Chapter 3 - securities markets Flashcards
primary market
Market for new issues of securities
secondary market
Market for already-existing securities
private placement
Primary offerings in which shares are sold directly to a small group of institutional or wealthy investors
how many shareholders can a private company have?
2,000
initial public offering
First public sale of stock by a formerly private company
seasoned equity offering
a public sale of additional shares of stock
underwriters
purchase securities from the issuing company and resell them to the public
underwriters
purchase securities from the issuing company and resell them to the public
firm commitment
the underwriters bear the risk that they won’t be able to sell the stock at the IPO price
book building
polling potential investors
prospectus
A description of the firm and the security it is issuing
shelf registration
a firm that is already publicly traded can register securities and gradually sell them to the public for three years following the initial registration
direct listing
A previously private company floats existing shares on the stock market but does not raise funds by issuing new shares to the public
lock-up period
prohibit officers, directors, founders, and other pre-IPO investors from selling their shares for several months after the IPO
direct search markets
The least organized, buyers and sellers must seek each other out directly
brokered markets
Brokers find it profitable to offer search services to buyers and sellers
dealer markets
- Markets in which traders specializing in particular assets buy and sell for their own accounts
- The spread between the bid (buy) and the ask (sell) prices is a source of profit
- Most bond and ForEx trade in OTC dealer markets
auction markets
An exchange or electronic platform where all traders can convene to buy or sell an asset
market orders
buy/sell orders that are to be executed immediately at the current market price
bid price
The price at which a dealer or other trader is willing to purchase a security
ask price
The price at which a dealer or other trader will sell a security
bid-ask spread
The difference between the bid and asked prices
depth
the total number of shares offered for trading at the best bid and ask prices
limit buy order
instructs the broker to buy some number of shares if and when they may be obtained at or below a stipulated price
limit sell order
instructs the broker to sell if and when the stock price rises above a specified limit
limit order book
a collection of limit orders waiting to be executed
inside quotes
the highest buy and lowest sell orders
effective spread
may be greater than the nominal one because they cannot execute the entire trade at the inside price quotes
over-the-counter market
An informal network of brokers and dealers who negotiate sales of securities
NASDAQ stock market
The computer-linked price quotation and trade execution system
electronic communication networks (ECNs)
Computer networks that allow direct trading without the need for market makers
designated market maker
A market maker designated by the exchange to commit its own capital to provide quotes and help maintain a “fair and orderly market” by trading from its own inventory of shares
latency
- The time it takes to accept, process, and deliver a trading order
- BATS average latency is 100 microseconds
algorithmic trading
The use of computer programs to make rapid trading decisions
high-frequency trading
A subset of algorithmic trading that relies on computer programs to make very rapid trading decisions
dark pools
Electronic trading networks where participants can anonymously buy or sell large blocks of securities
blocks
Large transactions in which at least 10,000 shares of stock are bought or sold
discretionary account
allows the broker to trade securities whenever deemed fit
full-service brokers
- provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and much more
- commissions at full-service brokerages are much higher than those at discount brokers
discount broker
- carries out buy and sell orders at reduced commission rates compared to a full-service broker
- does not provide investment advice or perform analysis on a client’s behalf
broker’s call loans
- debt financing
- Buying on margin
margin
- Describes securities purchased with money borrowed in part from a broker
- The margin is the net worth of the investor’s account
- The proportion of the purchase price contributed by the investor
- Margin = equity in account / value of position
maintence margin
the level at which the broker will issue a margin call
margin call
requires the investor to add new cash or securities to the margin account
short sale
- The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan
steps of a short sale
- First, borrow a share of stock from a broker and sell it
- Later, purchase a share of the same stock in order to replace the share that was borrowed
- Called to cover the short position
- Profit = initial price - (ending price + dividend)
securities act of 1933
Requires full disclosure of relevant information relating to the issue of new securities
securities act of 1934
- Established the SEC to regulate and register securities exchanges, OTC trading, brokers, and dealers
- Requires periodic disclosure of relevant financing information by firms with already-issued securities on secondary exchanges
commodity futures trading commission (CFTC)
Regulates trading in futures markets
federal reserve
-Broad responsibility for the health of the US financial system
-Sets margin requirements on stocks and stock options and regulate bank lending to securities markets participants
Securities investor protection act of 1970
- Established the securities investor protection corporation (SIPC)
- Protect investors from losses if their brokerage firms fail
- $500,000 per customer
Financial industry regulatory authority (FINRA)
Largest nongovernmental regulator of securities firms in the US
Sarbanes-Oxley act (2002)
- Created the Public Company Accounting Oversight Board to oversee the auditing of public companies
- Require independent financial experts to serve on audit committees of a firm’s board of directors
- CEOs and CFOs must personally certify their firm’s financial reports
- Auditors may no longer provide several other services to their clients
- Boards must be composed of independent directors
2012 JOBS act
Relieved many smaller forms of some of their obligations under SOX
insider information
Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about the firm
