As firms grow, their need for capital can expand dramatically. At some point, the firm may find that “cutting out the middle-man” and raising funds directly from investors is advantageous. At this point, it is ready to sell new financial assets, such as shares of stock, to the public.
The first time the firm sells shares to the general public is called the initial public offering, or IPO. The corporation, which until now was privately owned, is said to “go public.” The sale of the securities is usually managed by a group of investment banks such as Goldman Sachs or Merrill Lynch.
Investors who buy shares are contributing funds that will be used to pay for the firm’s investments in real assets. In return, they become part-owners of the firm and share in the future success of the enterprise. Anyone who followed the market for Internet IPOs in 1999 knows that these expectations for future success can be on the optimistic side (to put it mildly).
An IPO is not the only occasion on which newly issued stock is sold to the public. Established firms also issue new shares from time to time. For example, suppose General Motors needs to raise funds to renovate an auto plant. It might hire an investment banking firm to sell $500 million of GM stock to investors.
Some of this stock may be bought by individuals; the remainder will be bought by financial institutions such as pension funds and insurance companies. In fact, about a quarter of the shares of U.S. companies are owned by pension funds.
A new issue of securities increases both the amount of cash held by the company and the amount of stocks or bonds held by the public. Such an issue is known as a primary issue and it is sold in the primary market. But in addition to helping companies raise new cash, financial markets also allow investors to trade stocks or bonds between themselves.
For example, Smith might decide to raise some cash by selling her AT&T stock at the same time that Jones invests his spare cash in AT&T. The result is simply a transfer of ownership from Smith to Jones, which has no effect on the company itself. Such purchases and sales of existing securities are known as secondary transactions and they take place in the secondary market.
Some financial assets have no secondary market. For example, when a small company borrows money from the bank, it gives the bank an IOU promising to repay the money with interest. The bank will keep the IOU and will not sell it to another bank.
Other financial assets are regularly traded. Thus when a large public company raises cash by selling new shares to investors, it knows that many of these investors will subsequently decide to sell their shares to others.
Most trading in the shares of large United States corporations takes place on stock exchanges such as the New York Stock Exchange (NYSE). There is also a thriving over the- counter (OTC) market in securities.
The over-the-counter market is not a centralized exchange like the NYSE but a network of security dealers who use an electronic system known as NASDAQ to quote prices at which they will buy and sell shares. While shares of stock may be traded either on exchanges or over-the-counter, almost all corporate debt is traded over-the-counter, if it is traded at all. United States government debt is also traded over-the-counter.
Many other things trade in financial markets, including foreign currencies; claims on commodities such as corn, crude oil, and silver; and options. Now may be a good point to stress that the financial manager plays on a global stage and needs to be familiar with markets around the world.
For example, the stock of Citicorp, one of the largest U.S. banks, is listed in New York, London, Amsterdam, Tokyo, Zurich, Toronto, and Frankfurt, as well as on several smaller exchanges. Conversely, British Airways, Deutsche Telecom, Nestlé, Sony, and nearly 200 other overseas firms have listed their shares on the New York Stock Exchange.
No comments:
Post a Comment