CP

to move to the NYSE. One of the largest companies in the world in terms of market

value, Microsoft, trades on the Nasdaq market, as do most other high-tech firms.

A recent study found that institutional investors owned more than 60 percent of all

publicly held common stocks. Included are pension plans, mutual funds, foreign in-

vestors, insurance companies, and brokerage firms. These institutions buy and sell rel-

atively actively, so they account for about 75 percent of all transactions. Thus, institu-

tional investors have a heavy influence on the prices of individual stocks.

Types of Stock Market Transactions

We can classify stock market transactions into three distinct types:

1.Trading in the outstanding shares of established, publicly owned companies: the secondary

market.MicroDrive Inc., a company we analyze throughout the book, has 50 mil-

lion shares of stock outstanding. If the owner of 100 shares sells his or her stock,

the trade is said to have occurred in the secondary market.Thus, the market for

outstanding shares, or used shares,is the secondary market. The company receives

no new money when sales occur in this market.

2.Additional shares sold by established, publicly owned companies: the primary market.If

MicroDrive decides to sell (or issue) an additional 1 million shares to raise new eq-

uity capital, this transaction is said to occur in the primary market.^2

3.Initial public offerings by privately held firms: the IPO market.Several years ago, the

Coors Brewing Company, which was owned by the Coors family at the time, de-

cided to sell some stock to raise capital needed for a major expansion program.^3

This type of transaction is called going public—whenever stock in a closely held

corporation is offered to the public for the first time, the company is said to be go-

ing public. The market for stock that is just being offered to the public is called the

initial public offering (IPO) market.

IPOs have received a lot of attention in recent years, primarily because a num-

ber of “hot” issues have realized spectacular gains—often in the first few minutes of

trading. Consider the IPO of Boston Rotisserie Chicken, which has since been re-

named Boston Market and acquired by McDonald’s. The company’s underwriter,

Merrill Lynch, set an offering price of $20 a share. However, because of intense

demand for the issue, the stock’s price rose 75 percent within the first two hours of

trading. By the end of the first day, the stock price had risen by 143 percent, and the

company’s end-of-the-day market value was $800 million—which was particularly

startling, given that it had recently reported a $5 million loss on only $8.3 million

of sales. More recently, shares of the trendy restaurant chain Planet Hollywood

rose nearly 50 percent in its first day of trading, and when Netscape first hit the

market, its stock’s price hit $70 a share versus an offering price of only $28 a share.^4

Table 5-1 lists the best performing and the worst performing IPOs of 2001, and

it shows how they performed from their offering dates through year-end 2001. As

The Market for Common Stock 191

(^2) MicroDrive has 60 million shares authorized but only 50 million outstanding; thus, it has 10 million au-
thorized but unissued shares. If it had no authorized but unissued shares, management could increase the
authorized shares by obtaining stockholders’ approval, which would generally be granted without any argu-
ments.
(^3) The stock Coors offered to the public was designated Class B, and it was nonvoting. The Coors family re-
tained the founders’ shares, called Class A stock, which carried full voting privileges. The company was
large enough to obtain an NYSE listing, but at that time the Exchange had a requirement that listed com-
mon stocks must have full voting rights, which precluded Coors from obtaining an NYSE listing.
(^4) If someone bought Boston Chicken or Planet Hollywood at the initial offering price and sold the shares
shortly thereafter, he or she would have done well. A long-term holder would have fared less well—both
companies later went bankrupt. Netscape was in serious trouble, but it was sold to AOL in 1998.
Note that http://finance.
yahoo.comprovides an
easy way to find stocks
meeting specified criteria.
Under the section on Stock
Research, select Stock
Screener. To find the largest
companies in terms of mar-
ket value, for example, go
to the pull-down menu for
Market Cap and choose a
Minimum of $100 billion.
Then click the Find Stocks
button at the bottom, and it
will return a list of all com-
panies with market capital-
izations greater than $100
billion.

Stocks and Their Valuation 187