securitiesregulation—buell-lawschool-securitiesregulation—.docVIP

Securities Regulation—Buell Fall ‘06 Chapter 1--Introduction Types of Securities (See Class Handout) A security is a contract that represents a business interest in an enterprise; a bundle of rights that grants particular rights to the holder of the contract (cash flow, liquidation, voting) Common Stock Residual and discretionary dividends, residual liquidation, voting rights Preferred Stock Fixed and discretionary dividends, contingent voting rights Bonds Fixed and certain investment, high liquidation rights, no voting rights The Capital Market Primary Market Transactions (Issuance transactions—sold to investors) ’33 Act and IPOs Secondary Market Transactions (Trading transactions—sold between investors) ’34 Act NYSE, Nasdaq, etc. Investment Decisions Present Discount Valuation (PDV)—What a market would pay today for a given amount of money at a given time Interest Investors must be compensated for the risk of their investment; the higher the risk, the higher the required return for investors to put their money there Present Value Can quantify it if you have the cash flow and discount rate Cash flow/(1+discount rate)years of discount rate Risk: the probability of a certain return coming to fruition (stocks have a lot of risk, gov’t bonds don’t) PDV doesn’t matter much if there is huge risk—your discount rate probably won’t be accurate Risk=Inflation (discount rate) + other risk (systemic and unsystemic) Systemic: Risk that affects all companies similarly (though possibly not to the same magnitude)—Fed. Reserve Rate Unsystemic: Can be cured by diversification—it does not affect all companies in a similar manner Inflation is only a prediction of what prices will do in the future What Risks Matter? Materiality: If information is the goal and disclosure is the means, then policing disclosure requires knowing what matters to investors You can’t require people to disclose everything. It would be too expensive and there is a lot of stuff that doesn’t matter to investo