Investments, tenth edition

 How  Securities 

Are Traded 

 CHAPTER THREE 

     3.1 

How Firms Issue Securities  

 Firms regularly need to raise new capital to help pay for their many investment projects. 

Broadly speaking, they can raise funds either by borrowing money or by selling shares in 

the firm. Investment bankers are generally hired to manage the sale of these securities in 

what is called a    primary  market    for newly issued securities. Once these securities are 

issued, however, investors might well wish to trade them among themselves. For example, 

you may decide to raise cash by selling some of your shares in Apple to another investor. 

This transaction would have no impact on the total outstanding number of Apple shares. 

Trades in existing securities take place in the    secondary  market.    

 Shares of  publicly listed  firms trade continually on well-known markets such as the 

New York Stock Exchange or the NASDAQ Stock Market. There, any investor can choose 

to buy shares for his or her portfolio. These companies are also called  publicly traded, 

publicly owned,  or just  public companies.  Other firms, however, are  private corporations,  

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Final PDF to printer

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60  P A R T  

I

 Introduction

whose shares are held by small numbers of managers and investors. While ownership 

stakes in the firm are still determined in proportion to share ownership, those shares do not 

trade in public exchanges. While many private firms are relatively young companies that 

have not yet chosen to make their shares generally available to the public, others may be 

more established firms that are still largely owned by the company’s founders or families, 

and others may simply have decided that private organization is preferable.