Corporations Engage in Two Types of “Primary Market” Transactions: Public Offerings and Private Placements

In a primary market transaction, the corporation is the seller, and the transaction raises money for the corporation. . . . Corporations engage in two types of primary market transactions: public offerings and private placements. A public offering, as the name suggests, involves selling securities to the general public, while a private placement is a negotiated sale involving a specific buyer. . . .

Most publicly offered debt and equity securities are underwritten. In Canada, underwriting is conducted by investment dealers specialized in marketing securities. Examples are RBC Dominion, Scotia Capital, Nesbitt Burns, and CIBC World Markets.

When a public offering is underwritten, an investment dealer or a group of investment dealers (called a syndicate) typically purchases the securities from the firm and markets them to the public. The underwriters hope to profit by reselling the securities to investors at a higher price than they pay the firm.

By law, public offerings of debt and equity must be registered with provincial authorities, of which the most important is the Ontario Securities Commission (OSC). Registration requires the firm to disclose a great deal of information before selling any securities. The accounting, legal, and underwriting costs of public offerings can be considerable.

Partly to avoid the various regulatory requirements and the expense of public offerings, debt and equity are often sold privately to large financial institutions such as life insurance companies or mutual funds. Such private placements do not have to be registered with the OSC and do not require the involvement of underwriters.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17-18.

On the Two Kinds of “Secondary Markets”: Auction Markets and Dealer or Over-the-Counter (OTC) Markets

Financial markets function as both primary and secondary markets for debt and equity securities. The term primary markets refers to the original sale of securities by governments and corporations. The secondary markets are where these securities are bought and sold after the original sale. Equities are, of course, issued solely by corporations. Debt securities are issued by both governments and corporations. . . .

A secondary market transaction involves one owner or creditor selling to another. Therefore, the secondary markets provide the means for transferring ownership of corporate securities. There are two kinds of secondary markets: auction markets and dealer markets. 

Dealer markets in stocks and long-term debt are called over-the-counter (OTC) markets. Trading in debt securities takes place over the counter. The expression over the counter refers to days of old when securities were literally bought and sold at counters in offices around the country. Today, like the money market, a significant fraction of the market for stocks and all of the market for long-term debt have no central location; the many dealers are connected electronically. . . .

Auction markets differ from dealer markets in two ways: First, an auction market or exchange, unlike a dealer market, has a physical location (like Bay Street in Toronto or Wall Street). Second, in a dealer market, most of the buying and selling is done by the dealer. The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those who wish to buy. Dealers play a limited role.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17-19.

Financial Markets Can Be Classified As Either “Money Markets” (Short-Term Debt) Or “Capital Markets” (Long-Term Debt)

Financial markets can be classified as either money markets or capital markets. Short-term debt securities of many varieties are bought and sold in money markets. These short-term debt securities are often called money-market instruments and are essentially IOUs. For example, a bankers acceptance represents short-term borrowing by large corporations and is a money-market instrument. Treasury bills are an IOU of the government of Canada. Capital markets are the markets for long-term debt and shares of stock, so the Toronto Stock Exchange, for example, is a capital market.

The money market is a dealer market. Generally, dealers buy and sell something for themselves, at their own risk. A car dealer, for example, buys and sells automobiles. In contrast, brokers and agents match buyers and sellers, but they do not actually own the commodity. A real estate agent or broker, for example, does not normally buy and sell houses.

The largest money-market dealers are chartered banks and investment dealers. Their trading facilities, along with other market participants, are connected electronically via telephone and computer, so the money market has no actual physical location.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17.