Chapter 2 Terms

Question 1

What are money markets?

Answer 1

the market where short-term securities are bought and sold

Question 2

What are capital markets?

Answer 2

the market where long-term securities such as stocks and bonds are bought and sold

Question 3

Initial public offering (IPO)

Answer 3

First public sale of a company’s stock

Question 4

Underwriting the offering

Answer 4

promoting the stock and facilitating the sale of the company’s shares

Question 5

Prospectus

Answer 5

registration statement describing the issue and the issuer

Question 6

Red Herring

Answer 6

preliminary prospectus available during the waiting period

Question 7

Order of the IPO process?

Answer 7

1. Underwriting the offering
2. Prospectus
3. Red Herring
4. Quiet Period
5. Road Show

Question 7

Quiet Period

Answer 7

time period after prospectus is filed when company must restrict what is said about the company

Question 8

Road Show

Answer 8

series of presentations to potential investors

Question 9

Underwriting the Issue

Answer 9

purchases the security at agreed-on price and bears the risk of reselling it to the public

Question 10

Underwriting Syndicate

Answer 10

group formed by investment banker to share the financial risk of underwriting

Question 11

Selling Group

Answer 11

other brokerage firms that help the underwriting syndicate sell issue to the public

Question 12

Tombstone

Answer 12

public announcement of issue and role of participants in underwriting process

Question 13

Investment Banker Compensation form

Answer 13

typically in the form of a discount on the sale price of the securities

Question 13

Securities Exchanges

Answer 13

forums where buyers and sellers of securities are brought together to execute trades

Question 13

Over-the-counter (OTC) Market

Answer 13

involves trading in smaller, unlisted securities

Question 14

Bid Price

Answer 14

the highest price offered by market maker to purchase a given security

Question 15

Ask Price

Answer 15

the lowest price at which a market maker is willing to sell a given security

Question 16

Third Market

Answer 16

Large institutional investors go through market makers that are not members of a securities exchange

Question 17

Fourth Market

Answer 17

Large institutional investors deal directly with each other to bypass market makers

Question 18

Bull market

Answer 18

Favorable markets. Rising prices

Question 19

Bear Market

Answer 19

Unfavorable markets. Falling prices

Question 20

Indirect Ways to Invest in Foreign Securities

Answer 20

Purchase shares of U.S.-based multinational with substantial foreign operations

Question 21

Direct Ways to Invest in Foreign Securities

Answer 21

• Purchase securities on foreign stock
  exchanges
• Buy securities of foreign companies that trade on U.S. stock exchanges
• Buy American Depositary Receipts (ADRs)

Question 22

Insider Trading

Answer 22

Use of nonpublic information about a company to make profitable securities transactions

Question 23

Blue Sky Laws

Answer 23

Regulate sellers of securities. Intended to prevent investors from being sold nothing but “blue sky”

Question 24

Long Purchase

Answer 24

Investor buys and holds securities
“Buy low and sell high”
Make money when prices go up

Question 25

Margin Trading

Answer 25

Uses borrowed funds to purchase securities

Question 26

Advantages of margin trading

Answer 26

• financial leverage
• magnifies profits

Question 27

Disadvantages of margin trading

Answer 27

• magnifies losses
• interest expense
• margin calls

Question 28

Short selling

Answer 28

“Sell high and buy low”
Investors make money when stock prices go down

Question 29

Disadvantages to short selling

Answer 29

Unlimited risks: stock price can go up an unlimited amount
Limited return opportunities: stock price cannot go below $0.00