Chapter 3: Securities Markets Flashcards
What does ‘private placement’ refer to?
Primary offerings in which shares are sold directly to a small group of institutional or wealthy investors. These cannot be sold on the secondary market, but the SEC does not have the same rigorous requirements for public firms.
What is the initial public offering (IPO)?
The first public sale of stock by a formerly private company. IPOs are typically underpriced.
What is an underwriter?
Underwriters purchase securities from the issuing company and resell them to the public.
What is a prospectus?
A description of the firm and the security it is issuing, after approval by the SEC.
What is the shelf registration?
Rule 415 (1982) allows companies to register securities and gradually sell them to the public for 2 years after initial registration. These securities are ‘shelf registration’.
What are the four types of markets?
Direct Search Markets, Brokered Markets, Dealer Markets, Auction Markets
What are the two general kinds of orders?
Market orders: buy or sell orders executed immediately at current market prices.
Price-contingent orders: investors also may place orders specifying prices at which they are willing to buy or sell a security.
What is the bid-ask spread?
The difference between the bid (willing to purchase price) and the ask (the price at which a dealer is willing to sell).
What is the limit buy (sell) order?
An order specifying a price at which an investor is willing to buy or sell a security.
What are the three trading systems?
Dealer markets (over-the-counter, NASDAQ Stock Market), Electronic Communication Networks (computer networks that allow direct trading without the need for market makers) and Specialist Markets (a company that makes a market in the shares of none or more firms and that maintains a ‘fair and orderly market’ by trading for its own inventory of shares).
What is the NASDAQ?
Lists around 3,000 firms, and today handles the majority of firms. It has 3 levels of subscribers.
What is the New York Stock Exchange?
A secondary market, the largest U.S. stock exchange.
What are ECNs?
Fully automated markets, and include NASDAQ, BATS, and NYSE Arca.
What is algorithmic trading?
The use of computer programs to make rapid trading decisions. It attempts to leverage profit from the bid-ask spread.
What is high-frequency trading?
A subset of algorithmic trading that relies on computer programs to make very rapid trading decisions. This happens in micro- or milli-seconds. It can take advantage of buying cheaper in one market and selling at a higher price in another.
