investments notesLec02 class0 investments.ppt

Lecture 2
Trading of Securities
Primary Market
Initial public offering (IPO) – a private firm “going public” for the first time
Seasoned new issues – an existing listed firm issues new shares
Public offering – sold to the public then traded immediately in the secondary market
Private placement – sold to selected institutional investors, lock-up period applies; mon for debt securities and less for stocks
IPO process
An investment bank underwrites the issue by helping the issuer to resell the new shares under:
(1) mitment
(2) best efforts
Road show and book building - gather info from institutional investors about the pricing and quantity of the IPO
Institutional investors have an incentive to tell the truth because IPO shares are allocated partly based on their interests
Why are IPOs usually underpriced?
Under-pricing may represent a payment for useful info contributed by institutional investors during the book building process
Under-pricing may reflect a risk premium b/c some investors are more well-informed than others (winner’s curse story)
Not all IPOs are underpriced and some even cannot be sold to the market
Type of Markets
(1) Brokered market 經紀制度
Brokers bring buyers & sellers together and receive mission for the service
Brokers don’t trade on their own account
. real estate agents
(2) Dealer market 莊家制度
Dealers are . “market makers” or “liquidity providers”
Maintain an inventory; trade on their own account
Profit from the bid-ask spread: buy securities at the bid price and sell at the ask price
. FX market dealers
Type of Markets
(3) Auction market 競價制度
All traders converge physically or electronically and orders matched centrally
More efficient than dealer and brokered markets – allow trades to bypass the brokers and market makers (or minimize their importance)
Continuous auction market - orders are matched continuously according to price and time stamps
Call (auction) market - orders are accumulated and executed together at one m