Chapter 1: Securities Markets & Market Mechanics

Question 1

Initial Public Offering (IPO)

Answer 1

When a private firm sells a substantial block of shares and “goes public” to create a more active and diversified ownership.

Question 2

Syndicate

Answer 2

A group of investment bankers who share the risk and return of a public offering by underwriting the issue.

Question 3

Firm-Commitment Basis

Answer 3

This means the investment banker buys the offering from the firm and resells it to the investors. The investment banker bears the risk if the offering is less than fully successful.

Question 4

Best-Effort Basis

Answer 4

The investment banker acts as an agent for the issuing firm. Best efforts are used when the invesmtent banker feels there is a significant risk that the issue may not sell completely.

Question 5

Lettered Stock

Answer 5

Stock which can be resold only if it has been fully paid for and owned for a period of at least 1 year. Volume restrictions also apply on the number of shares that can be sold before 2 years have elapsed.

Question 6

Registered Representative

Answer 6

An individual affiliated with a broker/dealer for the purpose of selling securities.

Question 7

Series 7

Answer 7

An exam administered by the Financial Industry Regulatory Authority (FINRA) which qualifies brokers to solicit, purchase, and/or sell all securities products.

Question 8

Series 6

Answer 8

An exam which licenses individuals to sell mutual funds, initial offierings of closed-end investment companies, and variable annuities, provided the individual also holds the appropriate insurance license.

Question 9

Gramm-Leach-Bliley Act

Answer 9

Passed in 1999, this act repealed the Glass-Steagall Act (the Banking Act of 1933) which prohibited investment banks from operating commerical banks and vice versa.

Question 10

Floor Traders

Answer 10

Also known as registered competitive market makers (RCMMs) on the NYSE or registered trader/market maker on the AMEX, these individuals serve as back-up specialists. Each own exhange seats and trade for their own account.

Question 11

Dual Listing

Answer 11

Listed for trading on one or more exhanges.

Question 12

Over-the-Counter (OTC) Market

Answer 12

Also called the “off-exchange market.” Any trading done by a dealer network.

Example: NASDAQ

Question 13

Electronic Communications Network (ECN)

Answer 13

Organizations that provide access to the fourth market.

Question 14

May Day

Answer 14

The date that the SEC mandated that the fixed-commission schedule be abolished (May 1, 1975).

Question 15

Paying for Order Flow

Answer 15

An ethical issue which occurs when a dealer pays a firm or a particular broker for the number of orders sent to him or her. This often results in a the investor paying a higher price or receiving a lower price than necessary for the stock.

Question 16

Market Order

Answer 16

An order which has immediate execution at the best available price. A market order ensures the trasaction but the price is uncertain.

Question 17

Limit Order

Answer 17

A limit order to buy sets the maximum price the investor is willing to pay, and a limit order to sell sets the lowest price an ivnestor will accept. A limit order ensures the desired price, but only if the trade takes place.

Question 18

Bear Raid

Answer 18

A practice, now illegal, where unscrupulous investors try to use a rapid series of large short sales to force a signifcant decline in a stock’s price.

Question 19

Block Houses

Answer 19

Institutions which specialize in handling large quantities of block trades in ways designed to minimize market disruptions.

Question 20

Self-Regulatory Organizations (SROs)

Answer 20

Various stock exchanges such as FINRA. Created in connection with The Securities Exchange Act of 1934 which established the Securities and Exhange Commission.

Question 21

Securities Investor Protection Corporation (SIPC)

Answer 21

A nonprofit, non-government, membership corporation funded by member broker-delaers, although it does have the priviledge of borrowing from the SEC if its own funds are inadequate to meet is obligations.

Question 22

Introducing Firm

Answer 22

Employs the individual broker, who takes the customer’s order and sees that the order is executed.

Question 23

Clearing Firm

Answer 23

A firm that holds the customer’s cash and securities and sends out statements describing the assets it holds “on deposit” for the customer.

Question 24

Street Name

What is it and what are the advantages?

Answer 24

Leaving holdings in an account with a broker’s clearing firm.

Advantages:

1. It provides secure storage.
2. Securities can be taded without new certificates being issue or investors having to deliver certificates to the broker.
3. A customer who moves must file only one change of address.
4. An investor receives a single form 1099.

Disadvantages:

1. Assets may be tied upduring reorganization.
2. Dividends / interest may be credited to an improper account.
3. The broker may retain properly credited dividends in a non-interest bearing account for a few days before sending them to the shareholder.
4. Discount coupons and sample products may not be sent to street-name accounts.

Question 25

Discretionary Account

Answer 25

An account where the investor appoints his or her broker to invest the client’s money without consulting the client about the price, the type of security, the amount and when to buy or sell.

Question 26

Wrap Account

Answer 26

An account, similar to a discretionary account, where a set fee known as a wrap fee is charged which covers all commissions as well as any other expenses incidental to the account. Unlike a discretionary account, wrap accounts can be solicited.

Question 27

Churning

Answer 27

A practice where the broker may make some trades for the primary purpose of enhancing his or her commission income rather than for the benefit of the client.

Question 28

Cash Account

Answer 28

A highly liquid account used as a temporary “bucket” for purchasing stock or other securities. Sometimes called a Type 1 Account.

Question 29

Margin Account

Answer 29

An account from which an investor can borrow money from the brokerage firm to purchase stocks. Sometimes called a Type 2 Account.