So let's get started with the equity market. Of the markets we'll discuss in this module, the equity market is probably the market where corporations are most visible to the public. Let's start with the initial public offering, the first time a company seeks public investment in its shares. It's a comprehensive process. The dot points here describe almost the complete procedure required to introduce shares for public trading. A significant role is being played on behalf of the company by investment banks. Investment banks provide the access to the equity market for the corporation. And it also provides a guarantee that the shares issued will be successfully issued through underwriting the process. Then there's the prospectus. The public needs to be informed about the financial position of the corporation in which they can now buy shares. The accountants reports are crucially important to verify the information provided by the corporation. Then there is the road show where the investment banks seek out interest in the shares of the company. That's really the marketing phase of the shares. Then finally, the shares are going to be issued at the issue price, the price where demand meets supply, of which we will see more later. And the allocation, how many shares will each investor get? And lastly, to wrap up the process, the cash flow from the new investors in the shares will finally find its way to the corporation. That whole process describes the primary equity market, the market where shares are first issued. Once the shares have been issued in the primary market, they are subsequently listed for trading on the secondary market. That allows the new investors, the new owners of shares in the corporation, to sell on their securities, their shares, to other investors when they want to liquidate their position. Hence, they do not sell these shares back to the corporation, but they will sell them on to other investors interested in the shares of the corporation. Before the corporation's shares do get listed on the secondary market, the stock exchange as we know it. A few conditions have to be met. Those conditions, consider size of the issue, liquidity of the share issue, and ownership. All of these conditions serve to ensure that the exchange is actually able to provide its primary function of providing liquidity to the investors, allowing share investors to sell all their shares to other investors. So what happens once the shares have been listed successfully on the stock exchange for further public trading? At that stage, continuous price discovery takes over. And continuous price discovery will provide an opportunity for shareholders to sell those shares at a fair and transparent price to other investors. Fair and transparent, both to the buyers and to the sellers of those shares. The company, meanwhile, still engages with the secondary market, the secondary equity market. The company will communicate with the shareholders by releasing, regularly, price sensitive announcements, which includes regular earnings figures and dividend payments. But also, any other material information that might have an impact on the share price. So, what else happens once the shares have been listed? Is the only role for corporations to provide information on earnings and dividends? Well, no. Corporations actually use the exchange, the secondary market for trading in shares themselves, as well. For example, when new investment opportunities, new investment projects arise, and a corporation seeks additional funding, additional equity capital. So, capital erasings for new investment projects would occur on this secondary market. The corporation also has the opportunity to buy back its own shares to reclaim ownership in the corporation so to speak. It would do that if it is accruing cash that cannot be more productively invested simultaneously. And lastly the corporation might find partners, other corporations listed on the exchange, that it is interested to merge with, or perhaps to take over. It would do that by buying the shares of that corporation on the stock exchange, on the secondary market for equity. Having gone through the process of describing the issue of the shares and the subsequent listing on the stock exchange, the secondary market for equaity. Let's take a closer look at what this market is really all about. You've seen a graph where Kellogg's share price was listed over time, as it was traded on the New York Stock Exchange. The New York Stock Exchange trades many securities. Close to 2000 shares, in fact. It could have cost less and graphed all of these equities, price development individually. But it also uses indexes to describe the overall market mood. The market development of shares on aggregate, on the exchange. The New York Stock Exchange does that primarily through the Dow Jones Industrial Average, a small numbers of shares traded on the New York Stock Exchange. It also does that for a much more comprehensive set of companies through the Standard & Poor's 500. Kellogg's is, in fact, one of the constituents of that index, and it is given on this graph that you see here. Kraft, one of the competitors of Kellogg's, is listed on the NASDAQ exchange. NASDAQ has got its own broad market index, the NASDAQ composite. And it is also indicated on this graph here. Other markets, overseas, equity exchanges, have got their own indexes, like the FTSE100, for the London Stock Exchange, and the increasingly popular Shanghai Stock Exchange Composite Index. These indexes give a good impression to investors of the overall market price developments. We will get back to this when we discover price discovery functions of equity markets. Best known of the equity markets is the New York Stock Exchange. A traditional, floor traded equity market. When we discuss price discovery, we will see what the implications of floor trading are. It's important, because more and more companies are nowadays listed on automated trading platforms. The London Stock Exchange was one the first to introduce one such platform. In an event labeled as the Big Bang. Many exchanges have since followed suit. Another development in equity market is the merger of exchanges, or connecting exchanges across different countries. Europe and its Euronext share trading system is a key example of this, that has significantly enlarged the fundraising opportunities for European companies. New markets emerge all the time. Strong, growing economies like China and Brazil have seen a matching development in the stock exchanges. Lastly, equity trading is becoming increasingly global, continuously expanding the investor base for multiple listed corporations that seek funding where it is most affordable.
