GROUP MEMBERS

MUHAMMAD YASIRSAHIBZADA ANEES ZAIN UL ABBIDIN

SAHIBZADA REHAN ULLAH DILYAD KHANSAIRA NAZ

CAPITAL MARKET

• This is a market where long term financial securities are traded .it may be for more than 1 years securities and stock . For example bonds and stocks.

Types of capital market

• Primary market: • in the primary market

securities and bonds or simply long term financial securities and stocks are traded for the first time. Which can also be known as “new issues”. From the primary market the whole amount of “issue” the issuer receives.

• Secondary market:• this is a market where long term securities

and stock are traded frequently rather than new issue. or simply where pre-issued securities are traded.

Purpose of issuing bond and stock

• The basic purpose of issuing financial asset is to raise funds for the smooth running of business, expansion of business or meeting the any financial requirement of business.

Public issue

• It means selling the bond or stocks of the company to the general people. the financial assets are made available to the public by different ways as like by investment banker, private placement or best effort.

• Private placement • in this type of public issue the issuing

corporation issues to small number of investor , sometimes just one with less regulation compared with formal agreement. For example to the small group of insurance company.

• Investment banker:• In the form of issuing new financial assets are

sold to investment banker at a fixed price. Than the investment banker resell these to the public relatively high price than agreed with the corporation , which is known as underwriting spread. And the investment banker is responsible for any risk related to that agreed number of securities.

Best effort offering

• A security offering in which the investment bankers agree to use only their best efforts to sell the issuer’s securities. The investment bankers do not commit to purchase any unsold securities.

Shelf registration

• A procedure whereby a company is permitted to register securities it plans to sell over the next two years; also called SEC Rule 415. These securities can then be sold piecemeal whenever the company chooses.

Privileged subscription

• The sale of new securities in which existing shareholders are given a preference in purchasing these securities up to the proportion of common shares that they already own; also known as a rights offering.

Preemptive right

• The privilege of shareholders to maintain their proportional company ownership by purchasing a proportionate share of any new issue of common stock, or securities convertible into common stock.

Right

• -- A short-term option to buy a certain number (or fraction) of securities from the issuing corporation; also called a subscription right.

> SPECIFIED TERMS– the number of rights required to subscribe for

an additional share of stock– the subscription price per share– the expiration date of the offering

Options available to the holder of rights: Exercise the rights and subscribe for

additional shares Sell the rights (they are transferable) Do nothing and let the rights expire > the subscription period is three weeks or

less.

STANDBY ARRANGEMENT

• Standby Arrangement: A measure taken to ensure the complete success of a rights offering in which an investment banker or group of investment bankers agrees to “stand by” to underwrite any unsubscribed (unsold) portion of the issue.• Fee often composed of a flat fee and an

additional fee for each unsold share of stock.• The greater the risk of an unsuccessful rights

offering, the more desirable a standby arrangement.

• Oversubscription Privilege -- The right to purchase, on a pro rata basis, any unsubFor example, shareholders subscribe for 450,000 shares of a 500,000-share rights offering. Let us assume that some shareholders would like more shares and oversubscribe by 80,000 shares.

• As a result, each shareholder oversubscribing receives 5/8ths (50,000 / 80,000) of a share for each share oversubscribed.

• scribed shares in a rights offering

Privileged Subscription versus Underwritten Issue

• Investors are familiar with the firm’s operations when using a rights offering.

• The principal sales tool is a discounted price (rights offering) and the investment banking organization (underwriting).

• A disadvantage of a rights offering is that the shares will be sold at a lower price.

• There is greater dilution with a rights offering which many firms attempt to avoid.

• There is a wider distribution of shares with a public offering.

Regulation of Security Offerings -- Federal

• Securities Act of 1933 -- Generally requires that public offerings be registered with the federal government before they may be sold; also known as Truth in Securities Act.

• Securities Exchange Act of 1934 -- Regulates the secondary market for long-term securities -- the securities exchanges and the over-the-counter market

Regulation of Security Offerings -- Federal

• Registration Statement -- The disclosure document filed with the SEC in order to register a new securities issue.

PART 1: Prospectus -- Discloses information about the issuing company and its new offering and is distributed to investors.

Part 2: Additional information required by the SEC that is not part of the printed prospectus.

Red Herring

• Red Herring -- The preliminary prospectus. It includes a legend in red ink on the cover stating that the registration statement has not yet become effective.

• If there is any deficiency it is communicated by commencement letter.

• As the SECP satisfied ,it approves the registration, otherwise issues stop order.

Regulation of Security Offerings -- State

• Blue Sky Laws -- State laws regulating the offering and sale of securities.

• Individual states have security commissions that regulate securities in their states.

• These laws are particularly important when a security issue is sold entirely to people within the state and may not be subject to SEC regulation.

• Important if the SEC provides only limited review.• States vary on the strictness of their regulation.

Private Placement

• Private (or Direct) Placement -- The sale of an entire issue of unregistered securities (usually bonds) directly to one purchaser or a group of purchasers (usually financial intermediaries).

• Eliminates the underwriting function of the investment banker.

• The dominant private placement lender in this group is the life-insurance category (pension funds and bank trust departments are very active as well).

Private Placement Features

• Allows the firm to raise funds more quickly.• Eliminates risks with respect to timing.• Eliminates SEC regulation of the security.• Terms can be tailored to meet the needs of

the borrower.• Flexibility in borrowing smaller amounts more

frequently rather than a single large amount.

The Secondary Market

• Purchases and sales of existing stocks and bonds occur in the secondary market.

• Transactions in the secondary market do not provide additional funds to the firm.

• The secondary market increases the liquidity of securities outstanding and lowers the required returns of investors.

• Composed of organized exchanges like the New York Stock Exchange and American Stock Exchange plus the over-the-counter (OTC) market.

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