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Private Placement

See Also:
Convertible Debt Instrument
Common Stock Definition
Preferred Stocks
Hedging Risk
Treasury Stock

Private Placement Definition

The private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Institutional investors include the following:

You do not have to register private placement issuances with the Securities and Exchange Commission (SEC). In addition, you do not have to provide a detailed prospectus. The issuing company and the purchasing investors negotiates the terms and conditions are negotiated. You cannot trade private placement securities on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company.

A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Advantages and Disadvantages of Private Placement

The primary advantage of the private placement is that it bypasses the stringent regulatory requirements of a public offering. You have to conduct public offerings in accordance with SEC regulations; however, investors and the issuing company privately negotiate the private placements. Furthermore, they do not have to register with the SEC, do not require the issuing company to publicly disclose its financial statements, and ultimately avoid the scrutiny of the SEC.

Another advantage of private placement is the reduced time of issuance and the reduced costs of issuance. Issuing securities publicly can be time-consuming and may require certain expenses. It forgoes the time and costs that come with a public offering.

Also, because the investors and the issuing company privately negotiate private placements, they can be tailored to meet the financing needs of the company and the investing needs of the investor. This gives both parties a degree of flexibility.

Now, let’s look at the disadvantages of private placement. The main disadvantage of private placement is the issuer will often have to pay higher interest rates on the debt issuance or offer the equity shares at a discount to the market value. This makes the deal attractive to the institutional investor purchasing the securities.

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Private Placement, Disadvantages of Private Placement, Private Placement Definition
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Private Placement, Disadvantages of Private Placement, Private Placement Definition


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Core Satellite Portfolio

See Also:
Financial Instruments
Investment Risk
Common Stock Definition
Prepare an Investor Package
Fixed Income Securities
Treasury Stock
Venture Capitalists Definition

Core Satellite Portfolio Definition

Core Satellite asset allocation is an investment strategy that consists of two parts the “core” and the “satellite.” The first part is known as the core portfolio. It invests in traditional fixed income securities like index funds, mutual funds, and other passive strategy investments. The second is known as the satellite portfolio. It invests a percentage of the available funds in individual stocks and other actively traded investment.

Core Satellite Portfolio Explained

The core-satellite strategy has been around for a while. It has been useful to many investors who take full advantage of the core satellite approach. It allows investors to reduce their risk in a passive well diversified portfolio, while allowing these investors to seek out higher expected returns. The core satellite investment strategy is beneficial because the investor takes on little extra risk but can normally expect higher returns in the market.

Core Satellite Portfolio Example

Jacob has some extra cash that is sitting in a savings account at a bank. He has recently decided that he wants to invest this amount in the market. Jacob has also decided that he will use the core satellite investment approach. Jacob has thus decided that he will invest 80% of the cash in a passive mutual fund, and the other 20% in individual stocks that he believes will perform above the market. By doing this Jacob is safe from any huge downfalls in the market because he has a well diversified portfolio in the mutual funds, but he also expects a higher return from the individual stocks.

core satellite portfolio

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