NEW ISSUES AND RED HERRING :)

In a typical new offering, the final prospectus isn't ready until the day the securities are offered. But before that date you can get a "preliminary prospectus" or "red herring"—so named because it carries red lettering warning that the prospectus hasn't yet been cleared by the SEC as meeting disclosure requirements

The red herring will not contain the offering price or the final underwriting arrangements But it will give you a description of the company's business, and financial statements showing just what the company's growth and profitability have been over the last several years It will also tell you something about the management. If the management group is taking the occasion to sell any large percentage of its stock to the public, be particularly wary.

It is a very different case when an established public company is selling additional stock to raise new capital. Here the company and the stock have track records that you can study, and it's not so difficult to make an estimate of what might be a reasonable price for the stock. The offering price has to be close to the current market price, and the underwriters' profit margin will generally be smaller But you still need to be careful. While the SEC has strict rules against promoting any new offering, the securities industry often manages to create an aura of enthusiasm about a company (espacially in software development) when an offering is on the way On the other hand, the knowledge that a large offering is coming may depress the market price of a stock, and there are times when the offering price turns out to have been a bargain

New bond offerings are a different animal altogether. The bond markets are highly professional, and there is nothing glamorous about a new bond offering. Everyone knows that a new A-rated corporate bond will be very similar to all the old A-rated bonds. In fact, to sell the new issue effectively, it is usually priced at a slightly higher "effective yield" than the current market for comparable older bonds—either at a slightly higher interest rate, or a slightly lower dollar price, or both. So for a bond buyer, new issues often offer a slight price advantage.

What is true of corporate bonds applies also to U.S. government and municipal issues. When the Treasury comes to market with a new issue of bonds or notes (a very frequent occurrence), the new issue is priced very close to the market for outstanding (existing) Treasury securities, but the new issue usually carries a slight price concession that makes it a good buy. The same is true of bonds and notes brought to market by state and local governments; if you are a buyer of municipals, these new offerings may provide you with modest price concessions. If the quality is what you want, there's no reason you shouldn't buy them—even if your broker makes a little extra money on the deal.

NEW ISSUE. WHAT FOR?

To my mind, the new issue process is critical for the economy. It’s important that both old and new companies have the ability to raise additional capital to meet expanding business needs. For you, the individual investor, the area may be a dangerous one. If a privately owned company is “going public” for the fist time by offering securities in the public market, it is usually does so at a time when its earnings have been rising and everything looks particularly rosy. The offering also may come at a time when the general market is optimistic and prices are relatively high. Even experienced investors can have great difficulty in assessing the real value of a new offering under these conditions.

Also, it may be hard for your broker to give you impartial advice. If the brokerage firm is in the underwriting group, or in the “selling group” of dealers that supplements the underwriting group, it has a vested interest in seeing the securities sold. Also, the commissions are likely to be substantially higher than on an ordinary stock. On the other hand, if the stock is a “hot issue” in great demand, it may be sold only through small individual allocations to favored customers (who will benefit if the stock then trades in the open market at a price well above the fixed offering price).

If you are considering buying a new issue, one protective step you can take is to read the prospectus. The prospectus is a legal document describing the company and offering the securities to the public. Unless the offering is a very small one, it can't be made without passing through a registration process with the SEC. The SEC can't vouch for the value of the offering, but it does act to make sure that essential facts about the company and the offering are disclosed in the prospectus.

This requirement of full disclosure was part of the securities laws of the 1930s and has been a great boon to investors and to the securities markets. It works because both the underwriters and the offering companies know that if any material information is omitted or misstated in the prospectus, the way is open to lawsuits from investors who have bought the securities.

NEW ISSUE. WHAT DOES IT MEAN?

When you buy shares of stock on one of the exchanges, you are not buying a “new issue”. In the case of an old established company, the stock may have been issued decades ago, and the company has no direct interest in your trade today, except to register the change in ownership on its books. You have taken over the investment from another investor, and you know that when you are ready to sell, another investor will buy it from you at some price.

New issues are different. You have probably noticed the advertisements in the newspaper financial pages for new issues of stocks or bonds–large advertising which, because of the very tight restrictions on advertising new issues, state virtually nothing except the name of the security, the quantity being offered, and the names of the firms which are “underwriting” the security or bringing it to market.

Sometimes there is only a single underwriter; more often, especially if the offering is a large one, many firms participate in the underwriting group. The underwriters plan and manage the offering. They negotiate with the offering company to arrive at a price arrangement which will be high enough to satisfy the company but low enough to bring in buyers. In the case of untested companies, the underwriters may work for a prearranged fee. In the case of established companies, the underwriters usually take on a risk function by actually buying the securities from the company at a certain price and reoffering them to the public at a slightly higher price; the difference, which is usually between 1% and 7%, is the underwriters’ profit. Usually the underwriters have very carefully sounded out the demand is disappointing–or if the general market takes a turn for the worse while the offering is under way–the underwriters may be left with securities that can’t be sold at the scheduled offering price. In this case the underwriting “syndicate” is dissolved and the underwriters sell the securities for whatever they can get, occasionally at a substantial loss.

HOW DOES THE STOCK EXCHANGE WORK?

The Exchange is a non-for-profit corporation run by a board of directors. Its member firms are subject to a strict and detailed self-regulatory code. Self-regulation is a matter of self-interest for stock exchange members. It has built public confidence in the L Exchange. It is also required by law. The US Securities and Exchange Commission (SEC) administers the federal securities laws and supervises all securities exchanges in the country. Whenever self­ regulation doesn't do the job, the SEC is likely to step in directly. The Exchange doesn't buy, sell or own any securities nor does it set stock prices. The Exchange merely is the marketplace where the public, acting through member brokers, can buy and sell at prices set by supply and demand.

It costs money to become an Exchange member. There are about 650 memberships or "seats" on the NYSE, owned by large and small and firms and in some cases by individuals. These seats can be bought and sold; in 1986 the price of a seat averaged around $600,000. Today the price of a seat is more than a million! Before you are permitted to buy a seat you must pass a test that strictly scrutinizes your knowledge of the securities industry as well as a check of experience and character.

Apart from the NYSE and the AMEX there are also "regional" exchanges in the US, of which the best known are the Pacific, Midwest, Boston and Philadelphia exchanges.

There is one more market place in which the volume of common stock trading begins to approach that of the NYSE. It is trading of common stock "over-the-counter" or "OTC" - that is not on any organized exchange. Most securities other than common stocks are traded over-the-counter. For example, the vast market in US Govern­ment securities is an over-the-counter market. So is the money market - the market in which all sorts of short-term debt obligations are traded daily in tremendous quantities. Like-wise the market for long- and short-term borrowings by state and local governments. And the bulk of trading in corporate bonds also is accomplished over-­the-counter.

While most of the common stocks traded over-the-counter are those of smaller companies, many sizable corporations continue to be found on the "OTC" list, including a large number of banks and insurance companies.

As there is no physical trading floor, over-the-counter trading is accomplished through vast telephone and other electronic net­works that link traders as closely as if they were seated in the same room. With the help of computers, price quotations from dealers in Seattle, San Diego, Atlanta and Philadelphia can be flashed on a single screen. Dedicated telephone lines link the more active traders.

Confirmations are delivered electronically. Dealers thousands of miles apart who are complete strangers execute trades in the thousands or even millions of dollars based on thirty seconds of telephone conversation and the knowledge that each is a securities dealer registered with the National Association of Securities Dealers (NASD), the industry self-regulatory orga­nization that supervises OTC trading. No matter which way mar­ket prices move subsequently, each knows that the trade will be honored.

THE STOCK MARKET: IS IT A REAL PUZZLE FOR YOU?

The stock market. To some, it's a puzzle. To others, it's a source of profit and endless fascination. The stock market is the finan­cial nerve centre of any country. It reflects any change in the eco­nomy. It is sensitive to interest rates, inflation and political events. In a very real sense, it has its fingers on the pulse of the entire world.

Taken in its broadest sense, the stock market is also a control centre. It is the market place where businesses and governments come to raise money so that they can continue and expand their operations. It is the market place where giant businesses and institutions come to make and change their financial commitments. The stock market is also a place of individual opportunity.

The phrase "the stock market" means many things. In the nar­rowest sense, a stock market is a place where stocks are traded - that is bought and sold. The phrase "the stock market" is often used to refer to the biggest an most Important stock market in the world, the New York Stock Exchange, which is as well the oldest in the US. It was founded in 1792. NYSE is located at 11 Wall Street in New York City. It is also known as the Big Board and the Exchange. In the mid-1980s NYSE-listed shares made up approximately 60% of the total shares traded on organized national exchanges in the United States.

AMEX stands for the American Stock Exchange. It has the second biggest volume of trading in the US. Located at 86 Trinity Place in downtown Manhattan, the AMEX was known until 1921 as the Curb Exchange, and it is still referred to as the Crub today. Early traders gathered near Wall Street. Nothing could stop those out­door brokers. Even in the snow and rain they put up lists of stocks for sale. The gathering place became known as the outdoor curb market, hence the name the Curb. In 1921 the Curb finally moved indoors. For the most part, the stocks and bonds traded on the AMEX are those of small to medium-size companies, as contrasted with the huge companies whose shares are traded on the New York Stock Exchange.

<:3 )~~~~~~

Yours sincerely,

AlexSandra