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II: Equities I 6: Primary Equity Markets
II: Equities I
6: Primary Equity Markets
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
Partnership
Two equal Partners Joe W. Partner ($10,000) Elisabeth Entrepreneur ($10,000)
Two equal shares
Par Value
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Potential Buyer
Price? Par Value Book Value
Assets – Liabilities = Shareholders Equity Earnings Earnings per Share (EPS)
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
Price – Note 2
Price really is irrelevant unless someone wants to buy or sell.
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Share Prices
Decreasing Prices Dean gets food poisoning
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Share Prices
Increasing Prices Dean schedules the Faculty meetings in the
Discovery Café
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Expansion
Opportunity to expand to three new sites on campus.
We need $$$or another partner with $$$
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Venture Capitalist
Negotiates 40% partnership for the $50,000 we need to expand to three new sites.
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Pricing
What is my share worth? What is the company worth?
(Market Capitalization)
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Success at Last
Opportunity to expand to other campuses We need $$$$$
or more partners with $$$$$
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Public Equity Market
Individual Investors: smaller investors who would normally not have the opportunity to invest in businesses
IPO: Initial Public Offering
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
EDGAR
Electronic Data Gathering And Retrieval
sec.gov/edgar/searchedgar/webusers.htm
Annual and Quarterly Filings made available to the investing public.
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
SEC Registration Statement
Prospectus Red Herring
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
Setting the Price
$50/share
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
IPO: Hot
By 9:30 all 120,000 shares are sold. Secondary market Prices rise.
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
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 © Oltheten & Waspi 2012
Discovery Café
Price hovers right around the offer price of $50
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Discovery Café
What is my share worth? What is the Market Capitalization? How much money did we raise?
Chapter 6: Primary Equity Markets © Oltheten & Waspi 2012
Pricing
IPO at $50$15,000,000
II: Equity Markets I
