I. Securities Markets and
Regulation

  1. Securities Markets
    1. Primary Market - is where initial sales of securities takes place.
      1. Underwriting - the process of helping a company sell its equity or debt to the public with the assistant of an investment banking firm. An initial public offering refers to the first offering of shares to the public, institutional and individual alike. What follows is a discussion of the four types of underwriting.
        1. Firm Commitment - the underwriter commits to selling all of the company's shares.
        2. Best Efforts-the underwriter commits only to selling as much of the company's shares as it is able and may return some to the issuer.
        3. Stand-By - an underwriting engagement that pertains only to a rights offering.
        4. Private Placement - a company's shares are sold or placed directly with the investors, no more than thirty five non-accredited and no limit on the number of accredited investors, bypassing the public markets. Benefits of such an underwriting include speed (no lengthy registration requirements and road show to promote the issue) and reduced cost (SEC registration is not necessary). Private placement often occurs with large fixed income issues sold directly to an life insurance company.
      2. Costs of issuance - actual costs out-of-pocket (attorney's fees, etc.), the spread paid to the underwriting firm to sell the issue and possible dropping of the offering price to the public in an effort to get the security sold (price concession).
      3. Shelf Registration - SEC Rule 415 enables companies to pre-register their securities for sale. The company can then decide when the best time would be for issuance and do so quickly as the registration process has been completed in advance.
    2. Secondary Market - where securities issued in the primary market usually trade.
      1. New York Stock Exchange
      2. Over the Counter (OTC) - there is no one location for this market. Rather, it is a network of brokers who communicate by phone and computer. Various types of share trade in this market along with most U.S. government, corporate and municipal bonds.
    3. Third Market - stocks which trade both on the organized exchanges and in the over the counter market may be found here. Orders are typically large block trades.
    4. Fourth Market - here traders work without any intermediaries for what are typically large institutional clients.
    5. Foreign Markets - London and Tokyo are the large foreign markets of long-standing. The equity culture is developing in other European and Asian markets, both developed and developing.
    6. Trading - regulated by the 1934 Act
      1. Price - Restricted Orders-the type of order restricts the transaction price
        1. Market - executed immediately at the market price
        2. Limit - the customer limits the amount paid or received for securities.
        3. Stop (a.k.a. stop loss) - to protect a profit or prevent a loss if the stock starts to move in the wrong direction.
          1. Buy Stop Orders: protect against loss in a short stock position; protect a gain froma short stock position; establish a long position.
          2. Sell Stop Orders: protect against loss in a long position; protect a gain from a long stock position; establish a short stock position.
        4. Stop Limit - a stop order that becomes a limit order once triggered.
      2. Time Sensitive Orders
        1. Day Orders - valid until the close of the trading day on which it is entered. Open orders (stop or limit) are considered day orders unless otherwise indicated.
        2. Good till Canceled Orders - valid until canceled or executed.
        3. At the open and market on close - the former is executed at the market opening; the latter as close as possible to the market close with somewhat different rules for the NYSE and OTC markets.
        4. Not Held - the customer does not hold the broker to a particular time and price of execution.
        5. Fill or kill - fill the entire order immediately at the limit price or better, or cancel it.
        6. Immediate or cancel-similar to a fill-or-kill order, but with partial execution. The non-executed portion is canceled.
        7. All or none - to be executed in their entirety or not at all.
        8. Alternative - the customer may change orders based upon the direction of the stock. In this case, "one cancels the other" whence the OCO abbreviation for this type of trade.


Securities Regulation

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