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 wwwbusinessillinoisedufinancedev ID: 767313
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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 Yorkwww.business.illinois.edu/finance_dev/
Begin With A Business Discovery Café Use the Surveying Building as a Cyber Café Dean’s permissionI need $$ or Partner with $$
Partnership Two equal Partners Joe W. Partner ($10,000) Elisabeth Entrepreneur ($10,000)Two equal shares Par Value
Potential Buyer Price? Par Value Book ValueAssets – Liabilities = Shareholders EquityEarningsEarnings per Share (EPS)
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.
Price – Note 2 Price really is irrelevant unless someone wants to buy or sell.
Share Prices Decreasing Prices Dean gets food poisoning
Share Prices Increasing Prices Dean schedules the Faculty meetings in the Discovery Café
Expansion Opportunity to expand to three new sites on campus. We need $$$ or another partner with $$$
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
Venture Capitalist Negotiates 40% partnership for the $50,000 we need to expand to three new sites.
Pricing What is my share worth? What is the company worth? (Market Capitalization)
Success at Last Opportunity to expand to other campuses We need $$$$$ or more partners with $$$$$
Public Equity Market Individual Investors: smaller investors who would normally not have the opportunity to invest in businesses IPO: Initial Public Offering
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.
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.
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
EDGAR Electronic Data GatheringAndRetrieval sec.gov/ edgar / searchedgar /webusers.htm Annual and Quarterly Filings made available to the investing public.
SEC Registration Statement Prospectus Red Herring
SEC Registration Statement Prospectus Red HerringRoad ShowRegistration becomes “Effective”
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.
Setting the Price $50/share
IPO: Hot By 9:30 all 120,000 shares are sold. Secondary market Prices rise.
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
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
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.
Discovery Café Price hovers right around the offer price of $50
Discovery Café What is my share worth? What is the Market Capitalization? How much money did we raise?
Pricing IPO at $50 $15,000,000
II: Equity Markets I