SIE Study Guide
Post 2 of 11
- 1.1 Regulatory organizations
- 1.2 Structure of capital markets
- 1.3 Understanding Economic factors
- 1.4 Types of security offerings
- 2.1 Securities products in capital markets
- 2.2 Various types of Investment Risk
- 3.1 Settlement, Trading and Corporate Actions
- 3.2 Complicance Considerations and Customer Accounts
- 3.3 Prohibited Activities
- 4.1 Associated Persons SRO Regulatory Requirements
- 4.2 Reportable Events and Employee Conduct
Post 2 of 11 in the SIE Study Guide
Let’s see the various kinds of capital markets as well as how they are structured.
1.2.1 Market Types
There are four main types:
- Primary markets
- Secondary markets
- The third market
- The fourth market
The investing public can buy securities on the primary market and this process is known as issuer transactions.
In a broad sense, this is where investors can look for debt and equity securities to invest in.
The issuers of those securities then receive the proceeds of their sale.
In layman’s terms, it’s on the primary market that companies raise capital by offering their shares for purchase.
Investors take stock ownership of these shares when they purchase them.
Companies that offer shares for the first time do so through IPOs or initial public offerings.
These IPOs are underwritten by investment banks, for example.
They are tasked with not only pricing the shares but then offering them straight to investors.
Note that on the primary market, investors never trade directly with each other.
Instead, they buy them straight from the issuers.
The primary market is not only used by companies either.
Governments also use primary markets as a means to quickly raise capital that can be used on various things such as building new infrastructure, funding programs, and more.
There are two types of offerings found on a primary market:
- Primary offerings: Here the organization that issued the stock for sale get the proceeds and in this way, raises capital.
- Public offerings: Here, securities are also sold to investors. The process is facilitated by investment bankers or broker-dealers. who act as underwriters on those securities (as covered earlier). Because they often attract investors with smaller budgets who want to buy stock – including investment beginners – public offerings are highly regulated under the Securities Act (1933).
Earlier, we mentioned IPOs.
Let’s just clarify exactly what those are.
An IPO relates to the first-time issue of securities to the public.
You have additional public offers (APOs) as well and this relates to any further money raised.
APOs are used by companies to secure more equity capital via stock issues.
If this is the case, these are also considered to be primary market transactions.
Of course, various regulations govern IPOs.
These help to ensure that:
- Public offerings of securities are at the public offering price and are legitimate
- Securities are not withheld so the issuer can benefit in any way, for example, used as rewards to others to secure business in the future
- No one with insider knowledge can benefit over public investors
Those restricted from purchasing shares at the public offering price include:
- The company selling shares
- Employees of that company
- Anyone acting on behalf of the company (financial consultants or attorneys)
- Portfolio managers
- Anyone who owns a tenth or more of the company
- The immediate family of anyone listed above (including spouse, parents, children, or brothers and sisters)
When securities are not sold directly by the issuer, they are sold on the secondary market, more commonly known as the stock market.
The New York Stock Exchange (NYSE) is an example of a secondary market.
Here, following the IPO, publicly traded corporation shares can be purchased and sold as investors purchase securities from others using the trading accounts of brokerage firms.
In effect, secondary markets support primary markets, as their name suggests.
Over-the-counter (OTC) trading of securities listed on an exchange between broker-dealers and institutional investors occurs here and is commonly known as third market trading.
Those who engage in this form of trading circumvent fees that are usually charged to brokers and any association linked to a traditional stock exchange, like NYSE.
OTC trading occurs without the need for an exchange and happens through broker-dealer relationships.
Note that securities listed on stock exchanges can be traded in an OTC manner by broker-dealers that are certified as market makers as this allows them to conduct third marketing trading.
The third market is also known as the Nasdaq Intermarket.
In the fourth market, institutional investors can trade securities with each other, usually in large blocks and either those that are listed as well as unlisted stocks.
Trades like these take place 24-hours-a-day using the Electronic Communications Networks (ECN) without the need for reporting deals.
This form of trading is not open to retail investors, however.