Hello folks, in the previous blog, I had discussed about the role of securities market place in trading. In this blog, I am going to describe you about the process and structure of how to bring securities to the marketplace.
In trading, this is an important component to understanding how the securities marketplace works as a whole and also understand how securities are brought to the marketplace.
On the baisis of securities trading timing, the securities market is classified into two category:
- Secondary market: The majority of trades executed in securities marketplaces around the globe on a daily basis are in securities that have been brought to the marketplace at a prior point in time. So those securities that fall into this category are said to be trading in the secondary market.
- Primary market: Securities that are in the process of being brought to the marketplace are said to be trading in the primary market. The daily trading volume in primary market is lower than that conducted in the secondary market.
Methods of Issuing Securities:
The process of bringing securities to the marketplace is one that requires specialist skills. An issuer of securities typically operates in an industry which is different than the securities industry. So they do not have the expertise to manage the process efficiently.
It is a common practice for issuers to appoint specialists in the field of issuing securities. These experts typically reside within the corporate finance departments of international investment banks and commonly known as lead manager. Their responsibility is to provide their client (the issuer) with the most suitable means of raising cash within given market conditions. So they can expand their business and resulting in new issues of equity or debt.
There are various methods exist for issuing securities, it depends upon whether the issue is equity or debt and the historic practices within the financial centre in which the issue is launched. But in most cases the issuer will publish a prospectus which cantains details about issuing securities are as follows:
- Quantity of shares or bonds being issued.
- The issue price.
- A description of the company’s activities.
- Reasons for raising the cash.
- Financial history of the company.
- Debt or ownership changes when issue will create.
Apart from that, it has also a statement by independent accountants that verifies the data contained within the prospectus is legally valid.
On the basis of securities type (equity/debt), there are different issuing methods available.
Methods of Issuing Bond/Debt:
There are two methods used for issuing bonds
- Auction: The US Treasury and the Bank of England (for example), on behalf of their respective governments, issue bonds via auction where the securities are sold to the highest bidders.
- Syndication: Bonds are often issued by a method known as syndication, where the lead manager forms a consortium. Usually with a number of banks or STOs who agree to take a percentage of the issue and work together to promote the distribution of the bond to investors.
Methods of Issuing Equity:
The most common methods of issuing equity are described below
- Initial Public Offering(IPO)/Public Offer for Sale: An equity issue may be offered to potential investors by the issuer placing advertisements in the financial and national press and by the publication of a prospectus. In some markets it is usual for a syndicate of STOs to receive share allotments from the lead manager (on behalf of the issuer) and then to allot some or all of the shares to their clients. Such issues are commonly known as IPOs. Alternatively, for some issues the public can apply for shares directly to the issuer. This style of issuance is known as a Public Offer for Sale.
- Private Placement: Equities can also be issued restrictively by targeting the offer of shares to a select group of institutional investors, such as pension funds and insurance companies. These issues are not offered to the public directly.
Post the Lunch of Securities:
Following the completion of a new issue, the issuer will have received its cash and the securities will have been successfully brought to the marketplace. The primary market for the particular security ceases to exist at that point in time.
An owner of such securities may choose to hold them for days, months or years, or may choose to sell them immediately, all such trades will be effected within the secondary market.
In next blog, I will describe about structure of a Securities Trading organisation (STO). So stay tuned.
Happy Learning !!!
Book: Securities Operations: A Guide to Trade and Position Management by Michael Simmons