FBE 555 - 2. Trading Part 1

How do firms generally fund themselves?

Through equity

What are primary markets?

Markets where new stock or bond issues are sold to investors.

What is an equity stake?

Ownership in a company

Drawbacks of privately held companies

Poor liquidity

Benefit of going public

Access to more capital and increased company visibility.

Role of underwriters in IPO

Market the security

What is dilution in an IPO?

Reduction in existing ownership when new shares are issued.

What does P/CF ratio represent?

Price-to-Cash Flow ratio compares market price to cash flow.

Market order vs. Limit order

Market order ensures execution; limit order ensures price.

Significance of bid-ask spread

Indicates transaction costs and market liquidity.

Liquidity's effect on spreads

Higher liquidity usually results in narrower spreads.

Example of a market order

Buy/sell shares immediately at current market price.

Purpose of a limit order

Specify trade price

Unmet limit order result

Stays in order book until executed or canceled.

What is market impact?

Price effect caused by executing large orders.

Reason for IPO 'pop'

Underpricing by underwriters creates post-IPO price jump.

What is the order book?

Record of all outstanding limit orders.

Difference in electronic trading

Online platforms allow faster

Impact of broker commissions

They add to total trading costs.

Common type of private company

Small businesses not traded publicly.

Public vs. Private US companies

Only ~4

Definition of 'fair price'

Midpoint between bid and ask prices.

What is market stress?

High volatility that affects liquidity and execution.

Price impact formula

Price impact = (avg price paid / bid-ask mid) - 1.

Execution under stress

Higher risk and uncertain prices.

Going public benefits

Efficient capital raising and improved liquidity.

Lesson from Facebook IPO

Illustrates post-IPO volatility and order book complexity.

IPO challenges for small investors

Hard to access IPO shares and face aftermarket risks.

Causes of post-IPO price rise

Liquidity and demand drive share price up.

Limiting market order risk

Understand conditions or use limit orders.

Behavior of large orders

Can significantly move market prices.

Importance of bid-ask spread

Key indicator of trading cost and liquidity.

Meaning of 'execution'

Fulfilling a trade order.

Complementarity of order types

Market orders ensure execution

Why fewer public companies?

Regulatory and cost burdens of going public.

Successful IPO definition

Post-offering price surge reflecting strong demand.