transactions take place in either the primary market or the secondary
market. In the primary market,
the purchaser gives the original issuer of the security cash in exchange
for the security. In a primary
market, the original security issuer receives cash; the public now holds
a security that did not previously exist.
Weekly T-bill offerings by the U.S. Treasury and municipal bond
sales by a city occur in the primary market.
Following the primary offering of a security, the security is said
to trade in the secondary markets between members of the public.
The NEW YORK STOCK EXCHANGE, the AMERICAN STOCK EXCHANGE, and the
OVER-THE-COUNTER market are considered secondary markets.
bankers specialize in the creation and placement of securities in the
primary market. These organizations
provide advice, underwriting, and distribution services to their clients.
The advice provided by investment bankers usually relates to the
type of security offering (debt or equity), the timing of the offering,
the legal characteristics of the issue, and the price at which the security
can be sold.
refers to the investment bankers' practice of absorbing the price risks
the issuer is unwilling to accept.
Underwriting takes various forms:
The underwriter commits to purchase the full amount of the issue
from the seller at an agreed-upon price.
The banker then re-offers the security to the public.
The underwriter's spread represents compensation to the underwriter.
The investment banker frequently forms a purchase group consisting
of other investment bankers who participate in the purchase of the securities.
The lead underwriter is primarily responsible for negotiating the
agreement with the issuer and maintaining the record.
The underwriter agrees to help sell the new issue for a given period
of time. After this period
passes (often 30 days), the underwriter is required to purchase any unsold
securities at a predetermined price.
Standby agreements are frequently used in stock sales that utilize
a rights offering.
The banker acts as a broker and returns unsold securities to the
issuer. The banker assumes
no risk for unsold securities. Best-effort
underwriting is often used when the issuer is confident the issue can
be sold or when the issuer is relatively small and un-established.
are distributed by various methods.
Some issuers market their issues directly to the public (for example,
placements refer to the distribution of securities to fewer than 25 private
buyers. Private placements
do not require registration with the SEC.
Bond issues are frequently distributed through private placements.
established stock exchanges and the over-the-counter market represent
the secondary markets. On
the New York Stock Exchange, members are classified as:
partners in a brokerage firm who execute orders for their clients
on the floor of the exchange.
2. Floor brokers:
commission brokers who handle overflow transactions with the commission
3. Floor traders:
members who buy and sell solely for their own account.
members who are assigned a number of stocks in which they act as
brokers by maintaining a limit book and as dealers by selling and buying
shares in which they specialize.
Specialists provide a continuous and liquid market in securities.
and bond transactions that are not handled on one of the organized exchanges
are traded in the over-the-counter (OTC) market.
This market is not centrally located but consists of a network
of brokers and dealers who communicate by telephone or computer terminals.
Mutual fund shares, many bank and finance stock, most corporate
third market in securities refers to OTC transactions in a security that
is also traded on an organized exchange.
Institutional investors often trade large blocks of stock in this
market. Negotiated fees are
typical in this market.
fourth market in securities refers to transactions that occur directly
between a buyer and a seller of a large block of securities.
In the fourth market, brokers and dealers are eliminated.
A wire network provides current information subscribers are willing
to buy or sell at specified prices.
commissions have been negotiated rates since