY MARKETS Auction Markets Orders of traders are directly matched NYSE Members may act as dealers (specialists) or brokers (traders) E. Cost of Liquidity Services: Bid–Ask Spread Bid = highest unexecuted price to buy Ask = lowest unexecuted price to sell All Rights Reserved Dr. David P Echevarria

Alternative Trading Systems Regulation ATS Requirement by SEC to register as an ATS An ATS is frequently termed a “Dark Pool” Computers do the order matching vs. Market Makers or Specialists More than 60 ATS registered with the SEC Downside: Access by subscription Allows access to order stream by High Freq. Traders (HFT) All Rights Reserved Dr. David P Echevarria

MARKET MONITORING SEC: reporting requirements Sarbanes-Oxley (2002) www.sec.gov/edgar (web site for SEC reports) Sarbanes-Oxley (2002) Cannot audit books of firm any one of whose CEO or CFO formerly worked for the auditing firm Require outside directors to be on audit committee Members of audit committee may not receive special compensation Require CEO / CFO certification of correctness Failure to comply draws fines and imprisonment All Rights Reserved Dr. David P Echevarria

HOMEWORK QUESTIONS What rights do common stockholders have in the Corporate Charter? What characteristic of preferred stock causes sensitivity to interest rate changes? What does it mean when a preferred stock is cumulative & participating? What are preemptive rights and why are they important to common stockholders? How do we measure the cost of liquidity? What is the major requirement of Sarbanes-Oxley on the company’s management? All Rights Reserved Dr. David P Echevarria