Chapter 2: Market Participants and Market Structure

Question 1

Venture Capitalist

Answer 1

Invests in start-ups and small businesses

Question 2

Angel Capitalist

Answer 2

Provide capital to entrepreneurs and start-ups when the risk as high, i.e. the early stages

Question 3

Institutional Investors

Answer 3

Organizations that invest other people’s money

Question 4

Personal Investors

Answer 4

Invest own capital, seeking higher returns than traditional savings accounts or CD’s

Question 5

Broker executes trades for…

Answer 5

Investors

Question 6

Dealer executes trades for…

Answer 6

Itself

Question 7

Investment Advisor

Answer 7

Group or person that makes investment recommendations or carries out securities analysis

Question 8

Municipal Advisor

Answer 8

Financial expert who provides advice to municipal entities or individuals with financial obligations

Question 9

Issuers

Answer 9

Companies, organizations, or governments that sell securities to raise capital

Question 10

Underwriters

Answer 10

Assist issuers to mitigate business risks

Question 11

Initial Public Offering (IPO)

Answer 11

When a privately owned company offers to sell it’s shares for the first time on a public stock exchange

Question 12

Transfer Agent

Answer 12

Institution that a corporation designates to manage investor financial records and monitor account balances

Question 13

Depository Trust and Clearing Corporation (DTCC)

Answer 13

Clearing and settlement services for financial markets

Question 14

What is a security?

Answer 14

Financial instrument that is negotiable, interchangeable, and holds some form of monetary value

Question 15

Equity Security

Answer 15

Financial instruments that represent ownership in an entity, such as a company, partnership, or trust

Question 16

Collateralized Mortgage Obligations (CMO)

Answer 16

Pool of mortgages that are grouped together and sold as an investment

Question 17

CMO’s are sold by financial institutions as…

Answer 17

Fixed income investments and offer regular payments

Question 18

What factors can affect CMO’s?

Answer 18

Prepayments, credit risk, and fluctuating interest rates

Question 19

Collateralized Debt Obligations (CDO)

Answer 19

Range of loans, such as car loans, credit cards, commercial loans, and even mortgages

Question 20

CDO’s are packaged and rated by…

Answer 20

Credit rating agencies so Wall Street can sell them to investors

Question 21

CDO’s are divided into…

Answer 21

Tranches, each of which reflects a different level of risk

Question 22

Which tranches are paid of first and why?

Answer 22

Senior tranches due to lowest risk

Question 23

Debt Security

Answer 23

Financial instrument that represents borrowed funds

Question 24

What do dept securities typically provide for the holder?

Answer 24

Regular interest rates and repayment of the principal loan amount

Question 25

Broker

Answer 25

Acts as an intermediary between sellers and buyers in a transaction

Question 26

Dealer

Answer 26

Buys and sells securities from their inventory and earns a profit when the sale is higher than the purchase price

Question 27

Typical departments of a large securities firm

Answer 27

-Investment Banking (50%) -Research (12.5%) -Investment Management (12.5%) -Sales and Trading (12.5%) -Private Clients (12.5%)

Question 28

Investment Banking

Answer 28

-Issues new debt and equity securities for corporations -Aids in selling securities and facilitates mergers, acquisitions, reorganizations, and broker trades for institutions and private investors

Question 29

Research

Answer 29

-Supports other departments by giving insight to data, salespeople, and underwriters -Helps traders with pricing and selling securities

Question 30

Investment Management

Answer 30

-Handles financial assets and other investments -Devises long- and short-term strategies for disposing of and acquiring portfolio holdings

Question 31

Sales and Trading

Answer 31

Focuses on trading stocks, bonds, and other financial instruments

Question 32

Private Clients

Answer 32

Individuals or families with significant financial portfolios

Question 33

Market Makers

Answer 33

Firms or individuals who quote two-sided markets in security, provide bids and offers

Question 34

Retail investors primarily invest in:

Answer 34

-Bonds -Stocks -Retirement Accounts -Cryptocurrency

Question 35

Institutional investors primarily invest in:

Answer 35

-Mutual funds -Hedge funds -Real estate -Stocks

Question 36

Qualified Institutional Buyers (QIB)

Answer 36

Sophisticated investors who do not require the same level of regulatory protection as less sophisticated investors

Question 37

The primary market is the source of what?

Answer 37

New securities

Question 38

What is the main characteristic of the primary market?

Answer 38

Securities are directly purchased from an issuer

Question 39

What happens in the secondary market?

Answer 39

Securities are traded among investors after they are created in the primary market

Question 40

Examples of Secondary Markets:

Answer 40

-NYSE American and NYSE MKT -Boston Stock Exchange -Chicago Stock Exchange (CHX) -Pacific Stock Exchange (PCX)

Question 41

Dealer-to-Dealer Markets

Answer 41

Financial arena where multiple dealers buy or sell specific securities or instruments at different quoted prices

Question 42

Example of a dealer-dealer market

Answer 42

Nasdaq

Question 43

Non-Exchange Issues

Answer 43

Securities that are not part of any organized exchanges, which makes them extremely low priced and thinly traded

Question 44

Traders

Answer 44

People who purchase or sell assets in financial markets, either on their behalf or the behalf of others

Question 45

Third Markets

Answer 45

Trading by non-exchange brokers/dealers and institutional investors of exchange-listed stocks

Question 46

What does the third market allow for?

Answer 46

Greater liquidity and efficiency during trading

Question 47

Fourth Markets

Answer 47

Exclusive to institutional investors such as banks and hedge funds

Question 48

Dark Pools

Answer 48

Private exchanges for trading securities that are not accessible to public investment

Question 49

Clearing

Answer 49

Establishes the obligation of funds

Question 50

Settlement

Answer 50

Involves the final exchange of funds between banks

Question 51

Fully Disclosed Accounts

Answer 51

-Disclose the complete identity of the account holder -Individually held -Provide complete transparency and control to individual traders

Question 52

Omnibus Accounts

Answer 52

-Utilized by futures commission merchants -Facilitates managed trading for multiple individuals -Ensures anonymity

Question 53

Prime Brokerage Accounts

Answer 53

Comprehensive services that investment banks and other financial institutions provide to hedge funds and large investment clients