Chapter 3: How Securities are traded? Flashcards
1
Q
Primary Market
A
- Market for newly-issued securities
- Firms issue new securities through underwriter (investment banker) to public
2
Q
Secondary Market
A
Investors trade previously issued securities among themselves
3
Q
Privately Held Firms
A
- Up to 499 shareholders
- Middlemen have formed partnerships to buy shares and get around the 499-investor restrictions
- Raise funds through private placement
- Lower liquidity of shares
- Have fewer obligations to release financial statements and other information
4
Q
Publicly Traded Companies
A
- Raise capital from a wider range of investors through initial public offering, IPO
- Seasoned equity offering: The sale of additional shares in firms that already are publicly traded
- Public offerings are marketed by investment bankers or underwriters
- Registration must be filed with the SEC
5
Q
Initial Public Offerings
A
- Road shows to publicize new offering
- Bookbuilding to determine demand for the new issue
- Degree of investor interest in the new offering provides valuable pricing information
6
Q
Initial Public Offerings (Cont.)
A
- Underwriter bears price risk associated with placement of securities:
- IPOs are commonly underpriced compared to the price they could be marketed (ex.: Groupon)
- Some IPOs, however, are well overpriced (ex.: Facebook); others cannot even fully be sold
7
Q
Market Order: Executed immediately Trader receives current market price Price-contingent Order: Traders specify buying or selling price A large order may be filled at multiple prices Trade Execution: http://www.sec.gov/investor/pubs/tradexec.htm Payment for order flow Best Execution Price improvement
A
- Executed immediately
- Trader receives current market price
8
Q
Price-contingent Order:
A
- Traders specify buying or selling price
- A large order may be filled at multiple prices
9
Q
Trade Execution:
A
- Payment for order flow- As a way to attract orders from brokers, some regional exchanges or third market makers will pay your broker for routing your order to that exchange or market maker—perhaps a penny or more per share for your order.
- Best Execution- your broker has a duty to seek the best execution that is reasonably available for its customers’ orders
- Price improvement-
10
Q
Price Contingent Orders
A
Page 66 in book Figure 3.5
11
Q
Brokerage Commission: (Trading Cost)
A
- fee paid to broker for making the transaction
a. ) Explicit cost of trading
b. ) Full Service vs. Discount brokerage
12
Q
Spread: (Trading Cost)
A
Difference between the bid and asked prices
Implicit cost of trading
13
Q
Bid Price
A
- Bids are offers to buy.
- In dealer markets, the bid price is the price at which the dealer is willing to buy.
- Investors “sell to the bid.”
- Bid-asked spread is the profit for making a market in a security.
14
Q
Ask Price
A
- Asked prices represent offers to sell.
- In dealer markets, the asked price is the price at which the dealer is willing to sell.
- Investors must pay the asked price to buy the security.
15
Q
Direct search ( Types of Market)
A
Buyers and sellers seek each other
