8/3/2019 Offerings and Investor Monitoring 104385
1/28
1
10Stock Offerings and Investor Monitoring
2003 South-Western/Thomson Learning
8/3/2019 Offerings and Investor Monitoring 104385
2/28
2
Chapter Objectives
Describe the stock exchanges where stocks
are traded Analyze the process of the initial public
offering of stock by a company
Be able to interpret a stock quote Explain the institutional use of stock markets
Describe the globalization of stock markets
8/3/2019 Offerings and Investor Monitoring 104385
3/28
3
Common stock = certificate representing equity
or partial ownership in a corporation
Issued in primary market by corporations that
need long-term funds
Stock is then traded in the secondary market,
creating liquidity for investors and company
evaluation for managers
Background on Common Stock
8/3/2019 Offerings and Investor Monitoring 104385
4/28
4
Background on Common Stock
Owners of common stock vote on:Election of board of directors
Authorization to issue new shares
Amendments to corporate charter
Other major events Many investor assign their vote to management via a
proxy
Households own about half of all common stock, the
rest is owned by institutional investors
Ownership and Voting Rights
8/3/2019 Offerings and Investor Monitoring 104385
5/28
5
Background on Preferred Stock Represents equity or ownership interest, butusually no voting rights
Trade voting rights for stated fixed annualdividend
Dividend paid before common if dividends
are declared by board of directors
Dividend may be omitted
Cumulative provision
If common dividend paid, preferred dividend
fixed
8/3/2019 Offerings and Investor Monitoring 104385
6/28
6
Public Placement of Stock Initial public offerings (IPOs)
First-time offering of shares to the public
Firm must provide information to publicRegistration statement to SEC
Prospectus
Firm is assisted by an investment banker
Performance of IPOs
Price generally rises on first day
Longer-term performance of IPOs is poor
8/3/2019 Offerings and Investor Monitoring 104385
7/28
7
Public Placement of Stock Secondary stock offerings
New stock issued by firm that already has shares
outstanding Shelf Registration
1982 SEC rule
Allows firms to place securities without the timelag associated with registering with SEC
8/3/2019 Offerings and Investor Monitoring 104385
8/28
8
Stock Secondary Markets
Execute secondary market transactions
Examples: NYSE, AMEX, Midwest, Pacific
NYSE is largest, controlling 80 percent of valueof all organized exchanges
Must own a seat on exchange in order to trade
Trading resembles an auction
Organized Exchanges
8/3/2019 Offerings and Investor Monitoring 104385
9/28
9
Stock Secondary Markets
No trading floor or specific location Telecommunications network
Nasdaq
National Association of Securities Dealers Automatic
Quotations
Thousands of small firms, plus high-tech giants
Pink sheets
Tiny firms that do not meet requirements for NASDAQ
Over-the-Counter Market
8/3/2019 Offerings and Investor Monitoring 104385
10/28
10
Stock Secondary Markets Trend: Consolidation of stock exchanges
Market microstructure
Specialists, floor brokers, and market-makers Role of specialists
Types of orders
Market order Limit order
Stop order
8/3/2019 Offerings and Investor Monitoring 104385
11/28
11
Stock Secondary Markets
Changes in technology
Online trading
Real-time quotes
Company information
Electronic Communications Networks (ECNs)
Margin requirements
Specify amount of borrowed versus amount in cash
8/3/2019 Offerings and Investor Monitoring 104385
12/28
12
Stock Secondary Markets
Purchasing stock on margin
Borrow a portion of the funds from broker
Margin is the amount of equity an investor provide
Magnifies returns (both good and bad)
Short sales
Borrow stock and sell
Repay stock loan, hopefully at a lower price Investor able to have potential profit from decline in
stock price
8/3/2019 Offerings and Investor Monitoring 104385
13/28
13
Regulation of Trading on Stock
Exchangesn Securities Act Of 1933 and 1934
n Securities And Exchange Commission
n National Association Of Securities Dealers(NASD)
n Regulate minimum information for investor and
broker/dealer business practices
n Circuit breakers
8/3/2019 Offerings and Investor Monitoring 104385
14/28
14
Stock Quotation
Stock Quotation
52-week price range (high/low and YTD%
change) Stock symbol
Dividend annualized and dividend yield
Price-earnings ratio
Volume in round lots
Previous days price close and net daily change
Remainders in cents, not eighths
8/3/2019 Offerings and Investor Monitoring 104385
15/28
15
Exhibit 10.6
YTD %
change Hi Lo Stock Sym DIV Yld% PE Vol 100s Last Net Chg
110.3 121.88 80.06 IBM IBM .56 .6 20 71979 93.77 1 1.06
Year-to-date Highest Lowest Name Stock Annual Dividend Price- Trading Closing Change in the
percentage price price of stock Symbol dividend yield, which earnings volume stock stock price
change in of the of the paid per represents ratio based during the price on the previ-
stock price stock stock year the annual on the previous ous trading
in this in this dividend as prevailing trading day day from the
year year a percentage stock price close on the
of the pre- day beforevailing stock
price
8/3/2019 Offerings and Investor Monitoring 104385
16/28
16
Stock Indexes
Dow Jones Industrial Average
Price-weighted average
30 large U.S. firms Standard and Poors (S&P) 500
Value-weighted
500 large U.S. firms New York Stock Exchange Indexes
Other Stock Indexes
Amex, NASDAQ
8/3/2019 Offerings and Investor Monitoring 104385
17/28
17
Stock Indexes
Investing in stock indexes
Indexing
Has become very popularLower transactions costs
Studies find that actively-managed funds do not
outperform stock indexes
Examples of publicly traded stock indexes
SPDRs
Diamonds
8/3/2019 Offerings and Investor Monitoring 104385
18/28
18
Stock Market Performance
Comparing stock performance to bond
performance
8/3/2019 Offerings and Investor Monitoring 104385
19/28
19
Investor Trading Decisions
Stock value = proportional value of total
company
Investor return = dividend yield + capitalgain/loss
New information translated into trading
decisions impacting supply/demand for shares New equilibrium price established until new
information appears
8/3/2019 Offerings and Investor Monitoring 104385
20/28
20
Exhibit 10.8Increased
Demand for
Security
Reduced
Supply of
Security
for Sale
Increase in
Equilibrium
(Market)
Price of
Security
New
Favorable
Information
Disclosed
to Investors
New
Unfavorable
Information
Disclosed
to Investors
Increased
Valuation
of
Security
by Investors
Reduced
Valuation
of
Security
by Investors
Reduced
Demand for
Security
Increased
Supply of
Security
for Sale
Decrease in
Equilibrium
(Market)
Price of
Security
8/3/2019 Offerings and Investor Monitoring 104385
21/28
21
Institutional Participation in Stock
Markets
Program trading by institutions
Simultaneously buying and selling of a portfolio of
at least 15 different stocks valued at more than $1million
Most commonly used by securities firms
Program refers to the use of computers
Impact on stock volatility
Often blamed for rise or fall in stock market
Studies show that program trading does not increase
volatility
8/3/2019 Offerings and Investor Monitoring 104385
22/28
22
Investor Monitoring of Firms in the
Stock Market
Shareholder activism An investor who is dissatisfied with the way managers
are running a firm has three choices:
Sell
Do Nothing
Flush!
Shareholder Activism
8/3/2019 Offerings and Investor Monitoring 104385
23/28
23
Investor Monitoring of Firms in the
Stock Market
Communication with the firm
Effort to place pressure on management
Institutional investors CALPERS
TIAA
Proxy contest
Shareholder lawsuits
8/3/2019 Offerings and Investor Monitoring 104385
24/28
24
Corporate Monitoring of Firms in
the Stock Market
Market for corporate control
Stock price declines due to poor management Subject to possible takeover
Barriers to market for corporate control
Antitakeover amendments Poison pills
Golden parachutes
8/3/2019 Offerings and Investor Monitoring 104385
25/28
25
Corporate Monitoring of Their
Own Stock in the Stock Market
Stock repurchases
Dividend alternative or undervalued stock
Excessive cash relative to +NPV investments Leveraged buyouts (LBO)
If managers believe the stock price undervalued,
they may buy the outstanding shares withborrowed funds
Stock offerings
Signals overvalued shares
8/3/2019 Offerings and Investor Monitoring 104385
26/28
26
Globalization of Stock Markets
Barriers to international stock trading have
decreased
Reduction in information costs Reduction in exchange rate risk
Foreign stock offerings in the United States
International placement process Global stock exchange characteristics
Emerging stock markets
8/3/2019 Offerings and Investor Monitoring 104385
27/28
27
Globalization of Stock Markets
Methods used to invest in foreign shares
Direct purchases
American Depository Receipts (ADRs) International mutual funds
World equity benchmark shares
8/3/2019 Offerings and Investor Monitoring 104385
28/28
28
Globalization of Stock Markets
Global diversification and integration amongstock markets Integration of markets during the 1987 crash
All major stock markets declined, indicating theunderlying cause systematically affected all markets
Integration of markets during mini-crashesExample: August 27, 1998 Bloody Thursday
Russian financial crisis
Increased integration associated withincreased financial technology, competition,
and lessened government regulation