Financial Market Environment Flashcards
This is a type of financial market?
Capital markets, money markets, and derivative markets are all types of financial markets.
A company needs funds to expand its business by purchasing new equipment. Which financial market should the company use to raise money?
Capital markets are used to finance long-term projects.
Financial markets can address which problem faced by a company’s management?
Information asymmetry
According to the Insider Trading Act of 1988, the SEC is allowed to order a penalty of up to how much of the profit of the guilty parties?
The act allows the SEC to order a penalty of up to three times the profit.
Which regulation’s primary purpose is to ensure that buyers of securities receive complete and accurate information before they invest?
The Securities Act of 1933
Which statement does not accurately describe the Sarbanes-Oxley Act of 2002?
This act was amended by the Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.
Market oscillation is a result of
the flow of positive/negative information.
The Securities Exchange Act of 1934 is
a law governing the secondary trading of securities, financial markets and their participants.
A financial market is an
aggregate of possible buyers and sellers of financial securities, commodities, and other fungible items, as well as the transactions between them.
The term “financial markets” is often used to refer
solely to the markets that are used to raise finance: for long-term finance, capital markets are used; for short-term finance (maturity up to one year), money markets are used.
Stock markets and bond markets are two types of capital markets that provide
financing through the issuing of shares of stock or the issuing of bonds, respectively.
A key division within the capital markets is between the
primary markets and secondary markets.
While capital markets and money markets constitute the narrower definition of financial markets, other markets, such as derivatives and currency markets, are often
included in the more general sense of the word.
Derivative is…
a financial instrument whose value depends on the valuation of an underlying asset; such as a warrant, an option, etc.
Maturity is…
date when payment is due.
Capital is…
money and wealth; the means to acquire goods and services, especially in a non-barter system.
Fungible is…
able to be substituted for something of equal value or utility; interchangeable, exchangeable, replaceable.
A financial market is an aggregate of
possible buyers and sellers of financial securities, commodities, and other fungible items, as well as the transactions between them.
Examples of financial markets include
capital markets, derivative markets, money markets, and currency markets.
For long-term finance, what markets are used
capital markets
For short-term finance (maturity up to one year), what markets are used
money markets
For short-term finance (maturity up to one year), what markets are used
money markets
A key division within the capital markets is between the
primary markets and secondary markets.
Newly formed (issued) securities are bought or sold in
primary markets, such as during initial public offerings.
Secondary markets are for the secondary trade of securities, providing a
continuous and regular market for the buying and selling of securities.
The derivatives market is the financial market for derivatives–financial instruments like
futures contracts or options–which are derived from other forms of assets.
Currency markets, enabled by foreign exchange (or forex) markets enable
currency conversion and determine the relative value of world currencies.
One of the main functions of financial markets is to
allocate capital, matching those who have capital to those who need it.
Capital markets especially facilitate the
raising of capital
money markets facilitate the
transfer of liquidity
Exchange is…
a place for conducting trading.
Capital is…
money and wealth; the means to acquire goods and services, especially in a non-barter system.
Liquidity is…
availability of cash over short term; ability to service short-term debt.
One of the main functions of financial markets is to
allocate capital
Financial markets can provide feedback to management by
showing signals of the demand to supply funds to that enterprise.
the price discovery process is when…
Financial markets provide a sign for the allocation of funds in the economy based on the demand and supply
The Securities Act of 1933
ensures investors receive complete and accurate information before they invest.
The Securities Act of 1933’s objectives are to
provide investors with material financial and other corporate information about issuers of public securities.
Among other things, registration forms call for:
a description of the securities to be offered for sale; information about the management of the issuer; information about the securities (if other than common stock); and financial statements certified by independent accountants.
Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances,
the sale of restricted and controlled securities without registration.
Regulation S is a
“safe harbor” that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act.
Private placements: Private placement (or non-public offering) is
a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.
The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a
federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.
The Securities Act of 1933 (also known as the ‘33 Act) is essentially a consumer protection law for
“retail” investors (i.e., not money managers, foundations, pensions, etc.)
Many transactions are exempt from regulation under the Securities Act. Section 4 of the Act limits its application to public offerings (according to SEC guidelines, more than 25 offerees) by issuers and their underwriters (i.e., investment banks). This means that the Act primarily applies to companies offering securities to the public, and not to
transactions between investors or to sales of stock to small groups of investors (i.e., private placements.)
Among other things, registration forms call for
a description of the securities to be offered for sale
information about the management of the issuer
information about the securities (if other than common stock)
financial statements certified by independent accountants
For public offerings, the main requirement of the Securities Act is
registration
Rule 144, promulgated by the SEC under the 1933 Act, permits (under limited circumstances)
the sale of restricted and controlled securities without registration.
The amount of securities sold during any subsequent three-month period generally does not exceed any of the following limitations:
1% of the stock outstanding
the average weekly reported volume of trading in the securities on all national securities exchanges for the preceding four weeks
the average weekly volume of trading of the securities reported through the consolidated transactions reporting system (NASDAQ)
Notice of resale is provided to the SEC if the amount of securities sold in reliance on Rule 144 in any three-month period exceeds 5,000 shares or if they have an aggregate sales price in excess of $50,000. After one year, Rule 144(k) allows for the permanent removal of the restriction except as to ‘insiders’.
In cases of mergers, buyouts, or takeovers, owners of securities who had previously filed Form 144 and still wish to sell restricted and controlled securities must refile Form 144 once the merger, buyout, or takeover has been completed.
The Securities Exchange Act of 1934 is a
law governing the secondary trading of securities, financial markets and their participants.
One area subject to 34 Act regulation is the actual securities exchange:
the New York Stock Exchange, the American Stock Exchange, and regional exchanges like the Cincinnati Stock Exchange, Philadelphia Stock Exchange and Pacific Stock Exchange.
The ‘34 Act also regulates
broker-dealers without a status for trading securities. A telecommunications infrastructure was developed to provide for trading without a physical location.
In 1938 the Exchange Act was amended by the
Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.
The Maloney Act
authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.
The alternative trading system, or ATS, is a
quasi-exchange where stocks are commonly purchased and sold through a smaller, private network of brokers, dealers, and other market participants.
NASDAQ is
the National Association of Securities Dealers Automated Quotations; this is an electronic stock market.
The Securities Exchange Act of 1934 is also called…
the Exchange Act, ‘34 Act, or Act of ‘34
In contrast with the Securities Act of 1933, which regulates these original issues, the Securities Exchange Act of 1934 regulates
the secondary trading of those securities between persons often unrelated to the issuer, in most cases through brokers or dealers. Trillions of dollars are made and lost each year through trading in the secondary market.
In 1938, the Exchange Act was amended by the Maloney Act, which authorized
the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC. That amendment led to the creation of the National Association of Securities Dealers, Inc.—the NASD, which is a Self-Regulatory Organization (or SRO). The NASD had primary responsibility for the oversight of brokers and brokerage firms, and later, the NASDAQ stock market.
ATS acts as a niche market, a private pool of liquidity. Reg ATS, an SEC regulation issued in the late 1990s, requires these small markets to
1) register as a broker with the NASD, 2) register as an exchange, or 3) operate as an unregulated ATS, staying under low trading caps.
The Sarbanes–Oxley Act is to
set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
As a result of SOX, top management must now
individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe.
Off-balance sheet (OBS), or Incognito Leverage, usually means
an asset or debt or financing activity not on the company’s balance sheet.
The Sarbanes-Oxley Act of 2002 is a federal law that set new or enhanced standards for all public company boards, management, and public accounting firms in the United States. It is also known as the
Public Company Accounting Reform and Investor Protection Act (in the Senate) and Corporate and Auditing Accountability and Responsibility Act (in the House) and more commonly called Sarbanes-Oxley, Sarbox or SOX.
