CH3 Flashcards
What are privately held firms?
Primary offerings where shares are sold directly to a small group of investors, up to 2,000 shareholders.
What characterizes publicly traded companies?
Securities sold to the general public; investors can trade shares.
What is an Initial Public Offering (IPO)?
First public sale of stock by a formerly private company.
What role do underwriters play in an IPO?
Purchase securities from issuing company and resell them.
What is the purpose of a road show in Initial Public Offerings?
Bookbuilding and pricing. (Hype up the IPO)
What is a SPAC?
Special purpose acquisition company that raises funds in its own IPO and seeks to acquire a private firm.
How do SPACs differ from traditional IPOs?
SPACs can be taken public much faster with less information disclosure and at a lower cost.
What is the overall purpose of financial markets?
Facilitate low-cost investment and bring together buyers and sellers at low cost.
What is a direct search market?
Buyers and sellers locate one another on their own.
What is a brokered market?
Third-party assistance in locating buyer or seller.
What is a dealer market?
Third party acts as intermediate buyer/seller.
What is a market order?
Execute immediately at best price.
What is a bid price?
Price at which dealer will buy security.
What is an ask price?
Price at which dealer will sell security.
What is a margin call?
Notification from broker that you must put up additional funds or have position liquidated.
What does the term ‘margin’ refer to?
Securities purchased with money borrowed from broker.
What is the Initial Margin Requirement (IMR)?
Minimum percent of initial investor’s equity (1-IMR = max % investor can borrow)
What is the Maintenance Margin Requirement (MMR)?
Minimum value before additional funds must be added.
What happens when equity/market value ≤ MMR?
A margin call occurs.
What is algorithmic trading?
Use of computer programs to make rapid trading decisions.
What is high-frequency trading?
A subset of algorithmic trading making very rapid trading decisions for very small profits.
What are dark pools?
Electronic communication Networks where participants can buy/sell large blocks of securities anonymously.
What is internalization in trading?
Brokers practice of matching buy and sell orders internally.
What is an ECN?
Electronic communication networks that allow direct trading.
What is the spread in trading?
Cost of trading with dealer, calculated as Price Ask - Price Bid.
What is the role of a designated market maker (DMM)?
Accepts the obligation to commit its own capital to provide quotes.
What is a short sale?
Sale of shares not owned by investor but borrowed through broker
What must be done to cover or close out a short position?
Buy stock; broker returns title to original party
What does the SEC require from officers, directors, and major stockholders regarding their firm’s stock?
To report all transactions
What is insider trading?
Nonpublic knowledge about a corporation possessed by insiders
