II: Equities I 6: Primary Equity Markets 7: Secondary Equity Markets

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Introduction  Introduction to Stock Market Investment  designed for people who suspect that the New York Stock Exchange is in New York 

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Begin With A Business  Discovery Café  Use the Surveying Building as a Cyber Café  Dean’s permission  I need $$ or Partner with $$

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Partnership  Two equal Partners  Joe W. Partner ($10,000)  Elisabeth Entrepreneur ($10,000)  Two equal shares Par Value

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Potential Buyer  Price?  Par Value  Book Value Assets – Liabilities = Shareholders Equity  Earnings  Earnings per Share (EPS)

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Price – Note 1  I am using information from the past to make educated guesses about what will happen in the future. You can't just graph all the past data and draw a straight line though it. A lot will depend on how I evaluate the company's ability to grow and change over an uncertain future.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Price – Note 2  Price really is irrelevant unless someone wants to buy or sell.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Share Prices  Decreasing Prices  Dean gets food poisoning

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Share Prices  Increasing Prices  Dean schedules the Faculty meetings in the Discovery Café

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Expansion  Opportunity to expand to three new sites on campus.  We need $$$ or another partner with $$$

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Private Equity  Accredited Investors: investors sophisticated enough to analyze the risks of a new business and who control enough money to be able to take these risks.  Angel: one venture capitalist as opposed to a group or consortium  Finance 423: Financing Emerging Businesses

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Venture Capitalist  Negotiates 40% partnership for the $50,000 we need to expand to three new sites.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Pricing  What is my share worth?  What is the company worth? (Market Capitalization)

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Success at Last  Opportunity to expand to other campuses  We need $$$$$ or more partners with $$$$$

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Public Equity Market  Individual Investors: smaller investors who would normally not have the opportunity to invest in businesses  IPO: Initial Public Offering

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Investment Banking  Underwriter: financial advisers, lawyers, and marketers all rolled into one. The Underwriter takes us through the procedure of carving out a piece of the company to sell and making sure we do so legally and advantageously.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Going Public  We decide to issue 300,000 shares.  The original investors retain 180,000 shares.  The other 120,000 shares will be offered to the public.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 SEC  Securities Exchange Commission  to ensure that all investors have equal access to the information they need to make informed investment decisions,  and  to administer the federal securities laws and regulate firms that provide investor services

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 EDGAR  Electronic  Data  Gathering  And  Retrieval sec.gov/edgar/searchedgar/webusers.htm Annual and Quarterly Filings made available to the investing public.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 SEC  Registration Statement  Prospectus  Red Herring

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 SEC  Registration Statement  Prospectus  Red Herring  Road Show  Registration becomes “Effective”

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Setting the Price  Too High (?%$^#*&)  Investors may not buy all the shares we offer. Then the underwriter will be stuck with shares it can not sell,- or at least not at a profit.  Too Low (?%$^#*&)  We will not generate as much money as we might have done to finance our expansion.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Setting the Price  $50/share

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 IPO: Hot  By 9:30 all 120,000 shares are sold.  Secondary market  Prices rise.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Hot IPO: Netscape (NSCP)  Netscape Communications (NSCP) was the classic hot issue. It went public August 9, 1995 at an offer price of $28. On the same day it hit a high of $74¾ and closed at $58¼. Netscape hit an all time high of $174 in December 1995 and split 2:1 February 7,  A year later NSCP was trading at $30  Merged with AOL in March 1999

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Cold IPO:  Cyberian Outpost (COOL) was the classic cold issue. It went public July 31, 1998 at an offer price of $26. It closed the same day at $20 1/4. This represents a drop of 20% in one day. In September it hit a low of $5 5/16 before closing at $10 7/16 at the end of the month.  Acquired by Fry’s Electronics in November 2001 for 25c per share

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Ice Cold IPO  Underwriter cannot sell all the shares offered  Underwriter can not sell enough shares to make the issue worth while and the offering may be pulled.

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Discovery Café  Price hovers right around the offer price of $50

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Discovery Café  What is my share worth?  What is the Market Capitalization?  How much money did we raise?

Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012 Pricing  IPO at $50 $15,000,000

Chapter 7: Secondary Equity Markets Secondary Markets © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Stock Exchanges  Exists to bring buyer and seller together in a two sided auction.

Chapter 7: Secondary Equity Markets Auction  Buyers Bid .  $50.40  $50.35  $50.30  $50.25  $50.20  Sellers Ask  $50.65  $50.60  $50.55  $50.50 . Bid Ask Spread =10 ₵ Tick =5 © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Discovery Café  Over The Counter  NASDAQ  NYSE

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 OTC: Over The Counter  Stocks not listed on an exchange trade over- the-counter.  OTC stocks are generally smaller companies that trade infrequently

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 OTC  John Q. Investor goes to his broker to buy 1000 shares of Discovery Café.

Chapter 7: Secondary Equity Markets OTC: Pink Sheets © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 OTC  The Pink Sheets brings buyers and sellers together by providing a contact of the dealers in the stock.

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASD  National Association of Securities Dealers  self regulating organization  oversees the OTC market  administers rules of fair practice and governs the rules of how securities are traded, delivered, and settled.

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ  National Association of Securities Dealers Automated Quotation  Began as a computerized network to link traders of OTC issues that traded more frequently.  Filed for status as an exchange under the name NASDAQ

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ  Has no trading floor  network of computer and telephone lines that link the members of the NASD  Works through a system of competing Market Makers

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Brokers, Dealers, Market Makers  Suppose that Bill Gates writes a book entitled "The Secrets of My Success - The Microsoft Story".  Bill is a good friend* and I can get copies of this book autographed by the author.  *Actually, Bill doesn’t know me from Eve

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Broker  Agent  When you want to buy a book I can buy it for you. I charge you what I paid for the book (plus commission).  When you want to sell a book I can sell it for you. I give you what I get for the book (minus commission).

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Dealer  Manages an Inventory  When you want to buy a book I sell it to you from my inventory of books. I charge you my quoted ask price plus a small markup for handling.  When you want to sell a book I buy it from you for my inventory of books. I pay you my quoted bid price less a small markup for handling.

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 Market Maker  Must always stand ready to buy/sell  When you want to buy a book, whenever you want to buy a book, I must sell you one from my inventory of books.  When you want to sell a book, whenever you want to sell a book, I must buy it from you.

Chapter 7: Secondary Equity Markets Market Maker  Bid $50  If you want to sell a book, I will buy it from you for $50  Ask $53  If you want to buy a book, I will sell it to you for $53 © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets Market Maker  Bid $40  Discourage book sellers by lowering the price to $40  Ask $42  Encourage book buying by lowering the price at which I sell to $42 © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ: Example  Discovery Café applies for listing in NASDAQ  Assigned the ticker symbol CAFE (all NASDAQ stocks have 4 character symbols – or they used to anyway.)

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ  John Q. Investor goes to his broker to buy 1000 shares of Discovery Café

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ: Example

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NASDAQ  NASDAQ does not bring buyers and sellers together; it uses a system of wholesellers to ensure that you can always buy and sell

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 New York Stock Exchange

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NYSE  Has a trading floor  Uses a specialist system  Specialist: one and only market maker for a particular stock.  The specialist is situated at one of the seventeen specialist posts on the floor of the exchange. There are 482 Specialists employed by 21 firms.

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NYSE: Example  Discovery Café decides to list its shares on the NYSE  Our ticker symbol must change  DVC

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NYSE  John Q. Investor goes to his broker to buy 1000 shares of Discovery Café

Chapter 7: Secondary Equity Markets NYSE: Example  Specialist Bid $50 Broker Joe gets $1 per share more for his shares  Specialist Ask $52  John’s broker can buy directly from the specialist at $52ohn pays $1 per share less © Oltheten & Waspi 2012

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012 NYSE:  The specialist system brings buyers and sellers together by bringing everyone to the same place on the floor of the exchange  If there is an insufficiency of buyers then there is a market maker at hand  Specialist keeps the limit order book Gosh, I can hardly wait to find out what a limit order is…. maybe I’ll read chapter 8

II: Equity Markets I