Unit 1 Assignment-Portfolio Management

GF570 Portfolio Management
Unit 1 Assignment
During financial planning, important attention is provided to investment planning.
Investors have many types of investment options. For proper investment planning, the
investors need to understand the advantages and disadvantages of the investment options.
In addition, the investors need to understand how securities are dealt with.
1. What is the difference between an initial public offering (IPO) and a seasoned
equity offering (SEO)?
An Initial Public Offering (IPO) are usually occurs when a privately-owned company
offers ownership of equity or debt in order to raise capital to fuel growth, an IPO is the first time
a private company makes is security available to the public. On the other hand a Season Equity
Offering (SEO) happens when a company that is already listed wants to raise additional capital,
the company releases additional equity or debt via a secondary offering. (College for Financial
Planning, 2020, p. 3)

2. Discuss the differences between a primary and a secondary market.
According to the College for Financial Planning text the primary market is where new
securities (issues) are created while the secondary market is where existing stock (or previously
issued) securities are traded via the major stock exchanges (NASDAQ, NYSE, OTC or a
regional exchange).
Primary Markets are where IPO’s occur and involve many participants to make the IPO
happen such as Investment Bankers, attorneys, accountants, appraisers as well as other
professionals to assist with the underwriting. The secondary markets on the other hand consists
of the buying and selling of these previously issued securities and involves broker deals, market
makers and the various exchanges that these securities are traded on. (NYSE, NASDAQ, OTC,
INSTINET). One additional note unlisted securities can also trade on the secondary markets.
(College for Financial Planning, 2020, p. 9)
3. In what circumstance are private placements more likely to be used than public
In a situation where a public company is working with a willing buyer such as a bank,
insurance company, registered investment company, a pension plan, an employee benefit plan,
charitable organization and the various definitions of accredited investors and the corporation
wishes to avoid the extensive time and cost associated with preparing a public issue. (College
for Financial Planning, 2020, p. 6-7)

4. How do margin trades magnify both the upside potential and downside risk of an
investment portfolio?
In a margin transaction the potential up or downside is magnified based on the original amount
of capital invested vs. borrowed. So when the price of a security rises or falls, the gain or the
loss represents a much higher percentage relative to the money actually invested. An example:
Assumptions: 100 shares (shs) XYZ stock, margin requirement 50% / no dividends
Investor uses Margin:
1. Buys 100 shs PDQ x $100 = $10,000 = starting value
2. Sells 100 shs PDQ x $130 = $13,000 = ending value
3. Margin requirement = PDQ shs at $100 x .50 x 100shs = $5,000
4. Initial Investment $5,000
5. $13,000 – $10,000 / $5,000
6. $3,000 / $5,000
7. HPR = 60%
Investor does not use Margin:
Assumptions: 100 shares (shs) PDQ stock / no dividends
1. Buys 100 shs PDQ x $100 = $10,000 = starting value
2. Sells 100 shs PDQ x $130 = $13,000 = ending value
3. Initial Investment $10,000
4. $13,000 – $10,000 / $3,000
5. $3,000 / $10,000
6. HPR = 30%
(College for Financial Planning, 2020, p. 14-15)
5. How do security dealers earn their profits? Please explain with an example.
The primary source of income for a securities dealer is the bid-ask spread. This is the
difference between the price at which the dealer is willing to purchase a security and the price at
which they are willing to sell the same security.
For example, the other potential areas a securities dealer could earn a profit is being
involved an underwriting of an IPO, of course assisting investors in trading in the secondary
markets and capturing the difference in the bid-ask spread as previously mentioned, assisting
investor in trading securities on margin and capturing the interest rate spread between what the
banks charge the security dealer and what they charge the investor for interest on borrowing.
Lastly, this was not explicitly mentioned but the topic of money markets was discussed and many
money markets have an embedded expense ratio that is charge to manage these funds and this is
a way to earn profits from these securities. (College for Financial Planning, 2020)

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