Investment Banking

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investment bankers

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-a securities firm that specializes in helping other business firms obtain the money they need on the most advantageous terms possible
-firms which sell new securities to the general public
-do not carry out other activities considered to be banking activities
-also known as an underwriter
-conduit through which securities sold to public

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firm commitment

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-an underwriting where the underwriter (investment banker) buys the entire issue from the issuer at an agreed upon price & then proceeds to sell the issue
-issuer has a firm commitment because the entire issue is sold to the underwriter
-re-offer to the general public
-risk of selling rests with the underwriter & not with the firm issuing the securities

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best effort agreement

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-the investment banker makes his best effort to sell the securities acting on behalf of the issuer, but does not guarantee the specified amount of money will be raised
-not guarantee corporation money for unsold portion

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best efforts underwriting

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-underwriters make no commitment to buy or sell the issue
-no syndicate formed
-form a selling group, with each member doing his best to sell his allotment

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primary offering

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-authorized but previously unissued stock (new stock) offered to the public
-also known as Initial Public Offering (IPO)
-original sale of security
-always raises new capital for issuer

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secondary offering (distribution)

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-offering of outstanding stock
-stock that has previously been & is now beng re-sold by investors
-corporation resells treasury stock
-this is what occurs every day on the exchanges & in the OTC market
-does not raise new capital for the issuer

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Securities Act of 1933

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-nickname is Act of Full Disclosure
-legislation that protects the public against the issuance & distribution of fraudulent securities by requiring the filing of a revealing reistration statement with the SEC

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registration statement

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-a document required to be filed with the SEC by the issuer of securities before a public offering may be attempted
-Securities Act of 1933 mandates that it contain all material information
-also required of affiliated persons intent upon offering sizeable amounts of securities in the secondary market

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cooling-off period

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-20 day period (minimum) that the SEC examines the statement, seeking obvious omissions or misrepresentations of fact, but specifically does not approve the issue

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in registration

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what the issue is said to be during the cooling-off period

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preliminary prospectus (red herring)

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-only form of written communication allowed between a broker/dealer & a potential purchaser before the effective date
-has red lettering on the front page
-describes company & the securities to be issued (includes firm's financial statements, its current activities, regulatory bodies to which it is subject, nature of its competition, mgmt of corporation, & what the expected proceeds will be used for
-missing is public offering price & the effective date of the issue
-used to acquaint prospect with the essential information about the offering

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indication of interest

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when prospect is interested in purchasing an issue after reviewing the red herring

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due diligence meeting

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-meeting held close to end of colling-off period between underwriter & corporation
-discuss any amendments that are going to be necessary to make the registration statement complete & accurate

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final (statutory) prospectus

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-similar to red herring without the red ink & with the missing numbers filled in
-all purchasers will receive

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syndicate

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-a group of investment bankers, usually organized along historical or social lines, with one member acting as manager, that collectively insures the successful offering of a corporation's securities

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tombstone ad

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containing only the key facts relating to the issue...name of issuer, number of shares being offered, price per share & the names of the members of the syndicate where a prospectus may be obtained

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all-or-none underwriting

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-unless all of the shares can be distributed within a specified period of time, the offering will terminate & no subscriptions or orders will be accepted
-underwriter must set up an escrow account for any money received before the closing date, in the event it is necessary to return the money

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rights offering (standby underwriting commitment)

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underwriter agrees to stand by & when rights offering time period is over, he will purchase any portion of stock not subscribed to by existing stockholders

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agent

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-role of a broker/dealer firm when it acts as an intermediary, or broker, between its customer and market-maker or contra broker
-firm receives a stated commission or fee
-buys or sells securities for the account & risk of someone else & charges a commission for service rendered
-investment banking firm acts as with best efforts

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principal

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-one who acts as a dealer rather than an agent or broker
-dealer buys & sells for his own account & risk
-dealers make money by buying at one price & selling at a higher price
-investment banking firm acts as in a firm commitment

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exempt securities

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-not all securities required to be registered with the SEC prior to sale

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major types of exempt securities

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-any security issued by the US Govt or any of its agencies
-any securities issued by any state or local government (municipals)
-commercial paper with a maturity not in excess of 270 days (9 mths)
-private placements
-intra-state offerings - issues sold only within one state to residents of tha that state - no federal jurisdiction

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fiduciaries

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-regulation of investments made by fiduciaries are regulated by state laws
-one in financial trust

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legal list

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-many states, the state banking authorities publish a list of investments which are considered legal investments for fiduciaries

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Prudent Investor Rule

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-1st written in 1992
-most states have adopted this rule
-a successor to the old Prudent Man Rule of 1830
-deals with investments made by fiduciaries & holds them to standards of prudence & good judgement when investing money for others
-newer vestion takes into consideration modern portfolio theory such as asset allocation& generally permits investments into mutual funds & variable annuities

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general types of investing risks

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-liquidating at inappropriate times
-marketability
-taxability
-social and political risk
-currency exchange risk

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types of risks with stocks

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-market risk (systematic)-market may go down
-business risk-thecompany (business) may not do well

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types of risks with bonds

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-credit risk-risk of default
-interest-rate risk (money-rate)-interest rates up, bond prices down
-purchasing power risk (inflation)-present value of money

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business cycles

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prosperity
contractino
recession
expansion

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What is the effects of business cycles on the securities markets?

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-bond markets are primarily affected by the resulting inflation-deflation of the cycle
-equities markets rise in value during moderate inflation

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Explain the inflatin/deflation cycle for bond markets

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-short-term debt securities react most immediately to changes in interest rates
-long-term debt securities experience a greater price change
-yield spread widens in bad times and narrows in good times

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monetary policy

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practicies followed by the Federal Reserve Board which affect the money supply, interest rates, and bond prices

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Federal Open Market Committee (FOMC)

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buying and selling securities

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types of issues

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-blue chip-seasoned securities with steady earnings and secure dividends
-defensive-makes money in both good times and bad times (utilities, supermarkets, clothing, alcohol, tobacco, cosmetics)
-cyclical-wide fluctuations in earnings, dividends, and stock prices based upon business cycles
-growth-bought for capital gains, not income
-public utilities-bought for income, not capital gains
-small cap vs large cap-speculative vs conversative