Chapter 3 Flashcards
How many shareholders can privately held firms have?
2,000
Where do purchases of new issues of stock take place?
In the Primary Market
What are Secondary Markets?
transactions that do not involve the original issue of securities
What is Seasoned Equity Offering?
If the company plans to sell more shares, there will be more shares available in the market
When a company is already trading in a stock market, all the shares in the market are called the ________ _____ of the company’s stock
outstanding shares
What is “Underwriting Syndicate”?
describes the investment banks that participate in the underwriting
Who assumes the full risk that the shares cannot be sold to the public at the stipulated offering price?
The underwriter
What is a Firm-Commitment Underwriting Arrangement?
the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price
What are the first steps when a firms decides to sell securities?
it must first ensure the preliminary registration statement is approved by the SEC
What is Book Building?
the process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO)
The bulk of most IPO’s of equity securities goes to ___________ ________
institutional investors
Initial public offerings (IPOs) are usually _________ relative to the levels at which their ______ _________ after they begin trading in the ________ ______
underpriced, prices stabilize, secondary market
IPOs generally have been ____ ____ ____ investments
poor long-term
IPOs usually provide ____ ____ ______ ______ to investors
very good initial return
What is a good example of Brokered markets?
the primary market where new security issues are offered to the public
Name the types of markets from least to most integrated and organized
direct search markets
brokered markets
dealer markets
continuous auction markets
What is / happens in Dealer Markets?
Dealers focus on different types of assets, buy them to keep in their own inventory, and later sell them for a profit.
They make money from the difference between the price they buy at (bid) and the price they sell at (ask)
What does a Continuous Auction Market require and give one example
requires: the greatest level of trading activity to be cost-effective
example: New York Stock Exchange
What is a Market Order?
an order to buy or sell a security at the current price
Why does the Bid-Ask Spread exist?
because of the need for dealers to cover expenses and make a profit
The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the ______ _____
bid-ask spread
Why do specialist try to maintain a small bid-ask spread?
- if the spread is too big, not a lot of trades will happen, losing commission income
- the exchange requires specialists to maintain price continuity
What does Inside Quotes mean?
refers to the difference between the highest bid price and the lowest ask price in the limit order book
What does the cost of buying and selling stock include?
- broker’s commissions
- dealer’s bid-ask spread
- price concessions that investors may be forced to make
When matching orders from the public, a specialist is required to use the ______ outstanding ___ price and the ______ outstanding ___ price
highest , bid , lowest , ask
What is a Stop-Loss order?
the stock will be sold if its price falls to the stipulated level
What is a Buy-Stop order?
the stock will be bought if its price rises above the stipulated level
What happens if you purchase a stock at $72 per share, the stock is currently selling at $95, and you place a stop-loss order?
your gains could be protected
In ______ ______, participants post ___ and ___ prices at which they are willing to trade, but orders are not automatically executed by computer
dealer markets , bid , ask
______ execute trades for people other then themselves, and in _________ _______ a computer matches orders with an existing limit order book and executes the trades automatically.
Brokers , electronic markets
What is a good example of a Dealer Market?
the over-the-counter securities market
On a stock exchange most buy or sell orders are executed via an _________ ______ rather than through _________
electronic system , specialists
Can specialists trade for their own acconunts?
YES!
Specialist maintain limit order books, what are they?
they contain the outsanding unexecuted limit orders
Specialists stand ready to trade at ________ bid-ask spread in cases where ….
narrower , the spread has become too wide
Advantages of ECNs over traditional markets do not include ability to handle very large orders, however they do include:
- lower transaction costs
- anonymity of the participants
- small amount of time needed to execute and order
What does Latency mean?
the amount of time it takes to accept, process, and deliver a trading order
As a result of high-frequency traders’ leaving the market during the flash crash of 2010, ______ ________ __________
market liquidity decreased
To prevent flash crashes, the SEC is testing circuit breakers that stop trading for _ _______ if a large stock’s price changes by more than ___ within _ _______.
5 minutes, 10%, 5 minutes
What are the three characteristics of Dark Pools?
- allow trading anonymity in trading
- often involve large blocks of stocks
- trades made through them might not be reported
All major stock markets today are …..
effectively electronic trading systems
If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as:
market value of the stock - amount owed on the margin loan
Maintenance requirements for margin accounts are set by….
brokerage firms
If you short-sell shares of a company without a stop-buy order or a margin call, your maximum possible loss would be?
unlimited
____ ___ orders often accompany ____ _____ and are used to _____ potential ______ from the short position
stop-buy , short sales , limit , losses
How much is a Round of stocks?
100 shares
