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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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

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

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

13. 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

14. 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

15. 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

16. MARKET MONITORING SEC: reporting requirements Sarbanes-Oxley (2002)
(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

17. 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