The typical underwriting arrangement involves the purchase of a security issue from a corporation by an investment banking firm or a group of such firms (called an underwriting syndicate), and the sale of the issue to the general investing public, institutional investors as well as wealthy individuals. This procedure is followed in the case of bond issues of corporations as well as for stock issues which are not required by law or by decision of the board of directors to be offered first to old shareholders.
Investment banking is the process by which new securities are brought to market in order to raise capital for businesses. In a broad sense, investment banking embraces all the institutions by which capital formation takes place, including: (1) the transfer of ownership of a corporate entity through investment banks which are usually brokerage houses; (2) security substitution, such as is involved in the issuance of securities by investment companies; and (3) security management, or the decision as to where investors’ funds are to be placed.
On August 3, 2000 this column stated, “Twenty years ago the majority of the American public did not feel a compulsion to invest in the stock market. After nearly 18 years of a generally upbeat market, with the past five years being rip-roaring, Americans have once again ‘fallen in love with the stock market.’ However, Andrew Smithers and Stephen Wright, in their book entitled “Valuing Wall Street,” persuasively argue that stock prices in America are severely over-valued and are set for a serious fall, not unlike those of the past. While Smithers and Wright strongly believe that for most of the time the stock market is the right place to be, they, in a hard-nosed and historical way, understand that there are a few times when the market is not the place to be.”
One of the traditional advantages of exchange trading like the orders that are executed on the New York Stock Exchange has been the ease of keeping track of information about securities. Keeping track of the price of a security traded over-the-counter by dealers across the country is a much more formidable task.
Two factors to consider when investing in a company is its industry category and life cycle. Industry categories fall into three broad groups: non-cyclical, cyclical and growth. Industry life cycles also fall into three broad groups: pioneering, growth and maturity. Below is a brief definition of industry categories and life cycles.
Bonds sold in one country but denominated in the currency of another country are called “Eurobonds.” This designation is not restricted to bonds issued by European countries; rather it reflects that fact that these bonds first appeared in Europe, and they are still more common there than elsewhere.