Chapter 2 Securities Markets and Transactions

Question 1

Primary Market

Answer 1

the market in which new issues of securities are sold to investors.

Question 2

Money Markets

Answer 2

the market where short term debt securities are bought and sold.

Question 3

Capital Market

Answer 3

where investors turn to buy and sell long term securities such as stocks and bonds.

Question 4

Initial Public Offering (IPO)

Answer 4

marks the first public sale of a company’s stock and results in the company’s taking a public status.

Question 5

Securities and Exchange Commission (SEC)

Answer 5

federal regulatory agency must confirm both the adequacy and the accuracy of the information provided to potential investors before a security is publicly offered for sale.

Question 6

Public Offering

Answer 6

the firms offers its securities for sale to public investors

Question 7

Rights Offering

Answer 7

the firm offers shares to existing stockholders on a pro rata basis.

Question 8

Private Placement

Answer 8

the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies, investment management, and pension funds.

Question 9

Prospectus

Answer 9

describes the key aspects of the securities to be issued, the issuer’s management, and the issuer’s financial position.

Question 10

Red Herring

Answer 10

a preliminary version of a prospectus, called this because of red printing on the front cover.

Question 11

Investment Banker

Answer 11

a financial intermediary that specializes in assisting companies to issue new securities and advising firms with regard to major financial transactions.

Question 12

Underwriting

Answer 12

involves purchasing the securities from the issuing firm at an agreed-on price and bearing the risk of reselling them to the public.

Question 13

Underwriting Syndicate

Answer 13

shares the financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public.

Question 14

Selling Group

Answer 14

made up of syndicate and a large number of brokerage firms. Each member is responsible for selling a certain portion of the issue and is paid a commission on the securities it sells.

Question 15

Secondary Market

Answer 15

or the aftermarket is the market in which securities are traded after they have been issued, do not involve the corporation that issued the securities.

Question 16

Nasdaq market

Answer 16

employs an all-electronic trading platform to execute trades.

Question 17

Over-the-counter market (OTC)

Answer 17

involves trading in smaller, unlisted securities.

Question 18

Broker Market

Answer 18

consists of national and regional securities exchanges

Question 19

Dealer Market

Answer 19

made up of the Nasdaq market and the OTC market.

Question 20

Market Markers

Answer 20

securities dealers that “make markets” by offering to buy or sell a certain amount of securities at stated prices.

Question 21

Designated Market Maker (DMM)

Answer 21

an exchange member who specializes in making transactions in one or more stocks

Question 22

Dual Listing

Answer 22

listings on more than one exchange.

Question 23

Bid Price

Answer 23

the highest price offered to purchase a given security.

Question 24

Ask Price

Answer 24

the lowest price offered to sell a given security.

Question 25

Secondary Distributions

Answer 25

involve the public sale of large blocks or previously issued securities held by large investors.

Question 26

Third Market

Answer 26

consists of over the counter transactions made in securities listed on the NYSE, the NSYE Amex, or one of the other exchanges.

Question 27

Fourth Market

Answer 27

consists of transactions made through a computer network, rather than on an exchange, directly between large institutional buyers and sellers of securities.

Question 28

Electronic communications networks (ECN’s)

Answer 28

are at the heart of the fourth market, they handle the electronic trades.

Question 29

Bull Markets

Answer 29

markets normally associated with rising prices, investor optimism, economic recovery, and government stimulus.

Question 30

Bear Markets

Answer 30

markets normally associated with falling prices, investor pessimism, economic slowdown, and government restraint.

Question 31

Diversification

Answer 31

the inclusion of a number of different securities in a portfolio to increase returns and/or reduce risk.

Question 32

Yankee Bonds

Answer 32

U.S. dollar denominated debt securities issued by foreign governments or corporations and traded in U.S. securities markets, trade in both broker and dealer markets.

Question 33

American Depository Share (ADSs)

Answer 33

created to permit U.S. investors to hold shares of non-U.S. companies and trade them on U.S. stock exchanges.

Question 34

American Depository Receipts (ADRs)

Answer 34

U.S. dollar-denominated receipts for the stocks of foreign companies that are help in the vaults of banks in the companies’ home countries.

Question 35

Currency Exchange Risk

Answer 35

the risk caused by the varying exchange rates between the currencies of two countries.

Question 36

Crossing Markets

Answer 36

orders are filled only if they can be matched, allow U.S. securities markets to compete more effectively with foreign securities markets, in which investors can execute trades when U.S. markets are closed.

Question 37

Insider Trading

Answer 37

the use of non public information about a company to make profitable securities transactions.

Question 38

Ethics

Answer 38

standards of conduct or moral judgement.

Question 39

Long Purchase

Answer 39

a transaction in which investors buy securities in the hope that they will increase in value and can be sold at a latter date for profit.

Question 40

Margin Trading

Answer 40

investors using borrowed funds to purchase securities.

Question 41

Margin Requirement

Answer 41

specifying the minimum amount of equity that must be the margin investor’s own funds.

Question 42

Financial Leverage

Answer 42

the use of debt financing to magnify investment returns.