Capital-Markets.ppt

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,1-,*,Capital Markets,14,Chapter Outline,Capital market and securities,Fund raisers in the capital markets,The three-sector economy of the United States,Physical and electronic markets,Rapid adjustment of prices as an indication of efficiency,Security legislation,2,Security Markets,Consist of various government bonds and corporate common stock,The markets are influenced by variables like:,Interest rates,Investor confidence,Economic growth,Global crises,etc.,3,Types of Security Markets,Money markets,Short-term markets comprising of securities with maturities of one year or less,Treasury bills,commercial paper,negotiable certificates of deposits,Capital markets,Long-term markets consisting of securities having maturities greater than one year,Bonds,common stock,preferred stock,convertible securities,These securities comprise a firms capital structure,4,International Capital Markets(contd),Establishment of NAFTA in 1994,CAFTA reduces trade barriers,The six original members of EU abolished internal tariffs in 1968,WTO strives to further liberalize international trade,Euro still considered second most important international currency,Value of“euro cash”in circulation now exceeds value of dollars in circulation worldwide,6,2006 Total Dollar Trading Volume on Ten Largest Equity Markets,7,International Capital Markets as a Source of Funds,An opportunity for companies to raise debt capital at the lowest cost,Many list their common stock around the world to:,Increase liquidity for the stockholders,Provide opportunities for the potential sale of new stock in foreign countries,About 3.7%of foreign investment has been invested in government securities,8,Government Securities,U.S.government securities-Treasury,Manages the federal governments debt in order to balance the flow of funds,Sells short-or long-term securities to finance shortfalls or retires in case of surplus,Federally sponsored credit agencies,Governmental units issuing securities on a separate basis from those sold by U.S.Treasury,Includes:,Federal Home Loan Banks(FHLB),10,Government Securities(contd),Federal National Mortgage Association(Fannie Mae),Farm Credit Banks,Student Loan Marketing Association,State and local securities,Municipal securities or tax-exempt offerings,Investors-high marginal tax brackets,Supported by revenue-generating projects,11,Corporate Securities(contd),Common stock,Sold by companies desiring new equity capital,Either sold as a new issue in an initial public offering(IPO)or as a secondary offering,Treasury stock:When a company purchases its own stock availability of surplus cash,13,Internally Generated Funds:Depreciation and Retained Earnings,15,The Supply of Capital Funds,Household sector-major supplier of funds,Indirect investments:,Household savings generated by wages,Transfer payments from the government,Wages and dividends from the corporations,These are funneled to financial intermediaries,Diverse financial institutions channel funds into commercial banks,mutual savings banks,and credit unions,16,Suppliers of Funds to Credit Markets(September 2007),18,The Role of the Security Markets,The capital markets are divided into many functional subsets,Each specific market serves a certain type of security,Secondary trading:,The security trades in appropriate markets not original offering,Provides liquidity to investors and keeps the prices competitive,19,The Role of the Security Markets(contd),Security markets provide liquidity by:,Enabling corporations to raise funds by selling new issues of securities,Allowing investor to sell them with relative ease and speed,Corporations and government units would not be able to raise large amounts of capital for economic growth without markets,20,The Organization of the Security Markets,Security markets structuring has changed because of:,Technological advances which include:,The rise of electronic communication networks(ECNs),Mergers or alliances between exchanges,Transformation of member exchanges into public companies,Acquisition of leading ECNs by the traditional exchanges,21,Traditional Organized Exchanges,Either national or regional,both structured in similar fashion,Historically,exchanges have central trading location,securities bought&sold in auction market by brokers acting as agents for buyers&sellers,Each stock trades at a physical location,trading post,on exchanges trading floor,Brokers are registered members of exchanges,22,Listing Requirements,A firms securities can be traded on an exchange if company meets listing requirements and has been approved by board of governors of that exchange,All exchanges have minimum requirements that must be met before trading occurs in companys common stock,NYSE-biggest exchange,generates most dollar volume in large companies,listing requirements are most restrictive,NASDAQ has less restrictive listing requirements than NYSE,24,Electronic Communication Networks(ECNs),Electronic trading systems that automatically buy and sell orders at specified prices,Also known as alternative trading systems(ATSs),Have SEC approval to be fully integrated into the national market system,Can choose to act as broker-dealer or an exchange,Lower the cost of trading,Forced organized security exchanges to make significant changes in their operations and structure,25,The New York Stock Exchange,In 2006,NYSE merged with a large ECN and became a public company,Comprises of thousands of huge companies whose shares are listed on the NYSE,Specialists meet to buy and sell securities through a bid and ask market,called an auction market,They are registered members of the exchange,In addition to acquiring Archipelago,NYSE merged with Euronext,NYSE acquired American Stock Exchange in 2008,26,The NASDAQ Market(contd),Created SuperMontage,electronic trading system that integrates trading process with limit orders,time stamps for receipt of orders,multiple quotes,etc.,Acquired the largest ECN called INET,and later BRUT,Created more speed and price efficiency in order executions,Divides its markets into national and small capitalization markets,28,World Federation of Exchanges Members(2006),29,Market Efficiency(contd),Fixed income securities,with known maturities,have reasonably efficient markets,The most efficient is that for U.S.government securities,Corporate bond markets are reasonable to a degree,Common stocks market has been supported through decimalization,ECNs,etc.,31,The Efficient Market Hypothesis,Weak form,Past price information is unrelated to future price,Trends cannot be predicted and taken advantage of by investors,Semistrong form,Prices currently reflect all public information,Strong form,All information,both private and public,is immediately reflected in stock prices,32,Regulation of the Security Markets,Organized securities markets are regulated by the:,Securities and Exchange Commission(SEC),Self-regulation of the exchanges,Three laws govern the sale and trading of securities with a primary purpose:,To protect unwary investors from fraud and manipulation,To make markets more competitive and transparent,33,Securities Act of 1933,Important features include:,All offerings except government bonds and bank stocks to be sold in more than one state to be registered with the SEC,The registration statement is to be filled 20 days in advance of date of sale and must include detailed corporate information,The SEC does not certify the fairness of a price,but only that the information seems to be accurate,All new issues of securities must be accompanied by a prospectus containing the same information appearing in the registration statement,Officers of the company and other experts preparing the prospectus or the registration statement could be sued for penalties and recovery of realized losses in case of discrepancies in information,34,Securities Exchange Act of 1934,Some of the important features include:,Guidelines for insider trading preventing them from taking quick advantage of information resulting in short-term gains,The Federal Reserves Board of Governors responsible for setting margin requirements to determine quantity of credit,Manipulation of securities by conspiracies among investors was prohibited,SEC given control over the proxy procedures of corporations,SEC required that certain reports be filled periodically,for its regulation of companies traded on the markets,All security exchanges to register with the SEC,35,Securities Acts Amendments of 1975,Major focus:to direct the SEC to supervise the development of a national securities market,Assumed that any national market would extensively use computers and electronic communication devices,Prohibited fixed commissions on public transactions,also prohibited banks,insurance companies and other financial institutions from buying stock exchange membership to save commission costs,The Intermarket Trading system,computerization demonstrated by the ECNs,and a more competitive structure has now been observed,36,Sarbanes-Oxley Act of 2002,Not directly related to security trading,Features include:,Authorization of an independent private-sector board to oversee the accounting profession,Creation of new penalties and long prison terms for corporate fraud and document destruction,Restrictions on accounting firms from providing consulting services to audit clients,and other similar provisions,The act holds corporate executives legally accountable for the accuracy of their firms financial statements,It requires the CEO,along with the CFO,to sign off documents,making monitoring a very serious business,37,Investment Banking Public and Private Placement,15,Chapter Outline,What is investment banking?,Functions of an investment banker,Dilution of earnings,Public versus private financing,Leveraged buyouts and debt for restructuring of a corporation,39,The Role of Investment Banking,The investment banker is the link between the corporations in need of funds and the investor,Responsible for designing and packaging a security offering,Responsible for selling the securities to the public,40,Concentration of Capital,Allows large firms to take additional risks and satisfy the needs of an increasingly demanding capital market,Competition has propelled many businesses to the position they are at now,Raising capital has become an international proposition,Firms that are very large have the ability to compete,International consolidations with international buy-outs of banks have become common,41,Gramm-Leach-Bliley Act(1999),Repealed the separation policy of the Depression-era laws,Which included separating banking,brokerage,insurance,and investment banking into separate entities,Federal Reserve and Treasury:,Have the power to impose restrictions on the activities of the banks,Allows strong banks to participate in the venture capital market,42,Investment Banking Competitors,There is intense competition in the market,Being a leader in one sector helps a firms overall reputation,It,however,does not ensure success in other areas,43,Functions of the Investment Dealer,Underwriter:,buying the security and reselling it to the public(large companies).Takes a risk.,selling security on commission basis(unknown companies),Market Maker:,ensuring an available market by buying and selling the security,Advisor:,on securities issues,mergers and acquisitions,leveraged buyouts,corporate restructuring,Agent:,for private placements,mergers,acquisitions,PPT 15-4,44,Underwriter,An investment banker underwrites any risk associated with a new issue:,By giving a firm commitment to purchase the securities from the corporation,Large investment houses assume risk of distribution,Smaller investment houses may handle distributions for unknown corporations,This is done on a“best efforts”or commission,basis,45,Market Maker,Investment banker engaged in buying and selling of the security to ensure a liquid market,Provides research on the firm to encourage active investor interest,46,Advisor,Services offered include advising the client on a continuing basis about:,The types of securities to be sold,The number of shares or units for distribution,The timing of the sale,Important advisory services in the area of mergers and acquisitions,leveraged buyouts,and corporate restructuring are also offered,47,Agency Functions,An investment banker may act as an agent for a corporation,That wishes to place its securities privately with:,An insurance company,A pension fund,or,A wealthy individual,Involves in negotiation of the best possible deal for the corporation with potential investors,48,Distribution Process in Investment Banking,49,The Spread,The underwriting spread represents the total compensation for all participating members,The lower a party falls in the distribution process,the higher the price for the shares,The farther down the line the securities are resold,the higher the potential profit,The larger the dollar value of an issue,the smaller the spread is as a percentage of the offering price,50,Allocation of Underwriting Spread,51,Pricing the Security,Investment Banker,Price of the stock is an important consideration,Conduct an in-depth analysis to determine a firms value:,The companys industry,Financial characteristics,Anticipated earnings,Dividend-paying capability,52,Pricing the Security(contd),Based on a technique deemed appropriate by the underwriter:,A tentative price is assigned,This will be compared to others in that given industry,Anticipated public demand also plays a major factor,Underpricing,Setting the price slightly below the current market value,Common during the issuance of additional shares,53,Dilution,Problem associated with the issuance of additional securities:,Actual or perceived dilution of earnings effect on shares currently outstanding,May be caused by the perceived time lag in the recovery of earning per share,Resulting from increase in shares outstanding,54,Market Stabilization,An investment banker is responsible for stabilizing the offering during the distribution period:,Accomplished by repurchasing securities when market price is below initial public offering price,Stabilization lasts for two or three days after initial offering,Poor market environment-stabilization may be very difficult to achieve,Underwriter price support an exception to market manipulation,55,Aftermarket,Research shows that the IPO generally tends to perform well in the immediate aftermarket,After the first day of trading,IPO returns are approximately 3.4%lower than returns for similar sized firms over the first full year of trading,The IPO appears to be a good deal for investors who purchase shares from the underwriter,56,Shelf Registration(1982),Permits large companies to comprehensive registration statement,Should outline the firms financing plans for up to 2 years,The firm can issue securities without further SEC approval,This registration has become part of the underwriti