What defines a private placement market?
The limited number of investors
In a private placement market (both
debt and equity), what does an investment banker do?
- Acts as finder
- matches buyers with sellers
What are the two types of organized private markets?
What is a private equity market?
where small, unseasoned firms seek first outside investment
What is a venture capitalist?
- initial outside investor in a business
- operates in both private markets (equity and debt)
- high risk high return business
What does unseasoned mean?
firm has not sought outside financing before
Why do small, unseasoned firms need venture capitalists?
- 1) no one else wants to invest in small, unseasoned firms
- 2) firms have no historical records of operating results
- 3) firms have extremely uncertain growth projection
Why do venture capitalists invest in unseasoned companies?
- 1) to keep or acquire intellectual capital
- 2) to keep or acquire new technology
In the private equity market, where does the money come from?
What do venture capitalists get in return for the investment (besides monetary reasons)?
seats on the Board of Directors of the company they invest in
Besides individuals, who else can be a venture capitalist?
large seasoned companies usually have a venture capital subsidiary
What usually happens when venture capitalists get on the Board of a small unseasoned company?
minority position, but take over as soon as firm stumbles
Is venture capital money related to the US economy?
Yes - it is directly related
What is a primary market?
where securities are sold for the very first time
What is a secondary market?
where securities are bought and sold for the second and subsequent time
What does a money market deal with?
financial instruments with a maturity of less than 1 year
What does a capital market deal with?
financial instruments with a maturity of more than 1 year
Except organized exchanges, all financial markets are ___
over the counter markets
What does ECN stand for and what is it?
- electronic communication network
- telecommunication network without physical location
- provides information (quotes), but there is no trading
What is the disadvantage of over the counter markets?
not as continuous as organized exchanges, trades happen less often
What is a broker?
finder of buyers and sellers, does not hold securities in own account
What is a dealer?
finds buyers and sellers, does hold inventories of securities
Where are over the counter markets located?
wherever the dealer or broker is, not one set physical location
What are the characteristics of organized exchanges (3)?
- 1) they have a physical location
- 2) they are registered with the SEC
- 3) they are auction markets (must have buyers and sellers, which have to be matched)
What are the benefits of organized exchanges (3)?
- 1) continuous market = securities trade more often
- 2) establish and publish relatively fair security prices (prices consider all public information available)
- 3) they are extremely helpful in helping firms raise new capital
What are some listing requirements for organized exchanges?
- size of the firm (assets, revenue, etc)
- market value
- public ownership
What is an investment banker?
financial specialist who serves as intermediary in the selling of securities, can be individual or firm (Goldman-Sachs, Merill-Lynch)
What are the 3 functions of an investment bank(er)?
- 1) to underwrite a security's issue (buy from firm then sell to first buyer on primary market)
- 2) to distribute securities (syndicate is wholesaler, dealer's organization is retailer)
- 3) to advise buyers and sellers
What is a syndicate in relation to financial markets?
group of investment bankers
When and why is a syndicate formed?
when issuing new securities to spread the risk between the investment bankers