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Lecture 3 Flashcards

1
Q

What are primary markets?

A

Markets where new securities are sold

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2
Q

What are 3 types of equity?

A
  1. IPOs → Initial Public Offerings: Selling the stock to the public for the first time
  2. Seasoned Equity Offerings → Stock issued by firms that need additional funds after an IP
  3. Private Placement → Company is private and selling it to institutions directly
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3
Q

What are IPOs?

A
  1. Initial public offers
  2. Selling stock to the public for the first time
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4
Q

What are SEOs?

A
  1. Seasoned Equity Offerings
  2. Stock issued by firms to get additional funds
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5
Q

What are private placements?

A

Sale of stocks, bonds or securities directly to a private investor

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6
Q

What are the two types of debt?

A
  1. Public Offering
  2. Private Placement
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7
Q

What are public offering?

A

Offering the stock on the public stock exchange

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8
Q

Why are secondary markets significant?

A

Markets for outstanding issues are bought and sold

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9
Q

What are examples of the secondary market?

A

NYSE, Nasdaq, London Stock Exchange

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10
Q

How does the IPO process work?

A
  1. Register with the SEC to prepare a registration statement that provides financial and other information about the company to investor
  2. Preliminary prospectus will circulate before shares are offered
  3. The underwriter performs due diligence by ensuring that all the stated facts are correct
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11
Q

What are the types of Underwriting process?

A
  1. Lead underwriter
  2. Deals are usually either firm commitment or best effort deal
  3. Book building
  4. Bond Underwriting
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12
Q

What are the lead underwriter?

A
  1. Primary investment banking firms responsible for managing the deal
  2. Provides advice and arranges for group of other underwriters to help market and sell the issue
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13
Q

What is firm commitment?

A

Investment bank purchases securities from issuing the company and reselling them to the public

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14
Q

What are the steps to book building?

A
  1. Process of coming up with the offer price based on marketing
  2. Customers inform underwriters of interests by telling them how many shares they want to purchase
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15
Q

What are the 4 main types of secondary market?

A
  1. Auction markets
  2. Dealer Markets
  3. Direct search markets
  4. Bokered markets
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16
Q

What are auction markets?

A
  1. Traders converge at one place to trade
  2. Used for stocks, options, futures
  3. Limit order/order driven markets
  4. Best order wins the trade
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17
Q

What are dealer markets?

A
  1. Dealers have inventories of assets from which they buy and sell
  2. Used for bonds, currency, swaps and over the counter derivatives
  3. Quote driven
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18
Q

What are direct search markets?

A

Buyers and sellers seek each other

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19
Q

What are brokered markets?

A

Search out buyers and sellers (real estate)

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20
Q

Why is it that markets are not clear?

A
  1. Size, product specifications, information asymmetry, inventory costs
  2. Institutional framework/market microstructure
  3. Sunspot equilibria
  4. Historical accidents
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21
Q

What does designated market maker mean?

A
  1. Liquidity providers, designated dealer
  2. Supports the markets reputation as a place where a customer can always find liquidity
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22
Q

What does the DMM do to make money?

A
  1. Holds inventory and are ready to buy/sell to provide liquidity
  2. Have special privileges ie.) naked short selling
  3. Make money through bid ask spread
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23
Q

What does it mean for exchange listing?

A

A listing = a sponsorship and companies pay to be listed

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24
Q

What are the different types of Canadian Markets?

A
  1. Toronto Stock Exchange
  2. TSX Venture Exchange
  3. OTC Stock Market
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25
Q

What is the TSX?

A

Trading platform for senior companies

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26
Q

What is the TSX Venture Exchange?

A

Trading platform for smaller companies

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27
Q

What is the OTC stock market?

A
  1. Similar to pink sheets in the US
  2. NEX and Canadian Unlisted Board Club
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28
Q

What is a third market maker?

A
  1. A firm that is ready to buy or sell a stock listen on the exchange at publicly quoted prices
  2. May pay for order flow to attract orders
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29
Q

What are electronic communications network?

A
  1. Automatically matches buy and sell orders at specified prices
  2. Direct crossing of trades eliminate bid ask spread in dealer markets
  3. Improves anonymy
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30
Q

What are some new trading strategies?

A
  1. Algorithmic trading
  2. Dark pools
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31
Q

What are algorithmic trading?

A
  1. Using computer programs to make rapid trading decisions
    1. High frequency trading
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32
Q

What are dark pools?

A

Where people can buy and sell large blocks of securities anonymously

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33
Q

What are the advantages of dark pools

A

Trade large blocks of stock off the floor to avoid the transactions unsettling effect on the market

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34
Q

What are the potential problems of dark pools

A
  1. Contributes to the fragmentation of markets
  2. Public price may no longer reflect all potential information about a security
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35
Q

What are market orders?

A
  1. Buy or sell orders that are executed at current market bid or ask prices
  2. Larger order may fill at multiple prices
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36
Q

What are limit orders?

A

Buy or sell orders can be executed only if the market reaches or betters that price

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37
Q

What is limit buy

A

Order to buy a stock at or below a specified price

38
Q

What is limit sell

A

Order to sell a stock at or above a specified price

39
Q

What is limit order book

A

Collection of limit orders waiting to be executed

40
Q

What are stop orders?

A

Order executed if the stock hits a price limit

41
Q

What are the bids?

A
  1. Offers to buy
    1. Person you’re selling to certain price they’re willing to sell
42
Q

What are ask prices?

A
  1. Represents offers to sell
    1. Dealers sell at a certain price
43
Q

What are bid-ask spread?

A

Profit that the dealers and sellers will be making

44
Q

What are the ripoff rule?

A
  1. Buy at the highest price
  2. Sell at the lowest price
45
Q

What are stop loss orders?

A
  1. Order to sell the stock if the price falls below the set level
  2. Limits losses or stocks in a certain level of profit
  3. Hits the stop loss price and the order becomes a market order
46
Q

What are stop buy orders?

A
  1. Order to buy stock if price rises above set level
  2. Triggers a purchase when you are a short asset
47
Q

What are different order types?

A
  1. Stop-loss order
  2. Stop buy orders
  3. Limit buy orders
  4. Limit sell orders
48
Q

What are stop loss orders

A
  1. Orders to sell stock if the price falls below a set level
  2. Designed to limit losses or to lock certain level of profits
  3. Price hits the stop loss price, the order becomes a market order
49
Q

What is a stop buy order

A
  1. Order to buy a stock if price rises above set level
  2. Triggers a purchase when you are short the asset
50
Q

What are some trading costs?

A
  1. Explicity: Fees you pay the broker
  2. Implicit costs
51
Q

What are trading commissions?

A

Explicity costs that is paid to the broker

52
Q

What are bid-ask spread?

A

Implicit costs and these are costs of trading with a dealer and buying at the ask price and selling at the bid price

53
Q

What are price impact?

A
  1. Implicit costs
  2. Large orders eat up liquidity at inside quotes and moving prices
54
Q

What are bond trading?

A
  1. Bond trading takes place in the OTC market among bond dealers
  2. Markets for many bond issues are thin
55
Q

What are the rules of bid ask spreads

A
    1. Information asymmetry is very important in securities markets
    2. No trade theorems
    3. Transactions costs (bid-ask) spread can be driven by information asymmetry
56
Q

What are margin trading?

A

Borrowing part of the total purchase price of a position using a loan from a broker

57
Q

What are margin accounts?

A
  1. An account you have with a broker where you place the collateral in order to cover your position
  2. Broker requires collateral in account to cover their credit risk
  3. Collateral can take the form of cash or stock
58
Q

What are the types of margin transactions?

A
  1. Buying on margin
  2. Short selling
59
Q

What are margin trading rules?

A
  1. Initial margin
  2. Maintenance margin
  3. Firm Requirements
60
Q

What are initial margins?

A

Can borrow up to 50% of total purchase price of a stock for initial purchases

61
Q

What are maintenance margins?

A

Equity in account can’t fall below 25% of current market value of securities

62
Q

What is margin call

A

Deposits more funds or securities if fargin is less than maintenance marg

63
Q

What are firm requirements?

A

Firm has the right to set own maintenance margin nd are different for different types of stocks and can change depending on market conditions

64
Q

What happens when you buy on the margin?

A
  1. Borrow part of the purchase amount
  2. Loan plus own funds to purchase the stock
  3. Value of assets: Price times number of shares bought
  4. Liability is amount of the loan from the broker
  5. Price of stock exchanges → value of assets changes → value of equity changes
65
Q

What happens during short sales?

A
  1. Selling a security that the seller doesn’t own and you buy it
  2. Buy shares later at a lower price
66
Q

What are exchange rules?

A
  1. Proceeds from sale must be kept on account with broker
  2. Post margin to cover potential losses
67
Q

What are investor assets

A

Proceeds from sale plus posted collateral

68
Q

What is liability

A

Value of stock

69
Q

What are the rules around short sales

A
  1. Dividends and voting rights remain with the owner, short position has to pay the owner the dividends
  2. Exact institutional arrangements of securities will vary from security to security
  3. Institutions receive 1 to 2 basis points per month for lending the stocks that are not in demand
70
Q

What is Naked Short selling?

A

Illegal except for designated market makers

71
Q

What are major regulations?

A
  1. Securities act of 1933
  2. Securities act of 1934
  3. Securities Investor Protection Act of 1970
  4. State blue sky laws
72
Q

What is the securities act of 1933?

A

Disclosure of rules and registration before issuance

73
Q

What is the securities act of 1934?

A

Established SEC

74
Q

What are the securities investor protection act of 1970?

A

Established SIPC

75
Q

What are self regulation?

A
  1. Financial Industry regulatory authority
  2. CFA Institute standards of professional conduct
76
Q

What are the regulation of securities

A
  1. Through Sarbanes Oxley Act
  2. Dodd Frank
  3. Consumer protection
  4. Financial stability
  5. Have major regulations:
    1. Canada business corporations act
    2. Provincial securities act
    3. Criminal code
77
Q

What are types of investment companies?

A
  1. Open end funds (mutual funds)
  2. Close end funds: Exchange traded at market determined prices
  3. Exchange traded funds: Like mutual funds but trade intraday on stock exchanges
  4. Unit Investment Trust
78
Q

What are mutual fund styles

A
  1. Cross sectional comparison
  2. Time series comparison
  3. Equity style box
  4. Fixed Income Style box
79
Q

What are the types of investment companies?

A
  1. REITs
  2. Hedge funds
  3. Commodity Trading Advisors
80
Q

What is net asset value?

A

When investors buy shares and receive asset returns proportional to their shares

81
Q

What are some mutual fund types

A
  1. Equity funds: Growth funds; focus on capital appreciation and Income funds: Focus on high dividend yield
  2. Bond funds
  3. Money market funds
  4. Balanced funds
  5. Asset allocation funds
  6. Index funds
  7. Sector funds
  8. International funds
82
Q

What are cross sectional comparisons?

A

Comparing other funds

83
Q

What are time series comparisons?

A

Track styles over time

84
Q

What are equity style box?

A
  1. Divides stock into 3 groups based on market cap
  2. This classifies stocks as value, core, or growth stocks
  3. Classification of stocks in fund determines funds overall classification
85
Q

What are fixed income style box

A

Credit quality x maturity period

86
Q

What are some mutual fund fees and expenses?

A
  1. Paid directly by investors:
    1. Front end load: Commission or sales charge
    2. Back end load: Early exit fee
  2. Paid out of fund assets
    1. Operating expenses
    2. 12-b feeds (marketing and distribution fees)
  3. Indirect costs
    1. Taxes
    2. Transaction costs
    3. Soft money deals
87
Q

How do you calculate fund returns

A

Gross return on portfolio - total expense ratio

88
Q

How do you calculate total expense ratio

A

Operating expenses + 12b-1 fees

89
Q

What are the key differences with mutual funds?

A
  1. ETFs trade continuously on exchange
  2. Tax advantages are no trading initiated by redemptions
90
Q

What are some issues with performance measurement in mutual fund performances?

A
  1. Definition of risk/benchmark
  2. Data biases
  3. Luck vs skill
  4. Lots of bad performance studies

Bus 315 (6 decks)

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