An Introduction to International Capital Markets: Products, Strategies, Participants, Second Edition

8

Equity Markets and Equity Investment

8.1 CHAPTER OVERVIEW

Previous chapters have explored short and long-term debt securities. This chapter sets the scene for later material by reviewing the operations of equity markets. It considers the differences between debt and equity securities for corporate issuers and for investors. One of the most hotly debated subjects in finance is the extent to which markets are efficient. The practical implications of this debate for share traders and investors are assessed. Equity portfolio investment is discussed, as well as the theory and the practice of portfolio diversification. The chapter considers the key stages of an initial public offering (IPO) of new shares and looks at how further shares are issued through general cash offers or rights issues. Unlike bond markets, most share trading around the world is conducted on organized stock exchanges. The chapter looks at quote-driven markets based on dealers, and order-driven markets in which buy and sell orders are directly matched. Market operations are illustrated by considering a number of major organizations such as the New York Stock Exchange and the London Stock Exchange. The remaining sections of the chapter explore the markets for depository receipts, stock borrowing and lending, and portfolio trading.

8.2 COMPARING CORPORATE DEBT AND EQUITY

Most companies are funded through a mixture of debt capital and equity capital. Debt is provided by commercial banks in the form of loans, ...