EQUITY MARKETS

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 Markets available for equity
• Equity refers to owners capital. Share capital is part
ownership in a company.
• Owners share capital may be of following types:
(1)Preference share capital (also called Preferred Stock),
or
(2)Equity share capital (also called Common Stock or
Ordinary Share).
(Explain them in short)

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 • Following markets are available for trading in equity:
(1)Primary market, and
(2)Secondary market.

Collectively they are called ‘capital market’.

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 Primary Market
It is market where issuer of shares directly interact
with investors.
(Explain through example)

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 Secondary Market
• Any share issued through primary market can be
traded in secondary market.
• Following are the main secondary markets:
(1)Organized Exchange:
Stock exchange is the main organized exchange.
They have a trading floor where floor traders execute
transactions in the secondary market for their clients.
NYSE is the largest stock exchange.

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 • Only members or their authorized representatives can
trade in stock exchange.
• NYSE has two types of members:
(a) Floor Brokers: Floor brokers are either commission
brokers or independent brokers. Commission brokers
are employed by brokerage firms and execute orders
for clients on the floor. Independent brokers trade for
their own account and are not employed by any
brokerage firm.

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 (b) Specialist: They can match orders of buyers and
sellers. In addition, they can buy or sell stock of their
account.
- A stock needs to be listed to qualify for trading in stock
exchange. For this exchange charge an initial fees
depending on size of the company.

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 (2) Over the Counter Market:
- Stocks not listed on the organized exchanges are
generally traded in OTC market.
- Unlike the stock exchanges, the OTC market does not
have a trading floor.
- Buy or sell orders are completed through a
telecommunications network.

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 PRIVATE EQUITY
• When a firm is created, its founders typically invest their
own money in the business.
• It is possible founders also involved their family and
friends to invest in their business.
• This is referred to as ‘private equity’. Here business is
privately held and the owners cannot sell their shares to the
public.
• A public offering of stock may be feasible only if the firm
will have a large shareholder base to support an active
secondary market.

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 FINANCING THROUGH VENTURE
CAPITAL FUNDS
Private firms that need a large equity investment but
are not yet in a position to go public may attempt to
obtain funding from a venture capital fund.
VC funds receive money from wealthy investors and
from pension funds that are willing to maintain the
investment for a long time period (like 5 or 10 years).

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 • VC fund often provides its funding in stages based on
various conditions that the firm must satisfy.
• In this way, the VC fund’s total investment is aligned with
the firm’s ability to meet specified financial goals.
• VC fund exit the investment by selling its equity stake to
the public at the time of public offering of shares by the
company.
• They may also exit by selling the stake to acquirer or any
other investor.

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 FINANCING BY PRIVATE EQUITY
FUND
• PE funds pool money provided by institutional investors
and invest in businesses.
• They also pool debt to finance their investments.
• They generally take over business and manage them.
• They sell their stake after several years. If they were able to
improve business then they can sell their stake at a big
profit.
• They can go for IPO of the business and sell their stake at
that time.

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 PUBLIC ISSUE OF EQUITY
• When a firm goes public, it issues stock in the primary
market called ‘Initial Public Offering (IPO)’ for cash.
• Going public has two effects on the firm.
• First, it changes ownership structure of firm by
increasing the number of owners.
• Second, it changes the firm’s capital structure by
increasing the equity investment in the firm.

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 For going public firm appoint a lead underwriter who
determine the offer price at which shares will be
offered to public.
Also, firm attempt to understand the price that will be
paid for its shares. It is called process of book
building. (Give an example).
The transaction cost (issue cost) of equity is 7-10%.

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 Concept of Margin

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