Knowledge of Capital Markets
Capital markets: primary and secondary
Capital markets channel savings to issuers. In the primary market, an issuer sells new securities and receives the proceeds; in the secondary market, investors trade existing securities and the issuer receives nothing. Money market instruments mature in one year or less (T-bills, commercial paper, CDs, bankers' acceptances); capital market instruments have longer maturities (stocks, notes, bonds). Underwriters help issuers raise capital. In a firm commitment, the underwriter buys the issue and bears unsold inventory risk; in best efforts, it acts as agent and bears no such risk. A syndicate shares risk, and a tombstone advertises a completed deal. Registration under the Securities Act of 1933 requires a prospectus; Rule 415 permits shelf registration, Regulation D covers private placements, and Rule 144 governs resale of restricted stock. Market structure includes auction markets and dealer markets. The Fed's monetary tools are open market operations, the discount rate, and reserve requirements; fiscal policy is government taxing and spending. Leading indicators anticipate the cycle, coincident indicators move with it, and lagging indicators confirm it.
Traps: IPO proceeds belong to the issuer unless a secondary offering includes selling shareholders; money market means short maturity, not low risk; Fed purchases add reserves and pressure rates down; underwriting spread is not a sales commission.
Worked example: An issuer sells 2 million shares at $25. Gross proceeds are $50 million. A 6% underwriting spread is $3 million, so net proceeds to the issuer are $47 million.