1. II: Equities I 6: Primary Equity Markets

2. 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  www.business.illinois.edu/finance_dev/ www.business.illinois.edu/finance_dev/

3. 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 $$ or Partner with $$

4. 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

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

6. 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.

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

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

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

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

11. 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

12. 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.

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

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

15. 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

16. 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.

17. 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.

18. 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

19. 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.

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

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

22. 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.

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

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

25. 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, 1996.  A year later NSCP was trading at $30  Merged with AOL in March 1999

26. 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

27. 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.

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

29. 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?

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

31. II: Equity Markets I