3 Questions
What is the main reason why companies want to be listed in the stock market?
To access capital
What is the difference between common stock and preferred stock?
Preferred stock has priority over common stock in liquidation
What is bookbuilding in the context of an initial public offering (IPO)?
A process where the investment bank compiles indications of interest and adjusts the offering price accordingly
Study Notes
The Stock Exchange and Capital Markets
- Stock markets are venues where buyers and sellers exchange equity shares of public corporations, creating efficient price discovery and dealing in a transparent, regulated, and controlled environment.
- Common stock is a residual claim on a firm's assets, paid only after interest to debt holders and dividends to preferred shareholders. Preferred stock has scheduled dividends and priority over common stock in liquidation. Warrants give the holder the right to buy a firm's equity at a fixed exercise price.
- Companies want to be listed in the stock market for access to capital, more liquidity for shares, reputation/visibility, and transparency.
- Financial intermediaries include brokers, dealers, investment banks, exchanges, alternative trading systems, clearinghouses, and custodians.
- The stock market offers the advantages of any regulated market, transfer of risk and "waiting," and performs unique functions of creating public limited companies and issuing shares via the stock exchange (primary market) and reducing the cost of issuing long-term securities (secondary market).
- The primary market includes initial public offerings (IPOs) and secondary issues, with shares sold through an investment banking firm via bookbuilding, where the bank compiles indications of interest and adjusts the offering price accordingly.
- Underwritten offerings mean that the bank buys the unsold portion in case the issue is undersubscribed, creating a conflict of interest between maximizing the price for the issuer and avoiding buying the unsold portion. Best effort basis means the bank is not obligated to buy the unsold portion.
- Private placements involve selling shares directly to qualified investors.
- The main regulators in the United States are the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). In the UK, it is the Financial Services Authority (FSA), and in Spain, it is the Comisión Nacional del Mercado de Valores (CNMV).
Test your knowledge of the stock exchange and capital markets with this quiz! Learn about the different types of stocks, financial intermediaries, and the functions of the stock market. Challenge your understanding of the primary and secondary markets, underwritten offerings and private placements. This quiz also covers the main regulators in the United States, the UK, and Spain. Sharpen your knowledge and understanding of the stock exchange and capital markets with this quiz!
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