Chapter 2 Terms Flashcards
What are money markets?
the market where short-term securities are bought and sold
What are capital markets?
the market where long-term securities such as stocks and bonds are bought and sold
Initial public offering (IPO)
First public sale of a company’s stock
Underwriting the offering
promoting the stock and facilitating the sale of the company’s shares
Prospectus
registration statement describing the issue and the issuer
Red Herring
preliminary prospectus available during the waiting period
Order of the IPO process?
- Underwriting the offering
- Prospectus
- Red Herring
- Quiet Period
- Road Show
Quiet Period
time period after prospectus is filed when company must restrict what is said about the company
Road Show
series of presentations to potential investors
Underwriting the Issue
purchases the security at agreed-on price and bears the risk of reselling it to the public
Underwriting Syndicate
group formed by investment banker to share the financial risk of underwriting
Selling Group
other brokerage firms that help the underwriting syndicate sell issue to the public
Tombstone
public announcement of issue and role of participants in underwriting process
Investment Banker Compensation form
typically in the form of a discount on the sale price of the securities
Securities Exchanges
forums where buyers and sellers of securities are brought together to execute trades
Over-the-counter (OTC) Market
involves trading in smaller, unlisted securities
Bid Price
the highest price offered by market maker to purchase a given security
Ask Price
the lowest price at which a market maker is willing to sell a given security
Third Market
Large institutional investors go through market makers that are not members of a securities exchange
Fourth Market
Large institutional investors deal directly with each other to bypass market makers
Bull market
Favorable markets. Rising prices
Bear Market
Unfavorable markets. Falling prices
Indirect Ways to Invest in Foreign Securities
Purchase shares of U.S.-based multinational with substantial foreign operations
Direct Ways to Invest in Foreign Securities
- Purchase securities on foreign stock
exchanges - Buy securities of foreign companies that trade on U.S. stock exchanges
- Buy American Depositary Receipts (ADRs)
Insider Trading
Use of nonpublic information about a company to make profitable securities transactions
Blue Sky Laws
Regulate sellers of securities. Intended to prevent investors from being sold nothing but “blue sky”
Long Purchase
Investor buys and holds securities
“Buy low and sell high”
Make money when prices go up
Margin Trading
Uses borrowed funds to purchase securities
Advantages of margin trading
- financial leverage
- magnifies profits
Disadvantages of margin trading
- magnifies losses
- interest expense
- margin calls
Short selling
“Sell high and buy low”
Investors make money when stock prices go down
Disadvantages to short selling
Unlimited risks: stock price can go up an unlimited amount
Limited return opportunities: stock price cannot go below $0.00
