week 2 - securities markets

Question 1

What is the primary market?

Answer 1

market for new securities, consisting of:
- Public offerings: registered with an exchange and sale is
made to the investing public
- Private offerings: not registered, and sold only to a limited
number of investors with restrictions on resale

Question 2

what is the secondary market?

Answer 2

Market for already existing securities

Question 3

breifly explain IPOs

Answer 3

Public offers are the first offering of securities sold to the public from a formerly pricate company, they have/are;
- Unlimited number of share holders
- Obligated to release financial statements to the public
- Sold to the public (often with an underwriter)

Question 4

what does an underwriter do?

Answer 4

purchase securities from issuing company and resell them

Question 5

what is meant by IPO underpricing?

Answer 5

Post-initial sale returns average about 10% or more

Question 6

what is the functions of financial markets?

Answer 6

• Overall purpose: facilitate low-cost investment
  
  • Bring together buyers and sellers at low cost
  • Provide adequate liquidity
  • Minimise trade time
  • Promotes continuity
  • Set and update prices of financial assets
  • Reduce information costs associated with investing

Question 7

what is a direct search market?

Answer 7

Buyers and sellers locate one another on their own

Question 8

explain a dealer market and what it is used for

Answer 8

Third party acts as intermediate buyer/seller
primarily used for fixed income and forex

Question 9

what is a broker market and its primary use?

Answer 9

Third party assistance in locating buyer or seller
used for real estate

Question 10

what is an auction market and its primary use

Answer 10

in an auction market:
- Brokers and dealers trade in one location
- Trading is more or less continuous
used for equities

Question 11

give and explain 2 examples of dealers markets

Answer 11

• OTC market: informal network of brokers/dealers who
  negotiate securities sales
  
  • NASDAQ stock market: computer-linked price quotation
    system for OTC market

Question 12

what are electronic communication networks?

Answer 12

• Computer networks that allow direct trading
  
  • Individual investors need a broker to execute trades

Question 13

what is a specialist market?

Answer 13

• A market maker is a trader that quotes both bid and ask
  price to the public
  
  • Provide liquidity to other traders

Question 14

what is meant by a market order?

Answer 14

Executed immediately at best price

Question 15

what is a bid price?

Answer 15

price at which a dealer will buy securities

Question 16

what is an ask price?

Answer 16

price at which a dealer will sell securities

Question 17

give 2 examples of a price-contingent order and explain each example

Answer 17

• Limit order: specifies a price at which an investor will buy or
  sell
  
  • Stop order: not to be executed until price point hit

Question 18

what is the difference between a full-service broker and an online/retail broker

Answer 18

Full-service brokers
Offering advice on buying and selling securities, make recommendations, provide research and compile tailored investment plans
Typically charge a higher brokerage fee as a result of the advice and other services offered

Online (retail)
Offering no recommendations or advice regarding the appropriateness of your decision, hence lower brokerage fee

Question 19

what is the bid-ask spread when trading with a wealth dealer?

Answer 19

• Bid: price at which dealer will buy from you
• Ask: the price at which dealer will sell to you

Question 20

what determines the bid-ask spread in an order-driven market?

Answer 20

In an order-driven market where there are no dealers, the bid-ask spread is the cost for immediate execution, meaning a price to pay for your in-patience

Question 21

what is meant by the term price impact when trading an asset?

Answer 21

the price impact that an investor can create by trading on an asset and increasing its supply or demand (more relevant for institution investors rather than retail)