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Securities Markets and Investment Bankers

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  • 0:02 Markets of Opportunities
  • 2:46 Investment Bankers
  • 4:33 Why Is It Important?
  • 5:26 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Securities markets and investment banks provide opportunities for companies to obtain capital and people to make investments to increase their wealth. In this lesson, you'll learn about securities markets and the players involved.

Markets of Opportunities

Meet Sarah. She's started a green energy company that designs and builds wind turbines. Her business is growing quickly and successfully, but she is running out of money to fuel its growth. In fact, she needs so much money that her bankers don't want to take the risk of loaning her the tens of millions of dollars needed for her business to go to the next level. However, Sarah can seek capital through the securities markets.

Securities are generally either stocks or bonds. A stock, also referred to as equities or shares, is an ownership interest in a company. You can think of stock shares as owning a share - or part of - the company. A bond, sometimes called a debenture, is a debt instrument, which is a promise to repay a debt.

Stocks and bonds are traded on markets. A securities market is a market where securities are traded either on physical or electronic exchanges. Securities markets are generally divided between stock markets and bond markets. A stock market involves the trade of equity securities, which are ownership interests of a company commonly known as shares.

Some of the most important stock exchanges in the world include the New York Stock Exchange, the NASDAQ, Tokyo Stock Exchange, London Stock Exchange, Euronext, Hong Kong Stock Exchange and Shanghai Stock Exchange. A bond market involves the trade of debt securities. Rather than becoming owners of the company, the investors become creditors of it.

The securities market can be divided between primary and secondary markets. You are probably most familiar with the secondary stock market. A secondary market is where investors go to buy stocks and bonds from other investors. Yep, that's right - most people buy 'used' stocks and bonds. You can think of the secondary market as selling secondhand stock (not new).

Sarah is more interested in the primary market where new stock or bonds are initially sold to the public. Remember that primary often means first, as in first sale. This offering on the primary market is usually referred to as an initial public offering (IPO). For example, the first shares of Facebook were sold on the primary market. Investors who bought those shares may later trade them to other investors on the secondary market. Sarah can try to sell shares of her company on the primary market to raise the capital needed to expand her business.

Investment Bankers

Sarah seeks the help of Irene, who is an investment banker. An investment banker does not loan money but rather helps companies either raise money through IPOs or restructure through mergers and acquisitions where one company may purchase and merge with another company. Irene will help Sarah make her company's initial public offering and ensure that the offering complies with the complicated set of laws and regulations to which IPOs are subject.

Irene's bank will either underwrite the issue of stock or work on a best-efforts basis. If Irene's investment bank underwrites the issue, it will purchase all the stock Sarah wants to offer to the primary market and guarantee a certain price that Sarah will receive. Irene's bank will purchase the stock from Sarah at a discount and turn around and sell the stock at its full offering price to the public at the IPO.

The investment bank gets to keep the difference between the discount price and the price at which it sells the stock at the public offering. For example, if the initial offering price is $50 and the discount is 5%, Irene will pay Sarah $47.50 for each share and sell each share at the initial public offering for $50. If Irene can't sell all the stock, her investment bank is stuck with it, but it still has to honor its guarantee to Sarah.

If Irene just agrees to sell the issue on a best-efforts basis, she and her bank are only promising to use their best efforts to sell the stock for the price that Sarah wants. There is not a guarantee that Sarah will get the money she wants from the IPO in a best-efforts transaction.

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