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2.1.2 Trading & the market
Achievable Series 65
2. Investment vehicle characteristics
2.1. Equity

Trading & the market

Negotiable security

Common stock is negotiable, which means it can be bought and sold between investors who are “negotiating” prices. Investors who purchase common stock are company owners for as long as they hold those shares and may choose to sell them at any time. Once shares are liquidated (sold), the investor locks in their gain or loss and no longer participates in the successes or failures of the issuer.

Definitions
Issuer
The organization responsible for creating, registering, and selling a security.

For example:

  • Tesla is the issuer of Tesla common stock
  • The US Government is the issuer of US Government bonds
  • Ford is the issuer of Ford preferred stock

Buying investors purchase negotiable securities in the market from other selling investors. If you wanted to buy shares of Home Depot stock, you would purchase them in the secondary market from another investor, not directly from Home Depot.

Definitions
Secondary market
Where stocks trade after they’re initially sold in the primary market (e.g., initial public offerings). Commonly referred to as the “stock market.”

If a security isn’t negotiable, it’s likely redeemable. While common stock isn’t redeemable, there are a few securities you’ll learn about in future chapters that are (like mutual funds and unit investment trusts). A redeemable security is bought and sold directly with the issuer, not with other investors in the market. For example, investors purchase Vanguard funds directly from Vanguard. When Vanguard fund investors move to liquidate their shares, they redeem (sell) their shares with Vanguard (Vanguard “cashes out” the shares).

Here’s a quick video discussing the differences between negotiable and redeemable securities:

Settlement

Several protocols are followed behind the scenes after a common stock trade executes. Settlement refers to the day the stock is “officially” in the buyer’s possession. Most trades execute through regular-way settlement, which occurs on the first business day after the transaction (known as T+1 - trade date plus one business day). Make sure you don’t count weekends or holidays towards settlement time frames, as settlement only occurs over business days.

We’ll learn more about the “behind the scenes” activity involving settlement in a future chapter.

The stock market

Issuers can raise significant capital (money) by offering securities like common stock to investors in the primary market. The most notable primary market transaction is the IPO (initial public offering), which is the first time an issuer sells its shares to the general public. Primary market transactions are also known as issuer transactions, which occur when the issuer collects the proceeds from a sale of securities.

Companies sell securities for one primary reason - to raise capital (money). Remember, stockholders have some control over the direction of the company. Why else would a company give up control over its business? Scaling (growing) a business can require significant amounts of money, which may be required to build new offices, purchase necessary equipment, or hire the right employees.

Once a primary market transaction of common stock takes place, investors are generally free to trade the security in the secondary market (known generally as the stock market). When a trade occurs, a non-issuer transaction takes place, meaning the issuer did not collect the proceeds of the transaction. Instead, the investor selling the security and relinquishing their ownership collects the proceeds.

Other offerings may occur after a security is issued in the primary market and begins trading in the secondary market. A follow-on offering, essentially “IPO part II” (or part III, IV, etc.) and also known as an additional public offering (APO), involves the issuer offering more shares in the primary market after the IPO. In most scenarios, issuers do not sell all possible shares in their IPO. This allows more shares to be sold and more capital to be raised in the future.

A secondary offering can also occur, which may not involve the issuer. Instead, large shareholders offer shares they obtained from the issuer. These are often officers or directors of the issuer that accumulated shares through their employment.

Let’s explore an issuer that’s been involved in all the transactions discussed above. Meta Platforms, Inc. (ticker: META), formerly known as Facebook, initially launched as a company in 2003. After gaining some success and raising money from private investors, the company raised $16 billion from investors in its 2012 IPO. After the IPO, the stock began trading in the secondary market on the NASDAQ exchange (we’ll learn more about exchanges in a future chapter). Roughly a year after its IPO, the company performed its first follow-on offering, raising roughly an additional $1.5 billion. A secondary offering occurred simultaneously as Mark Zuckerberg (CEO of Meta) sold over $2 billion of stock he personally owned.

Key points

Negotiable securities

  • Trade in the secondary market between investors
  • Common stock is negotiable
  • Most securities are negotiable

Redeemable securities

  • May only be bought and sold with the issuer

Primary market

  • Where issuers offer securities to investors
  • IPOs are a type of primary market transaction

Secondary market

  • Where investors trade securities with other investors

Issuer transaction

  • Sale of securities where the issuer keeps proceeds
  • Takes place in the primary market
  • Common example: IPOs

Non-issuer transaction

  • Sale of securities where a party other than the issuer keeps proceeds
  • Takes place in the secondary market
  • Where securities trade after their initial sale

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