Security Markets

Question 1

What are the roles of financial markets?

Answer 1

These are markets that help to provide funds for borrowers
- And borrowers for people who want to lend

Question 2

What are primary markets?

Answer 2

Where new securities are issued
o E.g. As an IPO or a SEO
 SEO = Seasoned Equity Offering

Question 3

What are secondary markets?

Answer 3

Where investors trade previously issued securities
o Second hand securities
o E.g. NZX

Question 4

What are IPO’s

Answer 4

New listing of a company – when they first become a publicly listed
company
o Issue will be facilitated by an investment banker – for a fee

Question 5

Season new issue

Answer 5

This is a new issuance of a already publicly traded company

Question 6

Non dilutive

Answer 6

Can be from selling existing shares

Question 7

Dilutive

Answer 7

Or from new shares

Question 8

What are investment Banks.

Answer 8

These a facilitators of equity raising
o The oversee IPOs and SEOs

Question 9

IPOs: People pay too much for the _________ of a company. Therefore it creates a price ______ which makes shares of a recently ____ firm have a _____ annual percentage return than a company without ____

Answer 9

expected return, push, floated, lower, issuance

Question 10

What are secondary Markets

Answer 10

Markets where investors trade previously issued securities

Question 11

Dealer Markets

Answer 11

Bonds, NASDAQ, OTC Market

Question 12

Specialist markets

Answer 12

NYSE (Continuous auction)
 Each stock has a specialist that keeps the book for that
market

Question 13

Electronic Communications Networks (ECNs)

Answer 13

These are Electronic Brokerage houses
 Everything is done for you
 Finds/matches asks and bids together
o E.g. The NZX

Question 14

The NZX

Answer 14

This is a ECN with centralised computer screen trading
o Brokers terminals are connected to NZX trading system
 Therefore there is no physical trading floor
o Therefore the transfer of ownership is electronic and in real time –
no delay

Question 15

Share Market Index is a portfolio of shares used to?

Answer 15

measure the markets performance over time
As a bench mark to assess portfolio performance
To develop index investment funds

Question 16

Price Weighted Index

Answer 16

The index is driven by changes in share price not on the return of shares

Question 17

Price weighted index assumes

Answer 17

you hold an equal number of shares of each company in the index

Question 18

Return on price weighted index =?

Answer 18

ending value(sum of shares at time 1)/ starting value (sum of shares at time 0) -1

Question 19

Closing index =?

Answer 19

Opening Index * (ending value / starting value)

Question 20

When dealing with value weighted index only use shares for?

Answer 20

sale

Question 21

Value =?

Answer 21

Number of shares * price

Question 22

Equal weighted Index?

Answer 22

Each share us given an equal weight

Question 23

Capital Index

Answer 23

Measures share price changes only and reflects value of resources tied up in the market

Question 24

Capital Index: TMV =? (starting value)

Answer 24

total market value = share price * number of shares

Question 25

Capital Index: Ending value formula =?

Answer 25

Price at time 1, Ex Dividend * No of shares

Question 26

Gross Indices

Answer 26

Measures both changes in share price and value of dividends

Measures the total return to investors

Question 27

Closing Gross Index

Answer 27

(Price ex dividends + Dividends)*# of Shares

Question 28

Trading shares: investors submit ___ to a ___ by phone or on-line

Answer 28

orders, broker

Note: specify the share, volume and order type

Question 29

Market order?

Answer 29

Buy/sell stock immediately at the best available price
- Most common order

Question 30

Limit order?

Answer 30

Specified market price that it must reach before the transaction is
authorised
- Specify the length of time the order is open for, e.g. end of trading day or
forever

Question 31

Stop Order

Answer 31

Specifies a market price at which a market order is authorised
- To cut losses, or retain gains

Question 32

Shorting an asset

Answer 32

position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value

Question 33

Shorting an asset, is mathematically the same is buying ____
amounts of that asses, therefore it will have negative ____ in
a portfoli0

Answer 33

negative, weighting

Question 34

Margin

Answer 34

Borrowing money from a broker to buy approved shares using the value of your
portfolio as a security

Question 35

Initial Margin =?

Answer 35

= (amount investor contributes/Total value)

Question 36

Actual Margin =?

Answer 36

Actual margin = (Current Value – Amount borrowed)/Current
value

Question 37

There in NZ the initial margin requirements range between

Answer 37

30 - 60%

Question 38

Marginal Call

Answer 38

When actual margin falls below maintenance margin requirement (Initial
Margin – Buffer)