Raising equity and executing trades

Learning goals

• Explain primary financing using mechanisms and limitations.
• Explain market organization using mechanisms and limitations.
• Explain order instructions using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Primary financing

A new primary issuance supplies proceeds to the issuer before issuance costs; a secondary share sale normally pays the selling investor rather than financing the company.

An IPO introduces public trading and an SEO issues more equity after listing; underwriting, disclosure and dilution should be assessed separately from price excitement.

Market organization

Exchanges match orders through defined rules; OTC dealers negotiate or quote liquidity, and off-exchange venues can differ in displayed information and execution process.

A market order prioritizes execution but leaves execution price uncertain; a limit order controls the worst acceptable price but can remain unfilled.

Order instructions

A stop instruction becomes active after its trigger condition and does not guarantee the trigger price; gaps and limited liquidity can worsen execution.

Bid–ask spread, commissions and market impact are distinct costs. Evaluate the execution decision using order size, urgency and the relevant market conditions.

Index construction defines the exposure being measured

An equity index can represent a broad market, a sector, a geography, a size or a style universe. Price weighting gives greater influence to higher nominal share prices; capitalization weighting uses market value, often adjusted for investable float; equal weighting assigns equal capital weights at rebalance and then drifts with returns. Constituent selection, corporate actions and reconstitution rules matter.

A price-return index excludes reinvested cash distributions while a total-return index includes them under its convention. Compare like with like when judging a dividend-rich strategy. A float-adjusted cap index can be investable yet highly concentrated; equal weighting can tilt smaller companies and require more turnover. None guarantees outperformance.

Formula and assumptions

Quoted spread=ask−bid; proportional spread=(ask−bid)/midpoint

Original applied case: Raising equity and executing trades

1. A dealer quotes 49.80 bid and 50.20 ask; an investor buys 100 shares at ask.
2. The midpoint is 50.00 and the immediate half-spread cost relative to midpoint is 0.20×100=20.
3. An immediate resale at unchanged bid loses 40 before commissions; liquidity cost scales with size.

Errors to catch

• Do not assume: Every secondary trade adds cash to the issuer.
• Do not assume: An SEO must be the first public issue.
• Do not assume: OTC trading has no counterparty risk.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov