The Security Markets

Types of stock market transactions include IPO, secondary market offerings, secondary markets, private placement, and stock repurchase.

Internal Public Offering (IPO)

An initial public offering (IPO), or stock market launch, is a type of public offering in which shares of stock in a company are sold to the general public on a securities exchange for the first time. Through this process, a private company transforms into a public company. Companies use initial public offerings to raise expansion capital, monetize the investments of early private investors, and become publicly traded enterprises.

A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares are traded freely in the open market, money passes between public investors.

When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital.

Although an IPO offers many advantages, there are also significant disadvantages. Chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors or create difficulties with vendors. Details of the proposed offering are disclosed to potential purchasers in a lengthy document known as a prospectus.

Most companies undertaking an IPO do so with an investment banking firm acting as an underwriter. Underwriters provide a valuable service, which includes helping with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale).

Secondary Market Offering

According to the U.S. Financial Industry Regulatory Authority (FINRA), a secondary market offering is a registered offering of a large block of security that has been previously issued to the public. The blocks being offered may have been held by large investors or institutions, and the sale proceeds go to those holders, not the issuing company. This is also sometimes called secondary distribution.

A secondary offering is not dilutive to existing shareholders since no new shares are created. The proceeds from the sale of the securities do not benefit the issuing company in any way. The offered shares are privately held by shareholders of the issuing company, which may be directors or other insiders (such as venture capitalists) looking to diversify their holdings. Usually, however, the increase in available shares allows more institutions to take non-trivial positions in the issuing company, which may benefit the trading liquidity of the issuing company's shares.

Transactions on the Secondary Market

After the initial issuance, investors can purchase from other investors in the secondary market. In the secondary market, securities are sold and transferred from one investor or speculator to another. It is, therefore, important that the secondary market be highly liquid. As a general rule, the greater the number of investors that participate in a given marketplace and the greater the centralization of that marketplace, the more liquid the market.

The Philippine Stock Market Board

Private Placement

Private placement (or non-public offering) is a funding round of securities that are sold not through a public offering but rather through a private offering, mostly to a small number of chosen investors. "Private placement" usually refers to the non-public offering of shares in a public company (since, of course, any offering of shares in a private company is and can only be a private offering).

Stock Repurchase

Stock repurchase (or share buyback) is the reacquisition by a company of its stock. In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.

Companies making profits typically have two uses for those profits. Firstly, some of the profits can be distributed to shareholders in the form of dividends or stock repurchases. The remainder, termed stockholder's equity, is kept inside the company and used for investing in the company's future. If companies can reinvest most of their retained earnings profitably, then they may do so. However, sometimes, companies may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns.

Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/security-market-efficiency-and-returns-9/the-security-markets-83/index.html
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 License.