II: Equities I
6: Primary Equity Markets
Introduction
 Introduction to Stock Market Investment
 designed for people who suspect that the
New York Stock Exchange is in New York
 www.business.illinois.edu/finance_dev/
Chapter 6: Primary Equity Markets
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Begin With A Business
 Discovery Café
 Use the Surveying Building as a Cyber Café
 Dean’s permission
 I need $$
or Partner with $$
Chapter 6: Primary Equity Markets
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Partnership
 Two equal Partners
Par
Value
 Joe W. Partner ($10,000)
 Elisabeth Entrepreneur ($10,000)
 Two equal shares
Chapter 6: Primary Equity Markets
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Potential Buyer
 Price?
 Par Value
 Book Value
Assets – Liabilities = Shareholders Equity
 Earnings
 Earnings per Share (EPS)
Chapter 6: Primary Equity Markets
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Price – Note 1
 I am using information from the past to make
educated guesses about what will happen in
the future. You can't just graph all the past
data and draw a straight line though it. A lot
will depend on how I evaluate the company's
ability to grow and change over an uncertain
future.
Chapter 6: Primary Equity Markets
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Price – Note 2
 Price really is irrelevant unless someone wants
to buy or sell.
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Share Prices
 Decreasing Prices
 Dean gets food poisoning
Chapter 6: Primary Equity Markets
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Share Prices
 Increasing Prices
 Dean schedules the Faculty meetings in the
Discovery Café
Chapter 6: Primary Equity Markets
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Expansion
 Opportunity to expand to three new sites
on campus.
 We need $$$
or another partner with $$$
Chapter 6: Primary Equity Markets
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Private Equity
 Accredited Investors: investors
sophisticated enough to analyze the risks of
a new business and who control enough
money to be able to take these risks.
 Angel: one venture capitalist as opposed to
a group or consortium
 Finance 423:
Financing Emerging Businesses
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Venture Capitalist
 Negotiates 40% partnership for the
$50,000 we need to expand to three new
sites.
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Pricing
 What is my share worth?
 What is the company worth?
(Market Capitalization)
Chapter 6: Primary Equity Markets
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Success at Last
 Opportunity to expand to other campuses
 We need $$$$$
or more partners with $$$$$
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Public Equity Market
 Individual Investors: smaller investors who
would normally not have the opportunity to
invest in businesses
 IPO: Initial Public Offering
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Investment Banking
 Underwriter: financial advisers, lawyers,
and marketers all rolled into one. The
Underwriter takes us through the
procedure of carving out a piece of the
company to sell and making sure we do so
legally and advantageously.
Chapter 6: Primary Equity Markets
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Going Public
 We decide to issue 300,000 shares.
 The original investors retain 180,000 shares.
 The other 120,000 shares will be offered to the
public.
Chapter 6: Primary Equity Markets
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SEC
 Securities Exchange Commission
 to ensure that all investors have equal access
to the information they need to make
informed investment decisions,
 and
 to administer the federal securities laws and
regulate firms that provide investor services
Chapter 6: Primary Equity Markets
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EDGAR





Electronic
Data
Gathering
And
Retrieval
Annual and Quarterly Filings
made available to the investing
public.
sec.gov/edgar/searchedgar/webusers.htm
Chapter 6: Primary Equity Markets
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SEC

Registration Statement


Prospectus
Red Herring
Chapter 6: Primary Equity Markets
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SEC
 Registration Statement
 Prospectus
 Red Herring
 Road Show
 Registration becomes “Effective”
Chapter 6: Primary Equity Markets
© Oltheten & Waspi 2012
Setting the Price
 Too High (?%$^#*&)
 Investors may not buy all the shares we offer.
Then the underwriter will be stuck with shares
it can not sell,- or at least not at a profit.
 Too Low (?%$^#*&)
 We will not generate as much money as we
might have done to finance our expansion.
Chapter 6: Primary Equity Markets
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Setting the Price
 $50/share
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IPO: Hot
 By 9:30 all 120,000 shares are sold.
 Secondary market
 Prices rise.
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Hot IPO: Netscape (NSCP)
 Netscape Communications
(NSCP) was the classic hot
issue. It went public August 9,
1995 at an offer price of $28.
On the same day it hit a high
of $74¾ and closed at $58¼.
Netscape hit an all time high
of $174 in December 1995
and split 2:1 February 7,
1996.
 A year later NSCP was trading
at $30
 Merged with AOL in March
1999
Chapter 6: Primary Equity Markets
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Cold IPO:
 Cyberian Outpost (COOL)
was the classic cold issue. It
went public July 31, 1998 at
an offer price of $26. It
closed the same day at $20
1/4. This represents a drop
of 20% in one day. In
September it hit a low of $5
5/16 before closing at $10
7/16 at the end of the
month.
 Acquired by Fry’s Electronics
in November 2001 for 25c
per share
Chapter 6: Primary Equity Markets
© Oltheten & Waspi 2012
Ice Cold IPO
 Underwriter cannot sell all the shares
offered
 Underwriter can not sell enough shares to
make the issue worth while and the offering
may be pulled.
Chapter 6: Primary Equity Markets
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Discovery Café
 Price hovers right around the offer price of
$50
Chapter 6: Primary Equity Markets
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Discovery Café
 What is my share worth?
 What is the Market Capitalization?
 How much money did we raise?
Chapter 6: Primary Equity Markets
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Pricing
 IPO at $50
$15,000,000
Chapter 6: Primary Equity Markets
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II: Equity Markets I