Securities Markets
The world of finance is complex and multi-faceted, and one of the most important components of the financial landscape is the securities market. Securities markets are vital to our economy, as they provide a means for companies to raise capital by selling shares of stock and other securities to investors. At the same time, securities markets also provide investors with opportunities to buy and sell these securities, enabling them to participate in the growth of companies and the economy as a whole. This chapter will provide an overview of securities markets, including their history, the different types of securities that are traded, the major players in the market, and the ways in which securities are bought and sold.
Whether you are a seasoned investor or a newcomer to the world of finance, understanding the workings of securities markets is crucial to making informed financial decisions and achieving your investment goals.
- The term “security” refers to a financial instrument that holds some form of monetary value. It is fungible and negotiable. .
- Securities provide an ownership position in a publicly-traded corporation. These notes of ownership investment are called “stocks.”
- Securities create a creditor relationship with a corporation or government body. These are represented by owning a “bond.”.
- Securities can also be represented by rights to ownership called “options.”.
Types of Securities
There are two main types of securities, equity and debt. Each has its own set of usage and popularity. While not “officially” a type of security, a third one, known as hybrid, simply combines both equity and debt into a security.
Equity
Equity Securities are purchased shares of a publicly-traded corporation that provide ownership. They do not guarantee repayment but allow the owners to influence company decisions
Debt
Debt Securities are purchased loans that are repaid periodically. These are typically a fixed-term and rates. They do not provide ownership rights of any company or government entity.
"The Regulators"
Security and Exchange Commission
The Security and Exchange Commission was created in 1934 by Congress as a safeguard against a repeat of the Wall Street Crash of 1929. The SEC handles all aspects of regulation of Securities. These Include:
- The SEC reviews all registration information regarding securities and exchanges in registration statements and reviews all books and accounting for all firms and brokerages
- Requires registration of all brokers and dealers and requires filing of statements of registration.
- Regulates all secondary markets and all exchanges and regulates the secondary over-the-counter markets through the NASD.
- Created the Federal Reserve Board which governs credit extensions.
- Created the National Association of Securities Dealers (NASD) to self-regulate the secondary market. This has since been incorporated in to FINRA
NASD/FINRA
The Financial Industry Regulatory Authority (FINRA) is an independent self-regulatory, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States. The Financial Industry Regulatory Authority (FINRA) is the single largest independent regulatory body for securities firms operating in the United States. FINRA oversees more than 3,500 brokerage firms, 154,000 branch offices, and nearly 625,000 registered securities representatives. FINRA regulates the trading of equities, corporate bonds, securities futures, and options. NASD consolidated with FINRA in 2007. They have 4 primary bylaws which are:
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The Rules of Fair Practice/Rules of Conduct
The Rules of Fair Practice requires brokers and dealers to act fairly and equitably when dealing with customers. The rules specify prohibited actions, disclosure obligations and loyalty behaviors.
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Uniform Practice Code
The Uniform Practice Code (UPC) is a series of rules, interpretations and explanations designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business, particularly with regards to operational and settlement issues.
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The Code of Procedure
The Code of Procedure deals with violations of the Conduct Rules
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Code of Arbitration
The Codes of Arbitration Procedure provide rules that govern arbitration in FINRA's dispute resolution forum. Customer Code - The Code of Arbitration Procedure (Customer Code) governs arbitrations between investors and brokers and/or brokerage firms.
FINRA's main benefit is to protect investors from potential abuses and ensure ethical conduct within the financial industry. FINRA resources, such as BrokerCheck, allow investors to determine if someone claiming to be a broker is actually a member in good standing. By banning brokers that violate its rules of conduct, FINRA stops many financial crimes from taking place. Furthermore, FINRA made responsibility for these functions more clear by combining them in to one organization.
Exchange Markets
What are Exchange Markets?
Exchange markets are simply the way and locations where securities are bought, sold and exchanged. There are many other markets under the umbrella of Primary and Secondary markets such as: Over-the Counter, forex, money, stock and bond markets. Regardless of the market, they all fall under SEC and FINRA rules and regulations
Primary Market
New Issue Market: Where Initial Public Offerings (IPO’s) are sold IPOs include Page 2 Equity Shares, debentures, bonds, preference shares, and other innovative securities
Secondary Market
Where investors buy and sell securities, they already own. This is what most think of when they hear “stock market.” This includes the New York Stock Exchange (NYSE)and NASDAQ. The secondary market drives the prices of securities towards their actual value.
Third/Fourth Markets
Trading between brokers and institutional investors. Investment firms and pension plans tend to participate here due to the absence of broker fees. “Over-the-Counter” markets are traded directly among investors over the phone or online.
Underwriting Syndicates
Negotiated Underwriting
Negotiated Underwriting is the agreement between an issuer and SINGLE underwriter! The negotiation between the two focuses on the offering and purchase price of a new bond issue. Difference between the purchase price and the public offering price is known as the underwriting spread. This represents the profits that will go to the underwriting institution. Underwriters may be required to take ownership of shares that do not sell. This is called devolvement.
Underwriting Syndicates
Underwriting Syndicate is a temporary group of investment banks and broker/dealers who come together to sell new securities to investors when an IPO is too large for one firm to take on alone. Aka: underwriting group, banking syndicate, investment banking syndicates.
How it's formed:
Lead underwriter selects the groups and pools the resources together to complete the underwriting process.
Lead Underwriter
Receives the largest portion of IPO for disbursement and handles issues with the regulatory bodies.
Determine IPO Pricing
Members use closed bidding process to arrive at the IPO price after evaluating all financial information and growth prospects.
Profit/Loss
Syndicate shares profit/loss based on how the new stock performs on the market.
