RECAP LAST LECTURE 5

FINANCIAL SECURITIES & MARKETS

DEBENTURE

• A DEBENTURE ALSO CALLED A NOTE IS AN UNSECURED CORPORATE BOND OR A CORPORATE BOND THAT DOES NOT HAVE A CERTAIN LINE OF INCOME OR EQUIPMENT TO GUARANTEE REPAYMENT OF PRINCIPAL UPON THE BOND’S MATURITY

FINANCIAL SECURITIES

1. PREFERRED STOCK

2. COMMON STOCK

MOST IMPORTANT FEATURES PF PREFERRED STOCK

1. PREFERNCE TO DIVIDENDS2. PREFERNCE TO ASSETS3. BASICALLY A FIXED RETURN4. INDEFINITE LIFE5. USUALLY NONVOTING6. CUMULATIVE DIVIDENDS

FINANCIAL MARKETS & INSTITUTIONS

• TWO MAIN TYPES OF FINANCIAL MARKETS ARE:

1. MONEY MARKET

2. CAPITAL MARKET

CAPITAL MARKET

• IS THE MARKET FOR SECURITIES, WHERE COMPANIES AND GOVT CAN RAISE LONG-TERM FUNDS

• IT IS MARKET IN WHICH MONEY IS LENT FOR PERIOD LONGER THAN A YEAR

• THE CAPITAL MARKET INCLUDES THE STOCK MARKET AND THE BOND MARKET

CAPITAL MARKET

THE CAPITAL MARKET CONSISTS OF THE 1. PRIMARY MARKET AND 2. SECONDARY MARKET

CAPITAL MARKET

PRIMARY MARKET

• THE PRIMARY MARKETS ARE WHERE NEW STOCK AND BONDS ISSUES ARE SOLD (UNDERWRITING) TO INVESTORS.

• THIS IS ALSO CALLED INITIAL PUBLIC OFFERING (IPO)

CAPITAL MARKET

PRIMARY MARKET

• A PRIMARY ISSUE IS THE OFFERING OF SHARES OR BONDS THAT HAVE NEVER BEEN PREVIOUSLY ISSUED.

• THE OFFERING MAY BE MADE IN TWO WAYS1. DIRECT PLACEMENT2. UNDERWRITTEN PLACEMENT

CAPITAL MARKET

PRIMARY MARKET

• DIRECT PLACEMENT, A BOND OR SHARE ISSUE MAY BE PLACED DIRECTLY WITH THE INDIVIDUALS OR COMPANY WHO WILL OWN THE SECURITIES

CAPITAL MARKET

PRIMARY MARKET

• UNDERWRITTEN PLACEMENT, AN OFFERING MAY BE MADE BY A CORPORATION THROUGH AN INVESTMENT BANKER, A PRINCIPAL WHO ACTS AS THE MIDDLEMAN BETWEEN THE ISSUER AND THE PUBLIC.

CAPITAL MARKET

• WHAT IS UNDERWRITING MEAN?

CAPITAL MARKET

• WHAT IS INITIAL PUBLIC OFFERING MEAN (IPO)?

CAPITAL MARKET

UNDERWRITING• IN THIS ROLE, THE INVESTMENT BANKER IS AN

UNDERWRITER OF THE OFFERING, WHO BRINGS TOGETHER A GROUP OF OTHER INVESTMENT BANKERS TO UNDERWRITE OR PURCHASE THE ENTIRE OFFERING.

• ONCE THE UNDERWRITING SYNDICATE HAS MADE THE PURCHASE, IT WILL RESELL THE SHARES TO A VARIETY OF INDIVIDUALS AND INSTITUTIONS THROUGH THE MECHANISMS OF THE OVER-THE-COUNTER MARKET

CAPITAL MARKET

SECONDARY MARKETS• SHARES THAT HAVE BEEN PREVIOUSLY ISSUED

ARE TRADED IN THE DIFFERENT SECONDARY MARKETS, WHICH INCLUDE THE ORGANIZED EXCHANGES AND OVER-THE-COUNTER MARKET

CAPITAL MARKET

SECONDARY MARKETS

THE TRADING IS AIDED BY1. DEALERS 2. BROKERS

• DEALERS ACT AS PRINCIPALS AND BUY FOR THEIR OWN ACCOUNTS AND SELL SHARES FROM THEIR OWN INVENTORIES

CAPITAL MARKET

SECONDARY MARKETS

• BROKERS DO NOT BUY OR SELL FROM THEIR OWN INVENTORY OF SECURITIES. THEY ACT AS AGENTS FOR OTHERS AND RECEIVE A COMMISSION FOR ASSISTING A TRANSACTION

• THE SAME FIRM OR INDIVIDUAL MAY ACT AS EITHER A BROKER OR A DEALER AT DIFFERENT TIMES AND IN DIFFERENT TRANSACTIONS IN THE SECONDARY MARKETS, AS LONG AS DISCLOSING THIS CAPACITY TO THE CUSTOMER

CAPITAL MARKET

• SECONDARY MARKETS

• OVER-THE-COUNTER MARKET• IA AN INFORMALLY ORGANIZED GROUPING OF

BROKERS AND DEALERS FROM ALL OVER THE COUNTRY. IT HANDLES BOTH PRIMARY ISSUES AND SECONDARY TRANSACTIONS AND IS THE LARGEST SECURITIES MARKET

CAPITAL MARKET

• SECONDARY MARKETS

• IT HANDLES ALL CORPORATE SECURITIES AND VIRTUALLY ALL GOVERNMENT BONDS

• OTC MARKET IS A NEGOTIATED MARKET, BECAUSE PRICES ARE ESTABLISHED BY INDIVIDUAL BARGAINING BETWEEN BUYERS AND SELLERS

CAPITAL MARKET

• SECONDARY MARKETS

• NORMALLY, A CUSTOMER WORKS THROUGH A BROKER TO LOCATE A DEALER WHO IS ALWAYS PREPARED EITHER TO BUY OR SELL A CERTAIN STOCK OR BOND. THESE DEALERS MAKE A MARKET FOR THE SPECIFIC SECURITY.

• EXAMPLE: DEALER WHO MAKES A MARKET FOR THE COMMON STOCK OF ANGRO LTD

CAPITAL MARKET

• SECONDARY MARKETS

STOCK EXCHANGES

• IN ADDITION TO THE OVER-THE-COUNTER MARKET, CORPORATE SECURITIES CAN BE TRADED ON THE VARIOUS STOCK EXCHANGES.

• WHAT IS STOCK EXCHANGE?

CAPITAL MARKET

• A STOCK EXCHANGE IS A CENTRAL LOCATION WHERE MEMBERS MAY BUY OR SELL SECURITIES.

• STOCK AND BONDS MAY BE LISTED BY COMPANIES SEEKING GREATER MARKETABILITY OF THE STOCK AND GREATER LIQUIDITY FOR SHAREHOLDERS, WHO MY, THROUGH THEIR BROKERS, BRING THE STOCKS TO THE EXCHANGE TO BE TRADED

CAPITAL MARKET

• IF A COMPANY NEEDS TO RAISE FUNDS FOR THE LOMG-TERM, IT CAN ACCESS THE CAPITAL MARKETS; THIS IS A MARKET ON WHICH THE FOLLOWING ARE TRADED:

CAPITAL MARKET

1. JUNK BONDS (UNSECURED)2. DEBENTURES / LOAN NOTES 3. SHARES TRADED ON THE MAIN STOCK

MARKET4. SHARES IN ALTERNATIVE INVESTMENT

MARKET – WHAT IS ALTERNATIVE MARKET?

CAPITAL MARKET

EUROMARKETS

• IN RECENT YEARS A STRONG MARKET HAS BUILT UP WHICH ALLOWS LARGE COMPANIES WITH EXCELLENT CREDIT RATINGS TO RAISE FINANCE IN A FOREIGN CURRENCY

CAPITAL MARKET

EUROMARKETS

• THIS MARKET IS ORGANISED BY INTERNATIONAL COMMERCIAL BANKS. THIS MARKET IS MUCH BIGGER THAN THE MARKET FOR DOMESTIC BONDS / DEBENTURES

CAPITAL MARKET

EUROMARKETS – KEY FEATURES

• CHEAP DEBT FINANCE: CAN BE SOLD BY INVESTORS, AND A WIDE POOL OF INVESTORS SHARE THE RISK

CAPITAL MARKET

EUROMARKETS – KEY FEATURES

• UNSECURED OR NO COVENANTS:• ONLY ISSUED BY LARGE COMPANIES WITH AN

EXCELLENT CREDIT RATING

CAPITAL MARKET

EUROMARKETS – KEY FEATURES

• LONG-TERM DEBT IN A FOREIGN CURRENCY:TYPICALLY 5-15 YEARS, NORMALLY IN EUROS OR DOLLARS BUT POSSIBLE IN ANY CURRENCY

CAPITAL MARKET

REGULATION OF THE SECURITIES MARKET• THE SECURITIES MARKETS IN ANY COUNTRY

ARE CAREFULLY REGULATED TO ENSURE THAT INDIVIDUAL INVESTORS ARE TREATED HONESTLY AND FAIRLY

• IN PAKISTN THE SECURITY EXCHANGE COMMISSION OF PAKISTAN IS THE MAIN REGULATORY BODY

CAPITAL STRUCTURE

• CAPITAL STRUCTURE IS THE COMPOSITION OF DEBT AND EQUITY SECURITIES THAT COMPRISE A FIRM’S FINANCING OF ITS ASSETS.

• BOTH DEBT AND EQUITY SECURITIES ARE USED IN MOST LARGE CORPORATIONS.

CAPITAL STRUCTURE

• THE CHOICE OF THE AMOUNT OF DEBT AND EQUITY IS MADE AFTER A COMPARISION OF CERTAIN CHARACTERISTICS OF EACH KIND OF SECURITY, OF INTERNAL FACTORS RELATED TO THE FIRM’S OPERATIONS, AND OF EXTERNAL FACTORS THAT CAN AFFECT THE FIRM