2. Trading of Securities

Question 1

Disadvantages of IPO

Answer 1

• Underpriced, because uncertainty for potential investor

- Uncertainty about liquidity and level at which stock is going to trade

Question 2

How securities are traded

Answer 2

• Types of markets

- Types of orders

Question 3

Examples types of markets

Answer 3

• Direct research (least organized)
• Brokered (trading in good is active)
• Dealer (trading in particular type of asset increases)
• Auction (most integrated)

Question 4

Examples 4 types of orders

Answer 4

• Limit-buy order: profit objective -> buy if price is x or lower
• Stop-buy order: limit loss of short position -> buy if price is x or higher
• Stop-loss order: limit loss of long position -> sell if price is x or lower
• Limit-sell order: profit objective -> sell if price is x or higher

Question 5

High frequency trading

Answer 5

• HFT firms are gaming market in doing anything they can to be first
• Liquidity has increased and spreads have decreased

Question 6

Dark pool

Answer 6

Match buyer and seller without going to market

Question 7

Short sale

Answer 7

Profit from decline in asset price, when you expect price of stock to go down: sell stock that you don’t own -> buy back in future if price is down.

Question 8

Profit short

Answer 8

Negative investment in security = initial price –(ending price + dividend)

Question 9

Profit long

Answer 9

Positive investment in security = (ending price + dividend) – initial price

Question 10

Buying on margin

Answer 10

Use only portion of proceeds for investment, borrow remaining component to buy shares

Question 11

Why buying on margin?

Answer 11

• Create leverage to invest -> total return increases (rate of return increases), more money to invest
• Upside potential increase, but downside risk as well