Dealers and brokers involved in marketing or selling a new security issue or secondary issue of equity or debt
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A selling group comprises dealers and brokers involved in marketing or selling a new security issue or secondary issue of equity or debt. The selling group buys securities in bulk directly from the issuer and then sells them to the members of the selling group at a markup on what they paid the security issuer, but below the market price.
The selling group members, who comprise brokerage firms and stockbrokers, then sell the securities directly to potential investors and earn a profit on the difference in price paid to the selling group and the amount charged to the investors.
The members of a selling group help the group in selling and distributing the securities to the public but do not assume responsibility for any unsold securities. The members mainly participate in marketing or selling the new security issues but do not necessarily participate in the underwriting process. Usually, the operations of the selling group are governed by a selling group agreement, which sets the terms of operations, establishes the selling concession, and sets out rules on the termination of the group.
The selling group is not a permanent arrangement; rather, it is created to sell specific securities, and it is terminated when the sale transaction is completed or based on other rules of termination provided in the selling group agreement.
A selling group comprises brokers and dealers who are involved in marketing or selling a new or secondary issue of shares.
The underwriter buys securities directly from the issuer and then sells the issue to members of the selling group, who are tasked with distributing the issue to investors.
Members of a selling group benefit from the transaction by earning a profit on the difference between the price charged to investors and the price paid to the underwriter.
Understanding Selling Groups
The membership of a selling group can vary from tens to hundreds of brokers and dealers. When a selling group is formed, there will be a lead broker/dealer, and it will be joined by other participating brokers. The selling group is led by a senior manager, who invites other smaller broker and dealer firms from around the globe to join the selling group. The senior manager is also responsible for ensuring compliance with regulatory bodies.
Such an approach facilitates the distribution of shares and ensures that the shares sell quickly since each participating firm keeps a list of clients it sells to. The selling groups may comprise a list of underwriters who were involved in underwriting the issue. The underwriters receive a share of the selling group profits and are also accountable for any unsold shares.
If a member of the selling group is not one of the underwriters, they do not get a share of the group profits and are absolved from any responsibility for unsold shares. The group is governed by a selling group agreement, which outlines how the issue is allocated, any commissions due, and how the group will be terminated.
How a Selling Group Works
A selling group is formed to manage the distribution of a new security issue to investors. Usually, the group buys the securities from the issuer at a specified price and then sells it to small investment firms, instead of the issuer selling the security issue directly to investors. By buying securities from the issuer and reselling them to investors, the group stands to make a profit.
From the issuer’s standpoint, appointing a selling group to manage the marketing and selling process means that they do not need to sell the stocks directly to the investors. Instead, the issuer is paid upfront for the shares they are issuing, eliminating the risk of dealing with a large inventory of stocks.
Forming a selling group allows brokers and dealers to finance a high-volume security issue that would otherwise be expensive for one broker. Each of the participating brokers in the selling group gets a share of the security issue for sale directly to investors. The brokers earn a profit on the sale transaction in the spread between the buying price from the underwriter and the market price.
Once all the securities are sold off, the selling group is disbanded, and the underwriters share the residual profits of the issue. The individual brokers can then form selling groups for another security issue, such as for a single company stock or bond issue.
The Management of a Selling Group
When a selling group is formed, the members sign an agreement that determines the allotment of the security issue to each participant, the management fee, as well as their rights and obligations. The senior manager of the selling group allocates securities to each member, and the size of allocation may depend on the capacity of each participant.
Some participants may receive a large allocation, while others will receive a small allocation. The senior manager also sets the terms of the issuer, such as the offering price and the timing of the offering.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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