Explain Securities Distribution - Securities Industry Essentials SIE
- What is an exchange (listed) market?
- A centralized market where securities trade on an exchange. Exchanges provide organized trading with standardized rules, enhancing transparency and efficiency.
- What is a red herring (preliminary prospectus)?
- A preliminary prospectus used before effectiveness, missing final terms. It provides preliminary information to gauge interest, with a red legend indicating it's subject to change.
- What is a secondary distribution in equity markets?
- A large sale of stock by an existing shareholder, not the issuer. It involves resale of existing shares, providing liquidity for large holders without new capital to the issuer.
- What is an initial public offering (IPO)?
- A first-time sale of stock to the public by an issuer. It allows a private company to become publicly traded, raising capital through the initial distribution of shares.
- What is the difference between a principal trade and an agency trade?
- Principal: firm trades for its account; Agency: firm matches buyer and seller. Principal trades involve firm risk and inventory, while agency trades earn commissions without ownership.
- What is the cooling-off period under the Securities Act of 1933?
- Time after filing when sales are restricted until registration is effective. This period allows SEC review and investor education while prohibiting sales to prevent premature commitments.
- What is the underwriting spread (gross spread)?
- The difference between the public offering price and issuer proceeds. It represents the underwriter's compensation for services, calculated as the markup on the securities sold.
- What is a market maker in an OTC security?
- A dealer that posts bids and offers and stands ready to trade. Market makers ensure liquidity and continuous trading by maintaining inventory and quoting prices.
- What is a best efforts underwriting agreement?
- Underwriter sells as agent and does not guarantee all shares sell. It minimizes underwriter risk by committing only to marketing efforts, with proceeds based on actual sales.
- What is an underwriting syndicate?
- A group of underwriters that shares risk and distribution of an offering. Forming a syndicate distributes the financial and marketing burden among multiple firms for large offerings.
- What is the bid price and what is the ask (offer) price?
- Bid: dealer buys; Ask: dealer sells. The bid reflects the price at which dealers purchase from sellers, while the ask is for sales to buyers.
- What is a seasoned (follow-on) offering?
- A new issuance by a company that already has publicly traded shares. It enables established public companies to raise additional capital without the complexities of an initial offering.
- What is the role of an underwriter in a securities offering?
- To structure, price, and distribute an issuer's new securities. Underwriters manage the offering process to ensure efficient capital raising while assuming financial risk.
- What is the secondary market in securities transactions?
- The market where investors trade existing securities. It provides liquidity for investors by enabling the resale of previously issued securities without involving the issuer.
- What is a prospectus in a public offering?
- The disclosure document delivered to investors with final offering terms. It ensures investor protection by requiring full disclosure of risks, terms, and financials at the time of sale.
- What is a selling group in a public offering?
- Broker-dealers that help distribute shares without underwriting risk. They expand distribution reach by leveraging additional firms' networks without sharing underwriting liabilities.
- What is the primary market in securities transactions?
- The market where issuers sell new securities to investors. This market facilitates capital raising by allowing companies to issue new shares or bonds directly to investors for the first time.
- What is a firm commitment underwriting agreement?
- Underwriter buys the entire issue and resells to the public. This agreement transfers the risk of unsold shares from the issuer to the underwriter for guaranteed proceeds.
- What is a rights offering to existing shareholders?
- An issuance giving shareholders rights to buy new shares, usually at a discount. It protects existing shareholders from dilution by offering them priority to maintain ownership proportions.
- What is the effective date of a registered offering?
- The date SEC registration becomes effective and sales may begin. It marks the point when the SEC has approved the registration, allowing legal sales and distributions.
- Which price is higher in a normal market: bid or ask, and what is the difference called?
- Ask is higher; the difference is the bid-ask spread. In efficient markets, the ask exceeds the bid to allow dealer profit, with the spread indicating liquidity.
- What is the difference between a syndicate and a selling group?
- Syndicate assumes risk; selling group distributes only. The syndicate bears the underwriting risk, while the selling group focuses solely on sales to earn commissions.
- What is a private placement (Regulation D) offering?
- An unregistered sale of securities to exempt or qualified investors. It exempts offerings from full registration, targeting sophisticated investors to reduce regulatory burdens.
- What is an over-the-counter (OTC) market?
- A dealer market where broker-dealers trade via networks, not a central exchange. OTC markets offer flexibility for unlisted securities through decentralized dealer negotiations.
- What is a tombstone advertisement for a new issue?
- A notice ad listing basic offering facts, not a sales solicitation. It complies with SEC rules by providing public notice of the offering without constituting an offer to sell.