GROUP 5

NEW ISSUE SECURITIES

Carlos, Joel Jr. L.

Espiritu, Junalyn L.

Maraggun, Joyce-anne Q.

Pacheco, Lovely H.

III - C BSFM
Definition of New issue

 A new issue is a never-before-offered security.

 A new issue refers to a stock or bond offering that is made for the first time.
Most new issues come from privately held companies that become public,
presenting investors with new opportunities.
 When a stock or bond is offered for sale for the first time, it's considered a
new issue. New issues can be the result of an initial public offering (IPO),
when a private company goes public, or they can be additional, or secondary,
offerings from a company that's already public.

How Does a New Issue Work?

Let's assume that Company ABC makes a public offering of shares in order to finance
its business expansion. Company ABC, the issuer of the stock, must file a prospectus
with the Securities and Exchange Commission (SEC) summarizing the stock offering,
associated risk and financial information of the company. Because Company ABC has
never issued stock before, the offering is a new issue.

Initial public offerings are the most common new issues. However, companies,
governments or other entities also can make new issues of bonds, notes, commercial
paper or preferred stock.

Why Does a New Issue Matter?

Issuers are legally responsible for the securities they issue. To fulfill their legal
obligations to investors, they must follow strict reporting standards as set by the SEC,
including quarterly reporting of financial performance and conditions, material
developments and all operational activities required by regulations in the jurisdictions
of the security.

Different New Issue Securities

Debt Issue

 A debt issue refers to a financial obligation that allows the issuer to raise funds
by promising to repay the lender at a certain point in the future and in
accordance with the terms of the contract. A debt issue is a fixed corporate or
government obligation such as a bond or debenture. Debt issues also include
notes, certificates, mortgages, leases, or other agreements between the issuer
or borrower, and the lender.
 A debt issue involves the offering of new bonds or other debt instruments by a
creditor in order to borrow capital.
 Debt issues are generally in the form of fixed corporate or government
obligations such as bonds or debentures.
  In a debt issue, the seller promises the investor regular interest payments along
the with eventual repayment of the invested principal on a predetermined date.
 Corporate issue debt for capital projects, while governments do so to fund
social programs and infrastructure projects.

Why would you choose to invest in Debt New Issue?

 When you buy a bond, you are lending to the issuer, which may be a
government, municipality, or corporation. In return, the issuer promises to pay
you a specified rate of interest during the life of the bond and to repay the
principal, also known as face value or par value of the bond, when it
"matures," or comes due after a set period of time.
 Investors buy bonds because:
- They provide a predictable income stream.
- Typically, bonds pay interest twice a year. If the bonds are held to
maturity, bondholders get back the entire principal, so bonds are a way to preserve
capital while investing.
- Bonds can help offset exposure to more volatile stock holdings.

 Bonds can provide a means of preserving capital and earning a predictable

return. Bond investments provide steady streams of income from interest
payments prior to maturity.

As with any investment, bonds have risks. These risks include:

 Credit risk. The issuer may fail to timely make interest or principal
payments and thus default on its bonds.

 Interest rate risk. Interest rate changes can affect a bond’s value. If bonds
are held to maturity the investor will receive the face value, plus interest. If
sold before maturity, the bond may be worth more or less than the face
value. Rising interest rates will make newly issued bonds more appealing
to investors because the newer bonds will have a higher rate of interest
than older ones. To sell an older bond with a lower interest rate, you might
have to sell it at a discount.

 Inflation risk. Inflation is a general upward movement in prices. Inflation

reduces purchasing power, which is a risk for investors receiving a fixed
rate of interest. Liquidity risk. This refers to the risk that investors won’t
find a market for the bond, potentially preventing them from buying or
selling when they want.

 Call risk. The possibility that a bond issuer retires a bond before its
maturity date, something an issuer might do if interest rates decline, much
like a homeowner might refinance a mortgage to benefit from lower
interest rates.
LTNCD, or Long-Term Negotiable Certificate of Deposit

 An LTNCD, or Long-Term Negotiable Certificate of Deposit, is a bank

product offered to investors looking for a relatively safe investment, but with
higher interest rates than a regular savings account or short-term time deposit.

Breaking down the Acronym

Long-term: maturity date usually comes after 5 years or so.

Negotiable: can be sold in the secondary market, even before maturity date.

Certificate of Deposit: like a Certificate of Deposit (CD), LTNCDs also earn interest,
and is a debt instrument.

Deposit: as a bank deposit product, it is insured by the PDIC. It is a hybrid product in

a sense that much like a time deposit, it is issued by a bank and is covered by the
PDIC. Like a bond, it is negotiable, long-term, and has quarterly interest payments.

Why invest in LTNCDs?

Higher yield/Low risk. Rates on an LTNCD are higher than short term deposits. The
yield on the LTNCD is assured if you hold onto it until maturity. As a bank product,
LTNCDs are covered by the Philippine Deposit Insurance Corporation on a maximum
insurance coverage of up to P500,000 per depositor.

Tax-exempted. Individuals who purchased the LTNCD from the primary market will
be tax-exempt, provided that they hold the LTNCD for at least 5 years.

Negotiable. It can be sold to the secondary market even before reaching maturity at
the current market price.

Steady cash flow. Investors receive interest payments on a quarterly basis.

Equity New Issue

 Equity Issue means any issue of partnership interests or shares by the

borrower or any issue or grant of rights to subscribe for, or to convert any
security into, partnership interests or shares in the borrower.

Why would you choose to invest in Equity New Issue?

 People buy stock because they believe eventually the value of the stock
will go up, allowing them to sell the stock at a higher price than the initial
purchase price. The risk is that the value of the stock could go down.
 Stocks are but one of many possible ways to invest your hard-earned
money. Why choose stocks instead of other options, such as bonds, rare
coins, or antique sports cars? Quite simply, the reason that savvy investors
 invest in stocks is that they provide the highest potential returns. And over
the long term, no other type of investment tends to perform better.On the
downside, stocks tend to be the most volatile investments. This means that
the value of stocks can drop in the short term. Sometimes stock prices may
even fall for a protracted period. 

Initial Public Offering (IPO)

 An initial public offering (IPO) refers to the process of offering shares of a

private corporation to the public in a new stock issuance. An IPO allows a
company to raise capital from public investors. The transition from a
private to a public company can be an important time for private investors
to fully realize gains from their investment as it typically includes a share
premium for current private investors. Meanwhile, it also allows public
investors to participate in the offering.
 An initial public offering (IPO) refers to the process of offering shares of a
private corporation to the public in a new stock issuance.
 Companies must meet requirements by exchanges and the Securities and
Exchange Commission (SEC) to hold an IPO.
 IPOs provide companies with an opportunity to obtain capital by offering
shares through the primary market.
 Companies hire investment banks to market, gauge demand, set the IPO
price and date, and more.
 An IPO can be seen as an exit strategy for the company’s founders and
early investors, realizing the full profit from their private investment.

Why would you choose to invest in IPO?

 As with any type of investing, putting your money into an IPO carries risks
—and there are arguably more risks with IPOs than buying the shares of
established public companies. That’s because there’s less data available for
private companies, so investors are making decisions with more unknown
variables.
 By investing in an IPO, you can enter the ‘ground floor’ of a company
with a high growth potential. An IPO may be your window to rapid profit
in a short time period. It may also help grow your wealth in the long run.
 IPO investments are equity investments. So, they have the potential to
bring in big returns in the long term. The corpus earned can help you to
fulfil long-term financial goals like retirement or buying a house.
 The price per security issued is clearly mentioned in the IPO order
document. So, you have access to the same information as bigger
investors.
 The IPO price is often the cheapest price if you invest in a small company
that has the potential to grow big. That is because the company may offer a
 discounted rate. If you miss the IPO window, investing in that promising
company may be difficult because the stock price may skyrocket.

What is New Issue market/Primary Market?

 Primary market is a place where securities are issued by the company for the
first time to general public for raising funds in order to fulfil the long term
capital requirement.
 Primary Market is a form of the capital market wherein new securities are sold
by the companies for the very first time to the investors, to raise funds and that
is why it is also acknowledged as New Issues Market (NIM).
 The primary market is the financial market where new securities are issued
and become available for trading by individuals and institutions. The trading
activities of the capital markets are separated into the primary market and
secondary market.
 Primary market is also known as new issue market. As in this market
securities are sold for the first time, i.e., new securities are issued from the
company. Primary capital market directly contributes in capital formation
because in primary market company goes directly to investors and utilizes
these funds for investment in buildings, plants, machinery etc.

Types of Issue of Securities in Primary Market

There are several types of issue of securities in the primary market which are
discussed as under:
Public Issue: Public issue is when a company enters the market, to raise money from
all kinds of investors. The securities offered for sale to the new investors, so as to
become a shareholder in the issuer company, is called Public Issue.

Initial Public Offer: Initial Public Offer or IPO, as the name suggests, is the fresh
issue of equity shares or convertible securities, or exiting shares or convertible
securities by an unlisted company for the very first time i.e. the shares are not
previously traded or offered for sale to the general public. This is often followed by
listing and trading of the company’s securities on the stock exchange.

Further Public Offer: Otherwise called as Follow on offer or FPO, refers to the fresh
issue of securities to the general public made by a company already listed on the stock
exchange, so as to raise additional funds.

Right Issue: Right Issue is an offer to the company’s existing shareholders to buy
further new shares of the company at a discount, as a part of the dividend of pre-
emption rights. It helps the firms to raise additional funds, without going to the public.
It invites its existing shareholders to subscribe for its fresh issue in the proportion of
their shareholdings on the record date in the concern.

Bonus Issue: When a company issues fully paid additional shares to the company’s
existing shareholders for free. The issue is made from the company’s free reserves or
securities premium account, in a specific proportion to the shareholding on a specific
record date.

Private Placement: When a company’s stocks or bonds are sold directly to a selected
group of people, say 50 to 200 people, called as private investors or institutions,
instead of offering the same to the general public is called private placement. Hence,
in case of a private placement there are only a handful of subscribers to the
company’s shares. However, it is capable of raising money, more quickly as
compared to offering shares for sale in the open market.

Preferential Allotment: Preferential Issue is one in which the specified securities are
allotted by a listed company to a selected group on a preferential basis. The issuing
company needs to adhere to the provisions relating to pricing, lock-in period,
disclosures, and so on.

Qualified Institutional Placement: When a company, which is already listed in a

stock exchange issues shares or debentures (fully or partly convertible) or any other
kind of security not including warrants, which are convertible in nature, to Qualified
Institutional Buyer (QIB), is called as Qualified Institutional Placement (QIP).

Institutional Placement Programme: Institution Placement Programme or IPP

implies a further public issue of equity shares by a listed firm or group of promoters
of a listed company, wherein the offer and allocation are made to Qualified
Institutional Buyers only.

Note: Qualified Institutional Buyers includes mutual fund, venture capital fund,

scheduled commercial bank, state industrial development corporation, national
investment fund, insurance fund, provident fund, pension fund, etc.

In a nutshell, Primary Market is a market where new long term securities are created
and issued to the public for sale through IPO that helps the company, public sector
institutions and governments to raise funds. These funds are injected by the company
in new projects and also to expand or upgrade the existing projects.

Functions of Primary Market

The main functions of a new issue market can be divided into a triple service
functions:

1. Origination: It refers to the work of investigation, analysis and processing of new

project proposals. It starts before an issue is actually floated in the market. This
function is done by merchant bankers who may be commercial banks, all financial
institutions or private firms. At present, financial institutions and private firms also
perform this service. Though this service is highly important, the success of the issue
depends, to a large extent, on the efficiency of the market.
2. Underwriting: It is an agreement whereby the underwriter promises to subscribe to
a specified number of shares or debentures or a specified amount of stock in the event
of public not subscribing to the issue. If the issue is fully subscribed, then there is no
liability for the underwriter. If a part of share issues remains unsold, the underwriter
will buy the shares.

3. Distribution: It is the function of sale of securities to ultimate investors. This

service is performed by brokers and agents who maintain a regular and direct contact
with the ultimate investors.

Advantages of Primary Market

 Companies can raise capital at relatively low cost, and the securities so issued
in the primary market provide high liquidity as the same can be sold in the
secondary market almost immediately.
 The primary market is an important source for mobilisation of savings in an
economy. Funds are mobilised from commoners for investing in other
channels. It leads to monetary resources being put into investment options.
 Chances of price manipulation in the primary market are considerably less
when compared to the secondary market. Such manipulation usually occurs by
deflating or inflating a security price, thereby deliberately interfering with fair
and free operations of the market.
 The primary market acts as a potential avenue for diversification to cut down
on risk. It enables an investor to allocate his/her investment across different
categories involving multiple financial instruments and industries.
 It is not subject to any market fluctuations. The prices of stocks are determined
before an initial public offering, and investors know the actual amount they
will have to invest.

Disadvantages of Primary Market

 There may be limited information for an investor to access before investment

in an IPO since unlisted companies do not fall under the purview of regulatory
and disclosure requirements of the Securities and Exchange Board.
 Each stock is exposed to varying degrees of risk, but there is no historical
trading data in a primary market for analysing IPO shares because the
company is offering its shares to the public for the first time through an initial
public offering.
 In some cases, it may not be favourable for small investors. If a share is
oversubscribed, small investors may not receive share allocation.
 With this information regarding the primary market, individuals can make a
well-thought-out decision regarding investment in the market. It also makes
way for the creation of an investment portfolio with diversified risk.
Where do you find Primary market?

1. Corporations

 Corporations behave as operating businesses that require capital to grow and

run their operations. These corporations can vary in industry, size, and
geographical location. Careers at corporations that relate to the markets
include corporate development, investor relations, and financial planning and
analysis (FP&A).

2. Institutions (“Buy Side” Fund Managers)

 Institutions consist of fund managers, institutional investors, and retail

investors. These investment managers provide capital to corporations that need
the money to grow and operate their businesses. In return for their capital,
corporations issue debt or equity to the institutions in the forms of bond and
shares, respectively. The exchange of capital and debt or equity completes the
cycle of the two key players in the capital markets.

3. Investment Banks (“Sell Side”)

 Acting as an intermediary, investment banks are hired to facilitate deals

between corporations and institutions. The job of investment banks is to
connect institutional investors with corrosions, based on risk and return
expectations, and investment styles. Careers in investment banking involve
extensive financial modelling and valuation analysis.

4. Public Accounting Firms

 Depending on their divisions, public accounting firms can engage in multiple

roles in the primary market. These roles include financial reporting, auditing
financial statements, taxes, consulting on accounting systems, M&A advisory,
and capital raising. Therefore, public accounting firms are usually hired by
corporations for their accounting and advisory services.

5. Insurance Companies

 Part of the institutional investment community and controlled almost the same
amount of funds as investment firms. These organizations, which include
property and casualty insurers and life insurance companies, take
in premiums to protect policyholders from various types of risk. The
premiums are then invested by the insurance companies to provide a source of
future claims and a profit.
 Most often life insurance companies invest in portfolios of bonds and other
lower risk fixed-income securities. Property casualty insurers tend to have a
heavier allocation to equities.
What is secondary market?

 A secondary market is a platform wherein the shares of companies are

traded among investors. It means that investors can freely buy and sell
shares without the intervention of the issuing company. In these
transactions among investors, the issuing company does not participate in
income generation, and share valuation is rather based on its performance
in the market. Income in this market is thus generated via the sale of the
shares from one investor to another.
 Secondary market is a place where existing securities like shares,
debentures, bonds, options, commercial papers, treasury bills, etc. are
traded amongst investors. It is like an auction market where the trading of
securities is done through exchange or a dealer (OTC).
 The secondary market is where existing shares, debentures, bonds, etc. are
traded among investors. Securities that are offered first in the primary
market are thereafter traded on the secondary market. The trade is carried
out between a buyer and a seller, with the stock exchange facilitating the
transaction. In this process, the issuing company is not involved in the sale
of their securities.

Functions of Secondary Market

 A stock exchange provides a platform to investors to enter into a trading

transaction of bonds, shares, debentures and such other financial instruments.
 Transactions can be entered into at any time, and the market allows for active
trading so that there can be immediate purchase or selling with little variation
in price among different transactions. Also, there is continuity in trading,
which increases the liquidity of assets that are traded in this market.
  Investors find a proper platform, such as an organised exchange to liquidate
the holdings. The securities that they hold can be sold in various stock
exchanges.
 A secondary market acts as a medium of determining the pricing of assets in a
transaction consistent with the demand and supply. The information about
transactions price is within the public domain that enables investors to decide
accordingly.
 It is indicative of a nation’s economy as well, and also serves as a link
between savings and investment. As in, savings are mobilised via investments
by way of securities.

Advantages of Secondary Market

 Investors can ease their liquidity problems in a secondary market

conveniently. Like, an investor in need of liquid cash can sell the shares
held quite easily as a large number of buyers are present in the secondary
market.
 The secondary market indicates a benchmark for fair valuation of a
particular company.
 Price adjustments of securities in a secondary market takes place within a
short span in tune with the availability of new information about the
company.
 Investor’s funds remain relatively safe due to heavy regulations governing
a secondary stock market. The regulations are stringent as the market is a
source of liquidity and capital formation for both investors and companies.
 Mobilisation of savings becomes easier as investors’ money is held in the
form of securities.

Disadvantages of Secondary Market

 Prices of securities in a secondary market are subject to high volatility, and

such price fluctuation may lead to sudden and unpredictable loss to investors.
 Before buying or selling in a secondary market, investors have to duly
complete the procedures involved, which are usually a time-consuming
process.
 Investors’ profit margin may experience a dent due to brokerage commissions
levied on each transaction of buying or selling of securities.
 Investments in a secondary capital market are subject to high risk due to the
influence of multiple external factors, and the existing valuation may alter
within a span of a few minutes.
Where do you find Secondary market?

1. Buyers and Sellers

In the secondary market, fund managers or any investors who wish to purchase
securities or debts will have to locate a seller. Transactions are facilitated through a
central marketplace, including a stock exchange or Over The Counter (OTC).

Stock exchange- are centralised platforms where securities trading take place,
sans any contact between the buyer and the seller. Transactions in stock
exchanges are subjected to stringent regulations in securities trading. A stock
exchange itself acts as a guarantor, and the counterparty risk is almost non-
existent. Such a safety net is obtained via a higher transaction cost being
levied on investments in the form of commission and exchange fees.

Over-the-counter markets are decentralised, comprising participants

engaging in trading among themselves. OTC market’s retain higher
counterparty risks in the absence of regulatory oversight, with the parties
directly dealing with each other. Foreign exchange market (FOREX) is an
example of an over-the-counter market. In an OTC market, there exists
tremendous competition in acquiring higher volume. Due to this factor, the
securities’ price differs from one seller to another.

Auction Market- is a market where the price is determined by the highest

price the buyer is willing to pay (bids), and the lowest price the seller is
willing to take (offers). Bids and offers are matched for a trade to occur.
Auction markets are an efficient way to connect buyers and sellers. The New
York Stock Exchange (NYSE) is an example of an auction market. Trades on
the exchange will be executed when an offer and bid is matched – think of it
as an agreed-upon price between the buyer and seller. While negotiations are
made in OTC markets, no negotiations are made in auction markets.

Dealer Market- is a financial market mechanism wherein multiple dealers

post prices at which they will buy or sell a specific security or instrument. In a
dealer market, a dealer – who is designated as a “market maker” – provides
liquidity and transparency by electronically displaying the prices at which it is
willing to make a market in a security, indicating both the price at which it
will buy the security (the “bid” price) and the price at which it will sell the
security (the “offer” price). Bonds and foreign exchanges trade primarily in
dealer markets, while stock trading on the Nasdaq is a prime example of an
equity dealer market.

2. Commercial Bank

 Banks trade shares, securities, and debentures, and they provide advisory
services for customers that want to buy or sell these investments. In property
administration, commercial banks act as trustees and executors of the estate on
 behalf of their customers. Banks charge a nominal fee for the agency functions
performed on behalf of their clients.

3. Investment Banks

 While investment banks facilitate the issuance of bonds and shares in the
primary market, they expedite the sales and trading of issued debts and
equities between buyers and sellers in the secondary market. Investment banks
provide equity research coverage on each stock’s upside potential, downside
risk, and rationale to help buyers and sellers make a judgment. Moreover,
investment banks sell and trade securities on behalf of the clients to maximize
their profits.

Differentiate New Issue Market and Secondary Market

PRIMARY MARKET SECONDARY MARKET

It is a way of issuing fresh shares in the market. It It is a place where already issued or
is also called New Issue Market. A major existing shares are traded. It is called
component of the primary market is the IPO. After Issue Market.

The amount received from the issue of shares goes The amount invested by the buyer of
to the company for their business expansion shares goes to the seller, and hence the
purposes. company doesn’t receive anything.

Securities are issued by the companies to the Securities are exchanged between buyers
investors. and sellers, and stock exchanges facilitate
the trade.

The securities are all issued at one price for all Securities are exchanged at the market
investors participating in the offering. . price.

The primary market doesn’t provide liquidity for The secondary market provides liquidity
the stock to the stock.

Underwriters act as intermediaries. Brokers act as intermediaries.

On the primary market, security can be sold just On the secondary market, securities can
once. be sold innumerable times.
In a primary market, securities are created for the first time for investors to purchase.
New securities are issued in this market through a stock exchange, enabling the
government as well as companies to raise capital.

For a transaction taking place in this market, there are three entities involved. It would
include a company, investors, and an underwriter. A company issues security in a
primary market as an initial public offering (IPO), and the sale price of such new issue
is determined by a concerned underwriter, which may or may not be a financial
institution. An underwriter also facilitates and monitors the new issue offering.
Investors purchase the newly issued securities in the primary market

The entity which issues securities may be looking to expand its operations, fund other
business targets or increase its physical presence among others. Primary market
example of securities issued includes notes, bills, government bonds or corporate
bonds as well as stocks of companies.

A secondary market is a platform wherein the shares of companies are traded among
investors. It means that investors can freely buy and sell shares without the
intervention of the issuing company. In these transactions among investors, the
issuing company does not participate in income generation, and share valuation is
rather based on its performance in the market. Income in this market is thus generated
via the sale of the shares from one investor to another.

Some of the entities that are functional in a secondary market include: retail investors,
Advisory service providers and brokers comprising commission brokers and security
dealers, among others, financial intermediaries including non-banking financial
companies, insurance companies, banks and mutual funds.
As for the platform provided by a secondary market, it facilitates stock trading and
also enables converting securities into cash. Continuous trading in a secondary market
also increases the liquidity of traded assets. Investors are thus encouraged to
undertake investments in financial instruments available in secondary markets for
substantial corpus creation. It is ideal to take the assistance of fund managers to make
the most of investment in a volatile market scenario.
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https://www.investopedia.com/terms/d/dealersmarket.asp
QUESTIONS

1. It refers to a stock or bond offering that is made for the first time.
2. A form of the capital market wherein new securities are sold by the companies
for the very first time to the investors, to raise funds
3. A platform wherein the shares of companies are traded among investors.
4. It is when a company enters the market, to raise money from all kinds of
investors.
5. It refers to the fresh issue of securities to the general public made by a
company already listed on the stock exchange, so as to raise additional funds.
Answer:

1. New issue
2. Primary market
3. Secondary market
4. Public Issue
5. Further Public Offer (FPO )