What are the five key methods by which securities are distributed to f

What are the five key methods by which securities are distributed to final investors?

What will be an ideal response?

ANSWER

A Negotiated Purchase: In a negotiated underwriting, the firm that needs funds makes contact with an investment
banker, and deliberations concerning the new issue begin. If all goes well, a method is negotiated for determining the
price the investment banker and the syndicate will pay for the securities. The negotiated purchase is the most prevalent
method of securities distribution in the private sector.
A Competitive Bid Purchase: In a competitive underwriting, several underwriting groups bid for the right to purchase
the new issue from the corporation that is raising funds. The firm does not directly select the investment banker.
Instead, the investment banker that underwrites and distributes the issue is chosen by an auction process. The one
willing to pay the greatest dollar amount per new security will win the competitive bid.
A Commission or Best-Efforts Basis: Here, the investment banker acts as an agent rather than as a principal in the
distribution process. The securities are not underwritten. The investment banker attempts to sell the issue in return for a
fixed commission on each security actually sold. Unsold securities are then returned to the corporation. This
arrangement is typically used for more speculative issues.
A Privileged Subscription: When a new issue is marketed to a definite and select group of investors, it is called a
privileged subscription. Three target markets are typically involved: 1. current stockholders, 2. employees, or 3 .
customers of the firm. Of these, distributions directed at current stockholders are the most prevalent. Such offerings are
called rights offerings. In a privileged subscription, the investment banker may act only as a selling agent. It is also
possible that the issuing firm and the investment banker might sign a standby agreement, which obligates the
investment banker to underwrite the securities that are not purchased by the privileged investors.
A Direct Sale: In a direct sale the issuing firm sells the securities directly to the investing public without involving an
investment banker.