Question

1. What is the difference between an IPO and SEO?

2. Suppose you short sell 100 shares of stock X, which now sells for $200/share. What is your maximum possible loss? What happens to the maximum loss if you simultaneously place a "stop-buy" order at $210?

3. Suppose that you open a brokerage account and purchase 300 shares of stock Y at $40/share. You borrow $4,000 from your broker to help you pay for the purchase. The interest rate on your loan is 8%. What is the margin in your account when you first purchase the stock? If the share price falls to $30 per share, by the end of the year what is the remaining margin in your account? If the maintenance margin requirement is 30%, will you receive a margin call? What is the rate of return on your investment under the above scenario?

4. You are bullish on stock Z at $50/share and decide to invest. You have $5,000 of your own to invest and borrow an additional $5,000 from your broker at 8% yearly interest rate. You invest all of this in stock Z.

What is your rate of return assuming that stock Z does not pay a dividend if the price of stock Z increases by 10% to $55/share?

How far does the price of stock Z have to fall (assuming this happens immediately) for you to get a margin call assuming the maintenance margin is 30%.

Answer 1

1. Initial Public Offering (IPO) takes place when a company sells its shares to the public for the first time. A company lists its share in a stock exchange through IPO. Therefore, through IPO a private company transforms into a public company. Therefore, IPO is also called market listing or stock market launch.

SEO ( full form seasoned equity offering or secondary equity offering) is the issue of new equity of a company whose shares are already traded in the stock market. Therefore, SEO comes after IPO. In case of SEO, new shares may be issued to the existing shareholders, or new shareholders or both. SEO is also known as capital increase as new capital is raised through SEO.