Securities Regulation Outline 1 
Securities Regulation Outline
Introductory Material
Financial Products. Two ways to raise money: taking out loans from the bank, or issuing securities on the public market.
Bank Loans
Money in exchange for a promise to pay. Usually secured by some collateral.
Commercial lending: one bank is “lead arranger” for others. Reduces exposure.
Securities
Stock. An ownership interest.
Common stock.
Voting rights!
Dividends.
Get paid last in a liquidation.
Preferred stock.
No voting rights as long as financial covenants OK.
Dividends.
Paid after bonds but before common stockholders in a liquidation.
Bonds. No ownership interest. Bondholders are creditors.
Notes, < 10 years
Indentures, > 10 years
Ways to lower interest rates on a bond (and hence the cost of borrowing):
Debt-equity ratio covenants
Collateral
Negative covenants (won’t take on more debt or redeem with lower interest debt)
“Lockbox” (?)
The Markets
Investor phones broker with an order (buy or sell), who phones brokerage house, who phones a clerk on the exchange, who phones a floor broker, who walks the order to a specialist, who buys or sells the security.
You need a lot of investors to have a market! Provides liquidity and information.
New ECNs are starting to interfere with this by fragmenting the market – not everybody goes to the NYSE anymore. Less liquidity, less information sharing.
SEC is trying to remedy this with a “National Market System” where ECNs would have to post their best price on any stock.
NMS doesn’t solve the liquidity problem.
Also doesn’t help investors who want to trade in the dark – who want to move a lot of stock without anybody catching on.
Efficient Capital Markets theory.
Three types:
Weak: Price reflects only prior price information.
Medium: Price reflects all publicly available information.
Strong: Price reflects all public and private info.
Uninformed investors and lying interfere with efficient capital markets. However, there’s a lot of information out there to
Introductory Material
Financial Products. Two ways to raise money: taking out loans from the bank, or issuing securities on the public market.
Bank Loans
Money in exchange for a promise to pay. Usually secured by some collateral.
Commercial lending: one bank is “lead arranger” for others. Reduces exposure.
Securities
Stock. An ownership interest.
Common stock.
Voting rights!
Dividends.
Get paid last in a liquidation.
Preferred stock.
No voting rights as long as financial covenants OK.
Dividends.
Paid after bonds but before common stockholders in a liquidation.
Bonds. No ownership interest. Bondholders are creditors.
Notes, < 10 years
Indentures, > 10 years
Ways to lower interest rates on a bond (and hence the cost of borrowing):
Debt-equity ratio covenants
Collateral
Negative covenants (won’t take on more debt or redeem with lower interest debt)
“Lockbox” (?)
The Markets
Investor phones broker with an order (buy or sell), who phones brokerage house, who phones a clerk on the exchange, who phones a floor broker, who walks the order to a specialist, who buys or sells the security.
You need a lot of investors to have a market! Provides liquidity and information.
New ECNs are starting to interfere with this by fragmenting the market – not everybody goes to the NYSE anymore. Less liquidity, less information sharing.
SEC is trying to remedy this with a “National Market System” where ECNs would have to post their best price on any stock.
NMS doesn’t solve the liquidity problem.
Also doesn’t help investors who want to trade in the dark – who want to move a lot of stock without anybody catching on.
Efficient Capital Markets theory.
Three types:
Weak: Price reflects only prior price information.
Medium: Price reflects all publicly available information.
Strong: Price reflects all public and private info.
Uninformed investors and lying interfere with efficient capital markets. However, there’s a lot of information out there to