chapter 3, 3fb3 Flashcards
Q: What are the characteristics of privately held firms?
A: Limited to 499 shareholders.
Raise funds through private placement.
Shares have lower liquidity, making them harder to trade.
Fewer obligations to release detailed financial statements.
what are the characterictics of privately held firms?
A: Limited to 499 shareholders.
Raise funds through private placement.
Shares have lower liquidity, making them harder to trade.
Fewer obligations to release detailed financial statements.
Q: What is private placement, and why is it used by privately held firms?
A: Private placement is a method where firms sell securities directly to a small group of investors, avoiding the public markets and reducing regulatory requirements.
Q: What is private placement, and why is it used by privately held firms?
A: Private placement is a method where firms sell securities directly to a small group of investors, avoiding the public markets and reducing regulatory requirements.
Q: What is equity crowdfunding, and how does it benefit small start-ups?
A: Equity crowdfunding allows start-ups to raise funds from many small investors, reducing regulatory burdens and providing an innovative way to access capital.
Q: How do publicly traded companies raise capital?
A: Publicly traded companies raise capital through public offerings marketed by underwriters, including:
Initial Public Offerings (IPOs): First sale of stock to the public.
Seasoned Equity Offerings: Sale of additional shares by a company that is already publicly traded.
Q: What regulatory filings are required for public offerings in Canada and the U.S.?
A:
Canada: Registration must be filed with the Ontario Securities Commission (OSC).
U.S.: Registration must be filed with the Securities and Exchange Commission (SEC).
Q: What is shelf registration, and how does it benefit companies?
A: Shelf registration, under U.S. SEC Rule 415, allows firms to pre-register securities and gradually sell them to the public over two years, providing flexibility in timing sales.
Q: What is the Short Form Prospectus Distribution System in Canada?
A: The OSC allows companies to prepare a simplified prospectus with only minor additions to their available financial information, streamlining the process for seasoned issuers.
Q: What are the key activities involved in an Initial Public Offering (IPO)?
A:
Road Shows: Publicizing the new offering to generate interest.
Book-Building: Determining investor demand for shares.
Investor interest helps provide valuable pricing information.
Q: Why is investor interest important during an IPO?
A: The level of investor interest helps underwriters set the offering price by gauging demand, which is crucial for maximizing proceeds and ensuring a successful launch.
Q: What price risks do underwriters face during an IPO?
A: Underwriters bear the risk of mispricing:
Underpricing: Results in lost capital for the company (e.g., Twitter).
Overpricing: Leads to poor post-IPO performance and potential losses for investors (e.g., Facebook).
What is a direct search market?
A: A direct search market is where buyers and sellers seek each other out without intermediaries, often used for infrequent and low-volume transactions.
Q: What is a brokered market?
A: A brokered market involves brokers who help buyers and sellers find each other, commonly used for assets like real estate or initial public offerings.
: What is a dealer market?
A: In a dealer market, dealers maintain inventories of assets and buy or sell them directly, making profits from the bid-ask spread. Examples include bond markets.
Q: What is an auction market?
A: An auction market is where all traders converge in one place, either physically or electronically, to trade assets. Examples include stock exchanges like the NYSE.
Q: What is a market order?
A: A market order is an instruction to buy or sell shares immediately at the current market price, ensuring prompt execution but not guaranteeing the exact price.
Q: What is a price-contingent order, and how does it work?
A price-contingent order allows the trader to specify a buying or selling price. Examples include:
Limit Buy Order: Buy if the price is at or below a set level.
Limit Sell Order: Sell if the price is at or above a set level.
Q: What happens when a large order is placed?
A: A large order may be filled at multiple prices due to limited availability of shares at any single price level in the market.
Q: What is an Over-the-Counter (OTC) market?
A: The OTC market is an informal network of brokers and dealers where securities are traded directly without a centralized exchange, often used for smaller or less liquid securities.
Q: What are Electronic Communication Networks (ECNs)?
A: ECNs are computer-operated trading networks that register with the SEC as broker-dealers, allowing buyers and sellers to trade securities directly without intermediaries.
Q: What is the role of a Designated Market Maker (DMM) in specialist markets?
A: A DMM is responsible for maintaining a “fair and orderly market” by providing quotes and using its own capital to facilitate trading during imbalances.
Q: What major changes occurred in trading from the 1970s to the 1990s?
A:
1974: Fixed commissions on the NYSE were eliminated, increasing competition.
1994: New order-handling rules on NASDAQ led to narrower bid-ask spreads, benefiting traders.
Q: What significant milestones marked the rise of electronic trading?
2000s: U.S. electronic trading grew from 16% to 80%.
2000: NASDAQ stock market emerged.
2006: NYSE became NYSE Arca after acquiring Archipelago Exchange.
2007: National Market System (NMS) was created to link exchanges electronically.
Q: How did the minimum tick size evolve over time?
1997: Minimum tick size reduced from 1/8 to 1/16.
2001: Minimum tick size further reduced to $0.01, enhancing price precision in trading.
Q: What developments occurred in Canada and the U.S. for electronic trading?
Since 2004: Canadian Securities Exchange offered an ECN, competing with TSX and TSXV.
In the U.S., ECNs register as broker-dealers with the SEC and comply with Regulation ATS (Alternative Trading System).
Q: What are the primary equity exchanges in Canada?
A: Toronto Stock Exchange (TSX): Primary market for senior equities and large-cap companies.
TSX Venture Exchange (TSXV): Market for junior companies, often in growth or exploration stages.
