Lesson 2: Securities Trading

Question 1

what are the three ways securities trade?

Answer 1

1. stock exchange
2. over the counter
3. certain types of investors

Question 2

what is a public security?

Answer 2

Public securities are available for trading either over-the-counter or on an exchange. In principle, they are available for purchase by most investors

Question 3

what are private securities?

Answer 3

Private securities have not been listed for public sale, which means they can’t be traded on exchanges.
As a result, trading in private securities often has much larger transaction costs.

Question 4

what is a public market?

Answer 4

Once a company becomes public, its shares can be freely traded by most investors.
There shares may be available to trade on exchange, though in some cases, they may still only trade over-the-counter.
Public companies usually offer shares to the public for the first time using an Initial Public Offering (IPO).

Question 5

When does a company conduct a seasoned new issue?

Answer 5

When a public company wants to issue new shares after it has already conducted an IPO

Question 6

what is a private market

Answer 6

Privately held firms are not traded on public markets. As a result, they generally have a small number of shareholders.

Question 7

why remain a private company?

Answer 7

Becoming a public company is costly and requires more detailed public disclosures.
Remaining private may allow the owners to coordinate on long-term goals.

Question 8

what are the costs to remaining private

Answer 8

It can be more difficult to raise money, as issuing new shares requires finding new investors.
Existing investors may have trouble selling their shares.

Question 9

what are 3 examples of private companies?

Answer 9

Fully-owned subsidiaries
Family companies
Pre-IPO start-ups

Question 10

what is an initial public offering (IPO)?

Answer 10

the Initial Public Offering (IPO) was the means by which private firms became public firms.
Before the IPO, the shares are held privately by early investors and firm insiders.
After the IPO, shares are listed publicly and may be traded by members of the public.

Question 11

how is an IPO conducted?

Answer 11

by one or more investment banks called the underwriters. Often there is a lead underwriter and other investment banks who form the underwriting syndicate.

Question 12

what are 3 important jobs underwriters perform?

Answer 12

1) Advising the firm on the number and price of new shares.
2) Advising the firm on the preparation of the prospectus.
3) Marketing the securities to potential investors on road shows.

Question 13

what are 3 alternatives to an IPO?

Answer 13

1. Remaining private longer: Traditionally, IPOs were a key stage in a company’s growth. Now, many companies either remain private much longer or simply never go public.
2. Direct listing: Rather than offering a large number of shares on a specific day, some companies now simply allow initial investors to sell their shares on exchanges (Ex: Spotify).
3. Crowdfunding: Appealing directly to consumers for early stage funding, rather than selling shares.
4. Initial coin offerings (ICOs): Selling cryptocurrency tokens instead of traditional shares.

Question 14

what are the 3 steps in the trading process?

Answer 14

1. market type
2. order type
3. settlement process

Question 15

what do exchange traded securities require? are they listed on exchanges?

Answer 15

Exchange-traded securities usually require a high degree of standardization.
yes they are listed on exchanges

Question 16

what are over the counter exchanges? and are they listed

Answer 16

These securities are not listed on exchanges.
To trade these securities, investors must find a broker-dealer who either has the security available (if the investor wishes to buy) or is willing to purchase the security (if the investor wishes to sell).

Question 17

what is the definition of of an exchange?

Answer 17

an exchange not only allows securities trading, but also provides listing services:
Listing is the process by which a firm’s shares are formally made available for trade.

Question 18

what is an electronic communications network (ECN)?

Answer 18

An electronic venue on which securities are traded but listing services are not available

Question 19

what are Canadas 4 equity exchanges?

Answer 19

The Toronto Stock Exchange (TSX) provides listings to relatively large companies and ETFs.
The Toronto Venture Exchange (TSXV) provides listings to smaller companies.
Neo Exchange provides listings to some stocks and ETFs.
The Canadian Securities Exchange (CSE) provides listings to some stocks and ETFs.

Question 20

what are the 2 venues which trade non-equity securities?

Answer 20

The Montreal Exchange (MX) allows trading of options and futures.
CanDeal allows trading of some fixed-income securities.

Question 21

what is the limit order book?

Answer 21

The limit order book represents commitments to buy and sell a security at a specific price.

Question 22

what are bid orders and ask orders?

Answer 22

bid = buy
ask = sell

Question 23

what do limit orders represent?

Answer 23

Limit Orders represent a commitment to buy or sell at a fixed price. They enter the limit order book and remain available until another trader wishes to transact against them.

Question 24

what does a market order represent?

Answer 24

represent a desire to buy or sell immediately. They do so at the best price available at the current time.

Question 25

what is a dark order?

Answer 25

act similar to a limit order, however, other traders cannot view them in the order book. They are used by traders to hide their trading intentions.

Question 26

what is a pegged order?

Answer 26

Pegged orders act similar to a limit order, but with a price that changes depending on market conditions.
Midpoint peg: Acts as a limit order whose price is set to the midpoint (Bid Price + Ask Price / 2).
Best peg: Acts as a limit order whose price is set to the best bid (if it is to buy) or best ask (if it is to sell)

Question 27

what are stop-loss orders?

Answer 27

: Stop-Loss orders act similar to a limit order, except they are placed after a trader buys (or short sells) a security. A stop-loss order automatically closes the trader’s position if the price falls to far (or rises to far, in the case of a short-sale)

Question 28

what are intermarket sweep orders?

Answer 28

Large order that is divided into several smaller orders and sent to may different markets at the same time.

Question 29

what is trading on margin?

Answer 29

In some cases, investors may want to buy more shares of stock than they have the cash available to buy.
Investors may be able to get a loan from their broker, which they use to buy additional shares.

Question 30

what does the margin ratio refer to?

Answer 30

to the percent of the trade which the investor must own in equity.
In a typical case, an investor must have 30% margin, which means that they may only borrow 70% of the purchase price.

Question 31

what are the costs and benefits of tradng on margin?

Answer 31

For a given percentage return, a larger position earns more money than a smaller position.
For a given percentage loss, a larger position loses more money than a smaller position.
If the investor’s margin ratio falls below a pre-set value, they may receive a margin call from their broker. In this case, they may either provide new equity, or close the position at a loss.

Question 32

what are short sales?

Answer 32

the sale of an asset, such as a bond or stock, that the seller does not own

Question 33

what do short sales enable?

Answer 33

Short sales enable a seller to sell a stock first, and buy it back later.

Question 34

when are short sales used?

Answer 34

by investors who believe a stock’s price will fall. They sell high now and hope to buy back at a lower price.

Question 35

how to conduct a short sale?

Answer 35

a short seller needs to borrow the security from someone (usually their broker). Borrowing the security incurs a fee.

Question 36

what does settlement refer to?

Answer 36

Settlement refers to the process where the two parties actually exchange the securities and cash involved in the trade.

Question 37

why does settlement matter?

Answer 37

In Canada, equity trading usually settles at t+2, which means that the cash and shares are exchanged 2 days after the trade.
If we need to hold shares at a particular time, we must trade at least 2 days before we need them.
Two examples of such a time include dividend payments and shareholder votes.
Different markets have different settlement frequencies. It is important to understand the settlement frequency of the market you are trading in.

Question 38

what is clearing?

Answer 38

When parties trade frequently, settlement can be made more efficient. The process between trading and settlement

Question 39

what happens when trades are cleared bilaterly?

Answer 39

each trader has to settle their trade with each other trader they trade with.

Question 40

what happens when trades are cleared centrally?

Answer 40

each trader settles with a single, central counterparty. This central counterparty nets out some of the exposures between participants.

Question 41

what is price impact?

Answer 41

If an investor trades a large number of shares, the price may begin to move against them

Question 42

what does regulation help determine (3)?

Answer 42

1)Who can trade securities.
2)The process for trading securities.
3)Disclosure rules.