CH 3: Securities markets

Question 1

What are the 4 types of markets

Answer 1

1. Direct search Mrkt: characterized by sporadic participation and nonstandard goods. 2. Brokered Mrkt: (primary mrkt) brokers seek investors to purchase securities directly from the issuing corporation. 3. Dealer Mrkt: (bond markts) in which traders specialize in particular assets buy and sell for their own account. 4. Auction Mrkt: (NYSE) where all traders meet at one place to buy/sell assets.

Question 2

List the types of orders

Answer 2

(a) Market orders (b) orders contingent on price 1. Limit orders 2. Stop orders 3. Discretionary orders: give the broker a price range to sell/buy at, rather than a specified price.

Question 3

List and describe the types of limit orders

Answer 3

a. Day order: an order to buy or sell a security that automatically expires if not executed on the day the order was placed b. Good-till cancelled orders (GTC): buy or sell a security at a specified price that remains active until it is either rescinded by the investor or the trade is executed. c. Fill or kill (FOK): buy or sell immediately and completely or cancel the order. d. All or none: buy or sell immediately and completely or not at all, but without cancelling the order

Question 4

List the types of stop orders!

Answer 4

(accompanies short sales) a. stop-loss orders: sell if P fell below a level b. stop-buy orders: buy if P rises above a limit

Question 5

What are the 3 types of trading systems?

Answer 5

1. Dealer markets: over the-counter markets (sales are negotiated) 2. Electronic communication networks (ECNs): true trading systems (match orders directly) 3. Specialist markets

Question 6

What is NASDAQ?

Answer 6

the computer-linked price quotation and trade execution system.

Question 7

What is a margin

Answer 7

Describes securities purchased w/ money borrowed in part from a broke. It is the net worth of the investor’s account (portion of the purchase price contributed by the investor).

Question 8

What is the limit of margin required by the Fed Reserve?

Answer 8

50% (meaning that at least 50% of the purchase price is contributed by the investor)

Question 9

What is broker call rate?

Answer 9

interest rate that brokers borrow from banks to cover the positions of their customers who buy on margin.

Question 10

What is maintenance margin, Percentage margin and margin call?

Answer 10

1. minimum amount of equity that must be maintained in a margin account. 2. investor’s_equity / value_of_stock ; {investor equity = (P * #_of_Stock) - Broker_loan} 2. notification from broker you must put up more funds (cash or securities) since %margin is below the maintenance margin. If the investor doesn’t act, the broker may sell his securities to pay off enough of the lean to restore the percentage margin to acceptable level.

Question 11

Find the critical price of a shorted stock at which the minimum Margin Maintainance Requirment is met!

Answer 11

Question 13

NYSE individual traders are called:

Answer 13

Market Specialists