Topic 4 Flashcards
What are stocks (/common stock/equity)?
Shares in a firms ownership
2 rights stockholders have?
Entitled to share in the profits
Entitled to vote at firms annual meeting
Returns from stocks given by?
Increasing price of stocks or dividends
What is a residual claimant?
The last people to get paid if a firm is shutting down
Stockholders are these people
How much liability do stockholders have in a firm?
Limited - if a firm fails the most they can lose is their initial investment
2 main changes in a firm when public stocks are issued?
Changes in ownership (increase in number of owners)
Changes in a firms capital structure (increase in equity investment)
What is an IPO?
Initial public offer:
Initial issuing of stocks to the public
4 stages of IPO?
1) develop prospectus (contains info about a firm and its financial status)
2) pricing (price of shares at time of IPO)
3) allocation of IPO shares
4) transaction costs
What is ‘leaving money on the table’?
Selling shares for a lower price
What is ‘flipping shares’?
Purchasing stock at its offer price and selling it shortly afterwards
What are organised exchanges?
Auction markets that use floor traders who specialise in particular exchanges (secondary market)
What are over the counter dealers?
A collection of dealers in the secondary market who trade with one another electronically
What is an order driven market?
A market where all participants are natural buyers and sellers with no dealer acting as an intermediary
What is a quote driven market?
A market where the price is determined by the dealer, based on prevailing market conditions
Define orders?
Instructions to trade that traders give to their brokers and exchanges that arrange their deals
What do orders specify? (3)
Security to be traded
Quantity to be traded
Buy or sell
What is a bid?
A buy order specifying a price
What is an offer (/ask)?
Sell order specifying a price
What is a best bid?
A standing buy order that bids the highest price bid
What is a best offer?
A standing sell order that has the lowest price offer
What is a bid ask spread?
Difference between best offer and best bid
Condition for profit when trading stocks?
Ask - bid > 0
What are propriety orders?
Orders submitted by traders for their own account
What are market orders?
Orders to buy or sell at the best available price currently in the market
What are limit orders?
designated price thresholds for the trade
What is short selling?
Selling a stock you don’t own and you have to buy it back later
What is long selling?
Selling a stock after buying it yourself
What is buying on margin?
Borrowing to buy securities and using them as collateral
What are ECNs and what do they do?
Electronic communications networks - allow brokers and traders to trade without an intermediary
4 advantages of ECNs?
Provide: transparency, cost reduction, faster execution, after-hours trading
3 problems of ECNs?
Only work well for high volumes of stocks
Different ECNs competing for volume therefore confusing
Main exchanges are fighting ECNs by expanding their own auto trading systems
What do exchange traded funds (ETFs) do and what are they?
‘Basket of securities’, all known, that are traded on exchanges
They keep down transaction costs and provide diversification
What are stock market indexes?
Indexes used to monitor the behaviour of a group of stocks
3 uses of stock market indexes?
- tells change in average stock
- tells change in average wealth
- performance indicator for money managers
What is a price weighted average index?
An index giving greater weight to shares with higher prices tf higher priced stocks dominate the movement of the index (DJIA)
What is the Dow Jones industrial average index?
30 largest US companies, measures value of purchasing a single share of each of the stocks in the index
What is a value weighted index?
Larger firms carry more weight
What does the standard and poor’s 500 index measure?
Based in >500 largest US firms, tracks total value of those firms
Market capitalisation = ?
Stock Quantity x stock price
2 benefits of stock markets?
Helps to allocate resources efficiently and see how the economy is doing
2 ways stock market can be misleading way to judge the economy?
Euphoria - high confidence leads to increased prices of stock tf ‘bubbles’ tf crashes
Depression - vice versa
What is a bubble?
A gap between the true stock price and the selling prices on the market
