InvestHL Archives | Page 42 of 50

Aug

2023

What Is Book Value Per Share (BVPS)?

By Matthew Warholak | Growing Wealth, invest, Investing | Comments Off

One of the most popular and trusted forms of fundamental analysis is Book Value Per Share (BVPS), or a company’s “book value.” Book value per share is an accounting metric that calculates the per-share value of a company’s equity.

The book value per share of an undervalued stock is higher than its current market price, so book value per share can help investors appraise a stock price.

Knowing what book value per share is, how to calculate it, and how it differs from other calculations, can add yet another tool to an investor’s tool chest.

What Is Book Value Per Share?

Book Value per Share (BVPS) is the ratio of a company’s equity available to common shareholders to the number of outstanding company shares. This ratio calculates the minimum value of a company’s equity and determines a firm’s book value, or Net Asset Value (NAV), on a per-share basis. In other words, it defines the accounting value (i.e. book value) of a share of a company’s publicly-traded stock.

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Book Value Per Share vs Market Value Per Share

The Book Value Per Share provides information about how the value of a company’s stock compares to the current Market Value Per Share (MVPS), or current stock price. For example, if the BVPS is greater than the MVPS, the company’s stock market may be undervaluing a company’s stock.

The market value per share is forward-looking, since it’s based on what investors think a company should be worth, while book value per share is an accounting measure that uses historical data.

What Does Book Value Per Share Tell You?

Commonly used by stock investors and analysts, the Book Value Per Share (BVPS) metric looks at a company’s stock price to determine whether it’s undervalued compared to the stock’s current market price. An undervalued stock will have a BVPS higher than its current stock price.

If the company’s BVPS increases, investors may consider the stock more valuable, and the stock’s price may increase. On the other hand, a declining book value per share could indicate that the stock’s price may decline, and some investors might consider that a signal to sell the stock.

Book Value Per Share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid. However, because assets would hypothetically sell at market value instead of historical asset values, this may not be an entirely accurate measurement.

If a company’s share prices dip below its BVPS, the company can potentially be vulnerable to a takeover by a corporate raider who could buy the company and liquidate its assets risk-free. Conversely, a negative book value indicates that a company’s liabilities exceed its assets, making its financial condition “balance sheet insolvent.”

Book Value Per Share solely includes common stockholders’ equity and does not include preferred stockholders’ equity. This is because preferred stockholders are ranked differently than common stockholders in the event the company is liquidated. If a corporate raider intends to liquidate a company’s assets, the preferred stockholders with a higher claim on assets and earnings than common shareholders are paid first and that amount gets deducted from the final shareholders’ equity distributed among common stockholders.

How to Calculate Book Value Per Share

An investor can apply BVPS to a stock by analyzing the company’s balance sheet. Specifically, an investor will need total asset value, cost of acquiring an asset, and accumulated depreciation of corporate assets which helps provide the most accurate BVPS figure.

Whereas some price models and fundamental analyses are complex, calculating book value per share is fairly straightforward. At its core, it’s subtracting a company’s preferred stock from shareholder equity and dividing that sum by the average amount of outstanding shares.

Book Value Per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding Common Shares
Shareholders’ Equity = Total equity of all shareholders.
Total Outstanding Common Shares = Company’s stock currently held by all shareholders, including blocks held by institutional investors and restricted shares owned by preferred stockholders. This number may fluctuate wildly over time.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Example of Book Value Per Share

Company X has $10 million of shareholder’s equity, of which $1 million are preferred stocks and an average of 3 million shares outstanding. With this information, the BVPS would be calculated as follows:

BVPS = ($10,000,000 – $1,000,000) / 3,000,000
BVPS = $9,000,000 / 3,000,000
BVPS = $3.00

How to Increase Book Value Per Share

A company can increase its book value per share in two ways.

Repurchase Common Stocks

A common way of increasing BVPS is for companies to buy back common stocks from shareholders. This reduces the stock’s outstanding shares and decreases the amount by which the total stockholders’ equity is divided. For example, in the above example, Company X could repurchase 500,000 shares to reduce its outstanding shares from 3,000,000 to 2,500,000.

The above scenario would be revised as follows:

BVPS = ($10,000,000 – $1,000,000) / 2,500,000
BVPS = $9,000,000 / 2,000,000
BVPS = $4.50

By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.

Increase Assets and Reduce Liabilities

Rather than buying more of its own stock, a company can use profits to accumulate additional assets or reduce its current liabilities. For example, a company can use profits to either purchase more company assets, pay off debts, or both. These methods would increase the common equity available to shareholders, and hence, raise the BVPS.

The Takeaway

There are many methods that investors can use to evaluate the value of a company. By leveraging useful and insightful formulas such as a company’s Book Value Per Share, investors can determine a company’s value relative to its current market price. While it has limitations, the BVPS can identify companies that are undervalued (or overvalued) according to core fundamental principles, and it’s a relatively straightforward calculation that even beginner investors can use.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Aug

2023

What Is Gross Spread?

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

The term “gross spread” refers to an important element of the initial public offering (IPO) process: Gross spread is the money underwriters earn for their role in taking a company public.

When a company IPOs, or “goes public,” it releases its shares onto a public stock exchange, an undertaking that demands a tremendous amount of work behind the scenes. That work involves bankers, analysts, underwriters, and numerous others. All of that work must be compensated, which is where the gross spread — also called the underwriting spread — comes into play.

How Gross Spread Works

The gross spread refers to the cut of the money that is paid to the underwriters for their role in taking a company public. In effect, it’s sort of like a commission paid to the IPO underwriting team. But the underwriting spread isn’t a flat fee, but a spread in the sense that it represents a share price differential.

Underwriters

Underwriters are common players in many facets of the financial industry. It’s common to find underwriters working on mortgages, as well as insurance policies.

When it comes to IPOs, underwriters or underwriting firms work with a private company to take them public, acting as risk-assessors, effectively, in exchange for the underwriters spread. Their job is to evaluate risk and charge a price for doing so.

Recommended: What Is the IPO Process?

The Role of Underwriters in the IPO Process

These IPO underwriters generally work for an investment bank and shepherd the company through the IPO process, ensuring that the company covers all of its regulatory bases.

The underwriters also reach out to a swath of investors to gauge interest in a company’s forthcoming IPO, and use the feedback they receive to set an IPO price — this is a key part of the process of determining the valuation of an IPO.

In order to generate compensation for all this work, the underwriters typically buy an entire IPO issue and resell the shares, keeping the profits for themselves. So, the underwriters set the IPO price, buy the shares, and — assuming the shares increase in value once they become publicly available — the underwriters generate a profit from reselling them, the same way you would selling the shares of an ordinary stock that had risen in value.

For companies that are going public, the benefit is that they’re essentially guaranteed to raise money from the IPO by selling the shares to the underwriters. The underwriters then sell the shares to buyers they have lined up at a higher price in order to turn a profit. That difference in price (and profit) is the gross spread.

For the mathematically minded, the gross spread — basically the IPO underwriting fee — would be equal to the sale price of the shares sold by the underwriter, minus the price of the shares it paid for the shares.

💡Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

Gross Spread & Underwriting Costs

The gross spread, for most IPOs, can range between 2% and 8% of the IPO’s offering price — it depends on the specifics of the IPO. There can be many variables that ultimately dictate what the gross spread ends up being.

The gross spread also comprises a few different components, which are divided up by members of the underwriter group or firm: The management fee, underwriting fee, and concession. The underwriters typically split the gross spread, overall, as such: 20% for the management fee, 20% for the underwriting fee, and 60% for the concession. More on each below:

Management fee

The management fee, or manager’s fee, is the amount paid to the leader or manager of the investment bank providing underwriting services. This fee essentially amounts to a commission for managing and facilitating the entire process. It’s also sometimes called a “structuring fee.”

Underwriting fee

The IPO underwriting fee is similar to the management fee in that it is collected by and paid to the underwriters for performing their services. Again, this is more or less a commission that is taken as a percentage of the overall gross spread and divided up by the underwriting teams.

Concession

The concession, or selling concession, is generally the compensation underwriters get for managing the IPO process for a company. So, in this sense, the concession is a part of the gross spread during the IPO process and is, effectively, the profits earned by selling shares when the process is complete. It’s divided up between the underwriters proportionately depending on the number of shares the underwriter sells.

💡Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Examples of Gross Spread

Here’s an example of how gross spread may look in the real world:

Company X is planning to IPO, and its shares are valued at $30 each. The underwriters working with Company X on its IPO purchase the full slate of shares prior to the IPO, and then go off and sell the shares at $32 each to investors and the general public.

In this case, the gross spread would be equal to the difference between what the underwriters paid Company X for the shares, and what they then sold the shares for to the public — $32 – $30 = $2.

Or, to express it as a ratio, the gross spread is 6.7%. More on the ratio calculation below.

Gross Spread Ratio

As mentioned, the gross spread can be expressed or calculated as a ratio. Using the figures above, we’d be looking to figure out what percentage $2 is (the gross spread) of $30 (the share price sold to the underwriters).

So, to calculate the ratio, you’d simply divide the gross spread by the share price — $2 divided by $30. The calculation would look like this:

$2 ÷ $30 = 0.0666

The figure we get is approximately 6.7%. Also note that the higher the ratio, the more money the underwriters (or investment bank serving as the underwriter) receives at the end of the process.

IPO Investing With SoFi

Though the gross spread, or underwriters spread, is not a well-known aspect of the IPO process, it’s relatively straightforward. Underwriters, who shepherd a company through the IPO process, ultimately buy the initial shares from the company at one price, and sell them to the public at the IPO at a higher price. The spread between the two is considered the gross spread, or the compensation the underwriting team earns for all their work.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is meant by the underwriting spread?

The underwriting spread is another term for the gross spread. Underwriters pay issuers, or an issuing company, for a company’s shares prior to the IPO. The underwriting firm then turns around and sells shares to investors. The difference (expressed as a dollar amount) that the underwriter pays the issuer and that it receives back from selling the shares during an IPO is the underwriting spread.

What are gross proceeds in an IPO?

Gross proceeds, in relation to an IPO, refers to the total aggregate amount of money raised during the public offering. This is all of the money raised by investors during the IPO.

What is a typical underwriting spread?

As underwriting spreads are usually expressed as dollar amounts, the typical underwriting spread can vary depending on several variables in the IPO process — including share price, share volume, etc. But in general, it can amount to between 3.5% and 7% of gross proceeds during an IPO.

Photo credit: iStock/bankrx

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623082

Aug

2023

What Are Non-Transparent ETFs?

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

Unlike ordinary exchange-traded funds (ETFs), which disclose their underlying assets daily, non-transparent ETFs are only required to reveal their holdings on a quarterly or monthly cadence. This ability to conceal their assets can help active non-transparent ETF managers to cloak their strategies for longer periods, with the aim of maximizing performance.

To understand some of the advantages these funds may offer investors, it helps to compare them with standard ETFs.

Why Would You Invest in Non-Transparent ETFs?

For nearly 30 years, exchange-traded funds (ETFs) have been a mainstay for big institutional investors as well as individuals, thanks to their transparency, tax efficiency, and low cost. Today, the ETF industry in the U.S. has billions, if not trillions, under management.

Traditionally, investors have found ETFs an attractive option because of their liquidity, which has made ETFs more transparent than mutual funds. Unlike mutual funds, you can trade ETF shares throughout the day on an exchange, similar to stocks. And the way shares are created and redeemed gives investors more visibility into the funds’ underlying assets, compared with mutual funds. This ‘transparency’ has been true of both actively managed ETFs as well as passive ETFs, which track an index such as the S&P 500.

But the fundamental transparency of the ETF “wrapper” or fund structure has been a thorn in the side of some active ETF managers, who may prefer less visibility around their holdings for strategic reasons. Hence the appeal of non-transparent ETFs to active managers.

Active non-transparent ETFs — also called ANT ETFs — aren’t required to reveal their assets daily, as noted above; rather they report a snapshot of what they hold on a monthly or quarterly basis, similar to a mutual fund. In some cases they report the assets they hold, but not how much they hold.

Recommended: ETFs vs. Index Funds: What’s the Difference?

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Passive vs. Active Strategies Can Impact Transparency

If you think about it, the evolution of active non-transparent ETFs makes sense in the larger context of the ETF universe, where passively managed ETFs comprise more than 90% of that market.

Passively managed ETFs offer some of the lowest ETF fees in today’s market, which is one reason they’re typically cheaper to own than mutual funds. The overall tax efficiency of index ETFs also helps to lower investing costs, and has contributed to their overall popularity with investors.

ETFs, of course, are also valued for their role in adding diversification to investors’ portfolios, with many ETFs invested in specific sectors (e.g. electric vehicles, pharmaceuticals) or securities (e.g. U.S. Treasuries, corporate bonds).

No matter whether an ETF is invested in a broader equity market or a niche sector, passive ETFs are designed to mirror or track the stocks in a certain index. Thus the transparency of these funds is part of how they work.

That’s not true of active ETFs, which rely on the oversight of a fund manager to choose the underlying assets (just like an active mutual fund). But because ordinary ETFs require a daily disclosure of the fund’s holdings, this can hamper an active manager’s ability to execute their investment strategies.

When a fund’s assets are disclosed on a daily basis, the market can bid up the price for their holdings. And while in the short term this might be good (the assets could go up), in the long term it could disrupt the fund manager’s strategies. And, if other investors try to anticipate the trades that active managers might make, sometimes called front running, that could cause asset prices to fluctuate and potentially impact the ETF’s performance.

The Use of Proxies in Non-Transparent ETFs

How might a non-transparent ETF solve this problem?

The way ETFs keep their price in line with their assets is that the sponsor of the ETF trades throughout the day with an “authorized participant.” These authorized participants will create and redeem “baskets” of securities, i.e. the stocks or bonds that the ETF holds, and then trade them to the ETF for shares of the fund, which allows the ETF to stay in line with the price of its underlying stocks.

This process obviously requires a great degree of transparency across the board. So, how does a non-transparent ETF obscure its holdings? The answer is, by the use of “proxies”: These are baskets of stock that are similar to but not identical to the underlying holdings of the ETF.

Thus, non-transparent ETFs are able to occupy a happy middle ground in the ETF world: they enable fund managers to conceal their strategies while keeping the liquidity of pricing that is core to trading ETFs overall.

The History of Non-Transparent ETFs

For years, the ETF industry was composed mostly of index ETFs, which helps to explain why the universe of ETFs is primarily passive. But over time, some investment companies began seeking regulatory approval for non-transparent ETFs, also sometimes called semi-transparent ETFs, in order to pursue more active strategies. The approval for these funds, and the technology underlying the non-transparent strategy, began rolling out in late 2019, and ANT ETFs have seen steady inflows since then.

Though non-transparent ETFs are still a relatively small part of the overall ETF market, this sector is gaining traction and is now approaching $2 billion AUM. This reflects a similar trend among active ETFs, which have also seen more inflows this year.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

The Takeaway

Non-transparent ETFs may be a relative newcomer in the multi-trillion-dollar world of ETFs, but they offer an attractive new opportunity for investors who are interested in active investment styles — but still want the cost efficiency and liquidity of an ETF. Non-transparent ETFs also give active fund managers the ability to cloak their strategies, which may aid potential outcomes.

As with all ETFs, they may have a place in an investor’s portfolio. But it’s generally best that investors do some research or consult with a financial professional before investing.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/ANA BARAULIA

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723038

Aug

2023

Guide to Reading an S-1 Statement

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

An S-1 statement is a type of registration form that companies, hoping to go public, need to file with regulators in order to issue stocks on public exchanges. It’s an important document, and one that is combed through by many prospective investors prior to an IPO.

For investors who may be interested in IPO investing, learning the ins and outs of an S-1 statement is paramount.

What Is an S-1 Form?

An S-1 statement is the registration form companies must file with the Securities Exchange Commission (SEC) to issue new securities. As such, it’s a necessary document for any company preparing for an initial public offering (IPO) to list on a national exchange, such as the Nasdaq or the New York Stock Exchange.

The form serves as an introduction for companies hoping to raise money from the investing public, in which they essentially lay out their business plan. That includes explaining its current business model, its place in the current competitive landscape, as well as introducing managers and sharing a short prospectus for the stock itself. The form also includes the company’s methodology for formulating the stock price, and disclosures about how the company expects its IPO to impact the stocks of any existing public companies.

Thoroughly reading an S-1 is a great way for investors to research a company directly, rather than gathering information from third-party sources.

Recommended: What Is an IPO? Everything Investors Need to Know

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Where Can You Find S-1 Filings?

The S-1 form, like all SEC forms, is publicly available. You can typically find it by going to the “investor relations” section of a company’s Web site, or by searching on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.

The EDGAR system is free and publicly available. It allows you to search by company, or even by form type. So, for example, you could look for all the S-1 registrations for a given period.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

How to Read An S-1: Section Breakdown

There are several different sections of the S-1 form that contain helpful information for analyzing a stock.

The Box

The beginning of the form consists of a section often called “The Box,” which summarizes the major highlights of the document. The Box usually includes the following information about the company:

• Background information

• Industry information

• Competitive strengths

• Business strategies

• Risks

• Financial data

• Description of securities it plans to sell in its IPO

The box is where the company will try to tell its life story, its plan for the future, and why it is a worthwhile investment. It is, in some ways, a pitch to prospective investors. As such, it can be surprisingly non-technical, without some of the financial and legal jargon that can make financial statements so difficult to read.

Management’s Discussion & Analysis (MD&A)

This is where the company explains and offers context around the financial statements that appear in other sections of the S-1 registration.

This usually includes operating performance metrics, as well as how different business segments performed. This is also where management often elaborates on some of the risk factors that affect or will affect the company. Sometimes, a company will also use the MD&A as a place to share their long-term outlook.

Selected Consolidated Financial Data

This is the section where you’ll get to the numbers that matter, where the company shares a condensed statement of its income, balance sheet and cash flow.

Those statements present a quarter-by-quarter illustration of the company’s financials over the previous two years, showing its growth, capital expenditures, and other trends in the business. While those numbers may well tell a story on their own, they may be worth perusing with the commentary and background of the MD&A in mind.

Description of Capital Stock & Underwriting

While the other sections tell you what the company is, what it does, and how it’s doing, this one gets to the main point of the S-1 – what the company is selling, namely, its stock.

This section is where investors can dig in to understand the security that will be making its debut. It includes details of shareholder rights, such as its voting and conversion rights. It also lists the investment banks that the company has hired to sell its IPO shares to large investors.

Description of Capital Stock & Underwriting even gives a preview of the IPO itself, disclosing the stock’s offering price, the number of shares the company plans to sell, and the total proceeds that the company hopes to raise in the IPO.

Recommended: How Are IPO Prices Set?

Executive Compensation

This is the section that discloses how much senior management makes in salary and other compensation, and can give investors a sense of the net worth and motivation of the leadership.

Related Party Transactions

This is where investors get a glimpse into who the company is working with. It’s a chance to connect the dots, and see who’s backing the company. The Related Party section is where a company has to disclose any transaction with a private equity firm, or a family member.

The Footnotes

Seasoned investors are also close readers of the footnotes of an S-1. This is where the most interesting little details are sometimes buried.

The Takeaway

Filing an S-1 is a key part of the IPO process. Reading an SEC S-1 filing can help investors understand what to expect about an IPO. Every company approaches their S-1 registration differently. Each company will provide different degrees of disclosure, and they will use the format of the S-1 to present that information in the way they believe will benefit them.

Reading through the document can feel like a chore, but if you’re at all interested in IPO investing, it’s a worthwhile investment of time. If you feel like you’re in over your head, though, you may want to speak with a financial professional to try and get caught up.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/insta_photos

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

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Aug

2023

Capital Markets Explained

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Capital markets are markets for capital, where businesses and other organizations can find financial resources to help them grow. The capital markets are also where financial securities like stocks and bonds are generated, which is critical for investors of all stripes to understand.

The capital markets play a key role in the economy, and there are also a wide variety of them. Again, this can all be critical for investors to understand, especially if they’re in the early stages of building their portfolios.

What Are Capital Markets?

As mentioned, capital markets refer to entities that offer funding to businesses, organizations and other entities that need capital. Capital market instruments are financial securities, including stocks and bonds. Most capital markets are located in the world’s financial centers, such as London, New York, Singapore and Hong Kong.

The entities that supply the capital consist of financial institutions, corporate treasurers, commercial banks, pension plans, life insurance companies, charitable foundations, and other asset managers. The entities that go to the capital markets to acquire capital include companies, nations, states, municipalities, banks, among others.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Are the Types of Capital Markets?

There are a wide range of capital markets. The most common capital markets are stock markets, where investors exchange capital for equity stakes in a given company, and the bond market, where investors exchange capital for a right to agreed-upon debt repayments from a company, a state, or another entity.

Stock markets are probably the most well-known of the capital markets. They are capital markets because it’s where companies go to acquire the capital they need to grow, and where investors go to find opportunities for their capital to grow. Companies acquire capital in the stock markets through an initial public offering (IPO) when they sell fractional ownership stakes in themselves to investors.

Recommended: A Brief History of the Stock Market

Bond markets, on the other hand, are not as popular or as well understood by the general public. For one thing, the bond market doesn’t have a central exchange. Instead, they sell over the counter. And most of the people who trade in this OTC market are professional traders, such as pension funds, investment banks, hedge funds, and asset managers.

The bond market is a capital market because it is where companies, states, and other entities go to raise money by offering their debt in the form of a bond. In a bond issuance, investors pay for the right to receive repayment, along with the interest rate offered in the bond.

Stock and bond markets are one way to divide up the capital markets. But there are other so-called hybrid securities such as preferred stocks, convertible bonds, convertible preference shares and other sophisticated securities that companies sell to raise capital. And they also trade in the capital markets.

Primary Market vs. Secondary Market

Capital markets are also commonly divided into primary and secondary markets. The primary markets are where the entities who need capital sell stakes in themselves in the form of a stock IPO, or take on debt by selling bonds directly to investors. It is where issuers sell “new” securities, and where investors buy them.

The other side of the capital markets are the secondary markets. This is where investors buy and sell the stocks and bonds that have already been issued.

While the New York Stock Exchange and the Nasdaq are different stock exchanges where companies hold their IPOs, they are much better known to investors because of their roles as the secondary markets where investors buy and sell shares of companies. The issuers of stocks typically only play a role in the secondary markets when they conduct a share buyback.

Capital Markets vs. Financial Markets vs. Money Markets

While capital markets overlap with financial markets, the two are not synonymous.

Financial markets are a broader category that includes any venue in which people and institutions trade any financial asset, including securities, currencies, derivatives, commodities and contracts. Capital markets specifically refer to the places where companies and other entities go to raise funding.

Capital markets are also distinct from money markets in that the money market is where investors trade short-term debt. The money markets also have a wide variety of participants, such as corporations, banks, governments and financial institutions.

In the money market, they lend and borrow for terms as short as a single night, all the way up to a year. The capital markets, on the other hand, consist of trade in longer-term stocks and bonds.

Capital Markets vs. Other Funding Sources

When a company, a state or another entity needs to raise money, they have a few options. They can borrow money from a bank, or another institution. And a private company can even sell a stake to a private equity investor, a venture capital firm, or an angel investor. Those funding mechanisms come with less scrutiny and draw less attention. So what advantages do the capital markets offer?

If a company wants to access large-scale funding from the capital markets, it can issue stocks or bonds. To issue stocks to sell to the institutions that offer funding through the capital markets, the company will have to conduct an IPO.

IPOs and Capital Markets

A company will usually consider an IPO when it has grown in size and matured as an organization. From a size perspective, one common time to consider an IPO is when a unicorn company has reached a valuation of $1 billion, though many companies go public before this point.

As a company grows, many early-stage investors, including company founders, will look to the public markets as a way to cash out their investments.

The maturity of the company is also important, as it will need to have internal procedures and dedicated professionals to take on the kind of scrutiny and regulatory compliance that the Securities and Exchange Commission (SEC) demands of publicly traded companies.

Many companies will choose to conduct an IPO to raise capital in amounts that simply aren’t available through private investors. The public capital market creates the opportunity for millions of investors to buy stakes in the company.

For many companies, the day of its IPO represents the beginning of a new stage of growth. In addition to the funds raised in an IPO, the credibility and transparency of being a publicly traded company can make it easier and less expensive to borrow money in the future.

Bond Issuance and Capital Markets

To access public funding through a bond issue, a company or another entity will start by discussing its need for capital with an investment bank. The bank will do some research to see if the borrower meets the requirements for the bond market.

If the borrower doesn’t have a rating from a bond-rating agency, the bank will help the borrower get in touch with the right rating agencies.

Once the terms of the bond are agreed upon, and the rating assigned to it, the bank sets up meetings with institutional investors. If they respond positively, then the bonds go to the investors who agreed to buy it over the course of the meetings leading up to the issuance date.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

The Takeaway

The term capital markets encompasses any place where companies, countries, states or other entities go to obtain capital from investors. While the term capital markets is a familiar one, it is sometimes confused with other types of markets.

Understanding the basics of capital markets is very important for investors, as they will be interacting with numerous capital markets throughout their investing journeys. While you may not end up thinking about capital markets on a day to day basis, some background knowledge is helpful.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/Ivan Pantic

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