Securities Market

Question 1

What are the 3 types of securities?

Answer 1

1. Money market instruments
2. Bonds
3. Stocks

Question 2

What are money market instruments?

Answer 2

Short-term IOUs (debt/loan) issued by governments, corporations and financial institutions

Question 3

What are bonds?

Answer 3

Long-term IOUs issued by governments, corporations and financial institutions

Question 4

What are stocks?

Answer 4

Units of ownership in corporations.

2 kinds: Common and preferred

Question 5

Describe the primary securities market.

Answer 5

The financial market in which NEW security issues are first sold to investors (IPO). The money derived from the sale of stocks/bonds goes to the issuer

Question 6

Describe the secondary securities market.

Answer 6

The financial market in which EXISTING stocks and bonds are bought and sold by investors.

Question 7

What is an initial public offering (IPO)?

Answer 7

When a corporation’s stock is offered for sale for the first time

Question 8

What are the 2 ways that new stocks and bonds may be sold?

Answer 8

1. through investment bankers

2. through open auctions

Question 9

How can you make money by participating in the secondary securities market?

Answer 9

1. Capital gains

2. Dividends

Question 10

Describe the main characteristics of debt financing.

Answer 10

• no loss of ownership
• interest costs
• readily available in good times but hard to get in bad times
• obligation to reimburse according to set time
• Leverage (high return on investment)

Question 11

Describe the main characteristics of equity financing.

Answer 11

• Loss of ownership

- More conservative and prudent when owners reinvest earnings