Professor Chris Droussiotis' Notes
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IPO l~equir~d I)ocs:
e Amendment to the certificate o~ incorporation
• Corporate Governance (Private are far less formal —
responsibility}
Recruit Independent Board 1Vlembers f nsw board
committees.
Registration statements.-SAX {Sarbanes-Oxley A.ct}
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• Prirna~'y Markets —Fiat time companies Issue securities(IPO) to raise
capital —sell or float securities (Seasonal Issuers)
o Underwriters (I hanks)— market the securities —SEC /prospectus(fed
Nearing) —Prospectus — Shelf ~Zegistration —SEC approved —Rule 415
- regulated for 2 years to come into the market to raise capital
o Private Placement —Cheaper —Rule 144A (with registration rights) —
sophisticated investors
o IPO Process —Road Shows /hook Building /Allocation /Valuation
based on Supply and Demand / ~Ialuation methods to justify stock price
recommendation
➢ ❑Securities Act of 1933
Congress enacted the Securities Act of 1933 in the aftermath of the stock market
crash of 1929 and during the ensuing Clrea~ Depression.
The 1933 1~ct was the first major federal legislation to regulate the offer and sale of
securities. The primary purpose of this act is to require full and fair disclosure in
connection with the sale of securities to the public (during the 1920's —fraud in the
issuance of securities /purchase on margins as little as 5%down). The Act enforces
what securities ~i types of transactions need to register(Exempted (Kegs A,D,S,147)
and Ikon-Exempt).
• Secondary T~/Iark~ts - Mot affecting each other stock — simply a transfer
between investors
➢ Securities Act of 1934
o Created the SEC —delegated authority to enforce federal laws
o ~Zequired the registration of broker/I~eal~r
o Required the registration of all exchanges and all national securities
associations
o Required the registration of securities information process (SII~)
o Control the extension of credit (L,oan/1~/Iargin) on securities
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A LTC. C L.I.~EGE —DEPARTMENT OF ECONOMICS &FINANCE
Professor Chris Droussiotis' Notes
o Issuers of securities to file financial reports (lOk, 10~,8K)
o Rules on insider trading /trading activity, market manipulation (Reg 1l~I,
~2u1e 1 ~1, 102, 103,104 {Stabilization), 105 (selling short constraints)
o I~ow securities are traded — 4 types of markets:
■ Direct Search ~/Iark~ts -Not C)rganized —seek each other
(buyers and sellers)
■ broker Markets —Pay the broker to find the seller or the buyer
■ Dealer Markets —Purchase on their own —Inventory and market
them to retail(ETC)
■ Auction Markets —did and Ask —search across I3ealers
inventory for best price (Io1YSE)
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~ 1VIat°ket Orders
o A market order is an order to buy or sell at the prevailing market price.
(note: "not help market order" —discretion of the broker to execute)
~ L,irr~it Order
o A limit order i~ an order to buy or sell at a specific price or better
➢ Step Order (a/k Stop Loss Order)
0 1~ stop order is resting order to buy or sell that is activated when the
stock trades at or through the stop price. Once triggered automatically
on "the book" the orders become market order. The stop order takes
two trades to execute (Triggers and then execution price —next price)
o This is designed to protect the profit or prevent a loss if the stock
begins to move the wrong direction.
o It's not guarantee (like the limit order has)
o These rders are candled if they do not participate in the closing trade
of the day.
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1Vlarket enters — when a member firm's customer calls a broker to place an order to
buy or sell, the firm forwards the order to the market center to be executed. The
following ar market centers that are available for trade execution:
1. Exchange (NYSE,I`~asdaq) or Floor broker
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Professor Chris Droussiotis' Notes
The firm may direct the order to that exchange or top a
competing exchange.
2. Market ~/[ak~r
~ A market maker is a firm that publishes quotes in a stock and
stands ready to buy or sell a liven number of shares on continuous
basis —required.to publish firm quotes.
3. Internalization
An order may be placed to a separate division of the member
firm to be filled from inventozy from the firms' proprietary account
rather than sending it to a market maker or market.
4. Electronic Communications IOTetwork (ECI~)
i. Orders may also be ordered through ECI01, an electronic trading
system that automatically matches buy and sell orders as specific
prices
ii. ECIV are SEC sanctioned alternative trading systems(ATS)that
are open 24 hours a day and match buy and sell orders. Foy° yews
the tv~czcling needed to be cone bettiveen 9.30-4pm but in the lastl0
yea~^s the demand trading grew to afte~hou~s trading (note° volume
is low, often leading to higher volatility — cc~~e is neec~ecl)
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I~dYSE maintains a physical floor-based trading model.
The I~IYSE trading model includes several important market participants:
Designated 1~a~°ket bakers (I)I~IVI) —also called specialists
"These individuals bring order and liquidity to an exchange floor.
Each listed stock is assigned is assigned to a I~10~IN1
➢ Stock exchanges have controls(volume and price movements), so the
I~MM know how much buying or selling is required, as principal, to
keep the stock from running wild.
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E —DEPARTMENT C3F ECONOMICS &FINANCE
A IJCI~ C L,L~
Professor Chris Droussiotis' Notes
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Spe~i~l Liquidity Provider (SI~Ps)
Another set of individuals —electronic market maker that is permitted to
compete dvith the L?lYlli~se
Thy requirement is different —bid or offer (one-sided.
Their job is to add liquidity to the market.
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Floor° roke~°s
These individuals are generally erriployees of the member firms that
have a trading license.
Their primary function is to handle the order flew received from buyside customers t'rom the upstairs trading rooms of their employers and
other member firms. (IUote: Two-Dollar B~oke~s ayefloor b~oke~s who
receive businessfrom otherfloor b~oke~s when they aye too busy to
handle all ofthemfi~Yn.s' o~de~s)
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l~ew Rule for market halts —New Rule 80~ (Apri12014):
Level of 1VIarket
eclines
Level 1
Level 2
Level 3
S~iI'frorr~ the
a
Previous'Train
7%
13%
20%
Malt '~'imes
15 min
15 min
rest of the day
~1~tion~l Asso~iat~ons of Secur°~ties Dealers ~lutorriated Quotation (1~~1SDA(~)
In August of 2006 I~iAS~AQ stock :market began to operate as an
independent national securities exchange (it used be an OTC)
Is ascreen-based, ~E~ registered stock exchange.
Divided into 3 main components:
Global Select I!l~arket (C~SIVI){larger companies listed)
Global I~/Iarket(~S}
~apita11V1arket
Minimum listing requirements(GSNf, GM}(Initial: 3 1V~arket makers / ~4,
Ongoing: 2 Market Makers / $1)— N[inimum Number of shareholders owning 100
shams or more,
Two 1ev~ls of service (Level 1, 2 and 3)
L,I~~~ — DEPARTMEI'~IT OF ECONOMICS ~ FINANCE
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Professor Chris Droussiotis' Notes
a. Level 1 e This is for Registered Reps and individuals investors amore info)
b. Leve12: 'his for OTC traders and financial institutions {firm quotes
discplayed:
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IV[arket IVIaket°
did
Ask
Size
1VILG0
NII~M~'
SALD
~IEEI~
31
31.10
31.05
31
31.12
3 L20
31.15
31.12
10-12
16-25
3-10
2-15
I~L,CO is willing to buy up to 1,000 shares at 31 and set up ~0 2,000
sabres at 31.13. MHMY is willing to buy up to 1,600 sabres at 31.10 and
sell up to 2,500 shares at 31.20, and son on.
c. Level 3: This is for Market makers — it provides the services of Leve12
plus the capability to enter the system to update quotes and/or display,
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➢ The OTCBB is an electronic interdealer quotation service for more than 3,300
issues that do not meet the listing requirements of stock markets such as I~ASI)1~Q
or I~iYSE.
➢ At least One ~[ark~t 1l~Iaker per security
➢ Quotes(Bid/Ask) M1VI can be one-sided bid
➢ SEC require that all issuers whose securities are quoted on the bulletin hoard be
current in their regulatory filings,
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➢ Igo requirement for companies quoted in the ETC Pink
➢ quotation system -Penny Storks (less tan $5)
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1-~ I.TC~I C I,LEC~E - DEPaRT~ENT ~F EcoNo~lcs ~ Fl~ar~cE
Professor Chris Droussiotis' Notes
➢ Quotes from both third market makers and Dll~iils in listed stocks
CC)SL:IATEI)ri'AE S1'SrI'I ~~TS~
➢ R.eports real-time trade info~rmati~n ~n listed equity s~curiti~s
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1~ LJ~ C IJI~~ —DEPARTMENT OF ECONOMICS &FINANCE
Professor Chris Droussiotis' Notes
Trigger margin Ca11— at margin level — ~t trigger it requires:
~ Equity injection
• Sell of security
■ IRR higher when on Ililargin
~uYi~G o~ ~~~~~~
One Year (Floiding Period} -Assuming No Dividersds
Per
To~ai
share ~ha~e~
20,000
20
1,000
No Margin
Buy stock
1,000
25,000
25
Sell Stock
5,000
Profit
With Margin
Buy stock
Sell Stock
1,000
1,000
20
25
Interest int~resfi
Burgin
Pmt
Rate
Borrow ' Borro~sr
0%
-
20,000
25,000
5,000
50%
10,000
10,000
5.0%
500
500
4iPR
t~W
20,000
25,000
5,000
25.0%
10,000
14,500
4,500
5.0%
45.0%
o SHORT SELLING —First you sell and then you buy shares
■ A.n investor borrows a share of stock from broker and se11s it.
Later, the stock seller must purchase the stock in order to replace
the stock that they borrow —betting on going down for the profit.
T~IIS is C~OVERII~ICs TIDE S~-TORT POSITION
• Exchanges permit short selling only when the last change
of price is positive
• Also require that the proceeds for the stock sale must be
kept with the broker.
4- ~
CurrentPrice
CS`J
Per
Share
Borrowshares
Buy Shares
20
15
Shares
1,000
1,000
Tatat
20,000 Cr
15,000
5,000
li~argin
borrow
0%
Borrow
-
tnt~rest inYeresY
Pmt
safe
~1V~1
20,000 Cr
15,000
5,000
~rfPR
25.0%
Professor Chris Droussiotis' Notes
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Funds —sit fir purpose —profit measurement — N1~~ (Equity)
NAV = IV~V —Liabilities or per shire(MV —Liabilities)/Shares outstanding
~l"Z
1 m I1ni~ Investan~nt ~Trust~:
Pools of money in a portfolio —fixed for life of the fund (Unmanaged). To
form a unit investment trust, a sponsor, typically a brokerage firm buys a
portfolio of securities.
Then sells to the public shares (units in the trust), called Redeemable trust
certificates (municipal, corporate).
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hoard of I~irect~rs hires management company to manage the fund —paying
an annual fee (.2 — 1.5%)
a. Closed-enda ready to redeem or issue shares at the I~1~.V price.
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<~
t,
1~AV
1~arket Pace
PremiugrH/I)ise
S2-week
(~.I flA1~1~3')
Adams Express
15.96
13.85
Selling at a discount
-13.22
13.84
~p~-~~~ _ ~~~ ~ ~~~
b. ~taen-e~~l: Do not redeem or issue shares -exchange within
owners —it's usually traded at the NAV level
Sales Charge {Load)
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Professor Chris Droussiotis' Notes
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a. commingled Funds —partnership of inv~~tments that pool their
funds (insurance, partnerships, banks)
b, l~EIT (closed end funds) —invest in RE with leverage(70%) R.aise the Capital
c. I~ecige Funds (structured as a private partnership)
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• Require the investor to have an initial "lock-up" agreement for withdrawals
distributions. —This will a11ow the Hedge Fund Manager to invest in
illiquid assets°
• Since they are not SEC regulated (private —sophisticated investors) the
manager invests in other types of investments such as Derivatives, short
selling and leverage.
s compensation fee +share of profit(1.5% + 20% of profit}
• Hedge funds are designed to invest in various funds —focus on derivatives,
distress firms, currency speculation, convertible bonds, emerging markets,
mega arbitrages.
• Section of growth —Fund of Funds
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• Each fund has an II~IESTMEI~IT P~LI~~' -Discussed in the prospectus —
allocation (~hr~rt / L.ow / ~Zisk —Fidelity, Vanguard, Dreyfus)
• I~/Ioney Markets (CI3, CP, Deposits —one month average}
• Equity Funds (Stock — 95% of stick, ~% IVloney market)
■ Income Funds (high dividends)
■ CJrowth Funds (capital gain, I~I~ dividends)
~ Specialized Section Funds (specific Industry — i.e. ~Iealthcare)
~ Bond Funds (Corporate Funds, Municipal Funds)
~ Investment Funds (CJlobal funds)
• Balanced Funds (Equity, Bonds)
Life-cycle funds (aggressive for young investor) —
(~onservative for older}
Targeted Maturity funds —targeted to change as you get older
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C L,L,EE —DEPARTMENT OF ECONOMICS ~ FINANCE
A LJ
Professor Chris Droussiotis' Notes
~ Asset Allocation flexible fund (market timing between equity and bonds
depending of economic environment
• Index Funds
■ ~Tanguard 500
■ Sc4i~ 500
■ FEES: front-end load /bask-end load /operating expenses
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(NAVE —1~1AVo +Income +capital Gain)/ N1~~Io =Rate of Return
1~AV = ~Ialue of the Funds —Debt(leverage)
~A rant-end L.~~{~~~
commission or sale
charge paid when you
purchase the securities
Back-erc~ I_~~~~cl
Redemptions %exit
fee when you se11 the
security
Igo more than ~.5%
5-6% and reduces it
by 1%from every
year the fund are left
invested —contingent
—or deferred sales
charge
i
i ?l~-1 ~'h~~r~~
SEC allows managers
of 12b-1 funds to pay
for
advertising/marketing
— fees from investors.
Using 3.0%
$1,000 paid for fund
6% Load = 94 price
60/940 = 0.064
6.4%
Expenses —referred to a~ "soft dollars"
Taxation — "pass-through Mates" — U.S. Tax code
If the fund is held at IRS / 4d 1I~ — I~~ taxes —retirement accounts
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AIZLTC
I~L,EC~E - ~EpARTMENT of Ecor~oMlcs ~ FINa~rcE
Professor Chris Droussiotis' Notes
E~CHAI~GED-TRADED FUNDS(ETF)-trades like a ~~ock
SPIDER (SPDIZ) ar SAP Depository receipt -daily trades —unlike Mutual funds, the
I~AV is calculated at the end of the day.
DIAMOI~II~~ (ILIA) — I3JI1~ 30
QUBES(QQQ)— I~1ASI~AQ 100
i~IE~S — ~Iorld Equity benchmark shares —foreign indices
Il~Iutual end performance —compared to the Index /stock market
INFORMATION ON FUNDS —SEC required —Prospectus
a.
b.
c.
d.
e.
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Statement on Investment Objective
Investment Policies and Risks
Fund Advisory and IVlanagement Bios
Cost Structure {Expense Loads)
Statement of Additional Information ("SAI") — part B of the prospectus.