chap 3
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| investment bankers | market stocks, bond and securities for companies who need to raise capital by selling or floating securities
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| primary market | where new issues of company stock are sold
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| secondary market | market for already existing securities-trading in this market does not affect the amount of outstanding securities, rather ownership is traded from one person to another
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| two types of primary market issues | IPO's and seasoned new issues
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| IPO's | Initial Public Offerings, first sale of stock by a formerly private company.
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| seasoned equity offering | offered by companies that already have floated equity. ex, sale of IBM of new shaes of stock.
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| what are the two types of primary market issues for bonds? | public offering and private placement
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| bonds public offering | bonds sold to the general public
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| bonds private placement | an issue that usually is sold to one or a few institutional investors and is generally held to maturity.
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| underwriters | purchase securities from the issuing company and resell them.
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| How does a company go about selling it's stock to the public? | 1. find investment banker
2. submit regis statement to SEC
3. submit a preliminary prospectus (red herring)
4. when prospectus is approved, it is then the price is announced and stocks may be sold to the public
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| red herring | preliminary prospectus, in red print the statement is written that the company will not sell securities before registration is approved.
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| prospectus | a description of the firm and the security it is issuing.
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| firm commitment | firm sells to the investment banker their shares of stock for the general public selling price, minus the price spread for the investment banker.
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| how does the underwriting syndicate (lead underwriter and several other investment bankers) market a new stock? | takes out advertisements in the financial press to announce the prospective sale.
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| rule 415 approved by the SEC | allows firms to register securities and gradually sell them to the public for two years following the initial registration.
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| on the shelf or shelf registration securities | securities that are registered and ready to sell quickly. They have 2 yrs from point of registration and can remain on the shelf until company is rady to sell them.
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| private placement | primary off. that shares are sold directly to small grp of institut., wealthy invest. can be cheaper than PO. They do not trade in secondary markets like public offerings. this reduces their liquidity and the price investors are willing to pay for them.
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| road shows | arranged by investment bankers who travel around the country to publicize the imminent offering.
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| what are the 2 purposes of road shows | 1. generate interest among potential investors
2. provide information to the issuing firm and its underwriters about the price at which they will be able to market the securities.
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| book and bookbuilding | done on the road show book is indications of interest in securities by investors, pollling poten investors is bookblding
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| t or f IPO's stocks are normally underpriced. | true. the are priced to attract investors
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| t or f normally IPO's only go to large institutional investors | true
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| spinning | some investment bankers used IPO allocations to corporate insiders to curry favors, in effect as implicit kickback schemes. Underwriters would award generous IPO allocations to executives for their firm's future investment banking business
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| t or f despite their initial beginning investment, IPO's are statistically poor long term investments | true
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| dutch auction (used by Hambrecht and Co.) | in this auction, investors submit a price for a given number of shares of new stock. The bids are ranked in order of price, shares are allocated to highest bidders until shares are gone
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| types of markets | direct search, brokered, dealer, and auction markets
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| direct search markets | the least organized market. buyers and sellers seek each other out directly. Ex. is like selling a car and advertis. it in the newspaper. It does not pay most people to buy in this type of market.
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| brokered markets | brokers find it profitable to offer searches services to buyers and sellers. Ex. the real estate market, Primary markets are a brokers mkt where invest bnkers act as brokers
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| block houses | brokerage market where the brokers search for investors to purchase very large shares of stock, more than 10,000 and even larger amounts
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| dealer markets | markets in which traders specializing in particular assets buy and sell for their owne accounts
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| dealers | purchase various assets for their own accounts and later sell them from their own inventory for a profit (the difference between their buy price and sell price is the profit)
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| OTC securities market | good example of dealers market, an informal network of brokers and dealers who negotiate sales of securities
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| auction markets | this is the most integrated market in which all traders converge at one place to buy and sell an asset. (NYSE) one advantage is that all prices are listed at an auction
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| bid price | the price of which a dealer or other trader is willing to purchase a security
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| ask price | the price at which a dealer or other trader will sell a security
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| bid-ask spread | the difference between a dealer's bid and asked price
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| limit buy (sell) order | an order specifying a price at which an investor is willing to buy and sell a security
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| what are the two types of orders for securities? | market orders and orders contingent on price
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| market orders | buy and sell orders that are to be executed immediately at current market prices
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| price contingent orders | instuctions to buy some number of shares if and when IBM (or any stock) may be obtained at or below a stipulated price.
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| limit sell | instructs the broker to sell if and when the stock price rises above a specified limit.
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| limit order book | a collection of limit orders waiting to be executed
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| Archipelago | An electronic exchange (one of several)
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| stop loss orders | the stock is to be sold if the price falls below a stipulated level. It is sold to stop further losses.
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| stop buy orders | specify that a stock should be bought when its price rises above a limit.
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| short sales | sales of securities you don't own but have borrowed from your broker
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| what are the three trading systems in the US? | over the counter (OTC), electronic communic networks, and formal exchanges
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| National Association of Securities Dealers Auto0matic Quotations System | NASDAQ, was developed to link brokers and dealers in a computer network where price quotes could be displayed and revised.
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| t or f the difference between the bid-ask spoead is the source of the dealer's profit? | true
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| ECN's | Electronic communication networks--computer networks that allow direct trading without the need for market makers.
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| what is the benefit of ECN's | no broker-dealer system eliminates bid-ask spread. Also attractive for the speed at which they can be traded. Investors can remain anonymous
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| specialist | trades in formal exchanges like the New York Stock Exchange, a trader who makes a market in the shares of one or more firms and who maintains a fair and orderly market by dealing personally in the market
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| t or f specialists may buy and sell stock for their own portfolios | true, if there is no other person to take the other side of the deal, a specialist with buy and sell from his own account.
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| t or f the specialist in many ways is a facilitator in that he or she buys and sells orders at the best prices | true
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| How is the specialist expected by the exchange to keep an orderly market | by buying and selling shares from inventory. they maintain their own portfolios of stock and quoted bid and ask prices at which they are obligated to meet at least a limited amount of market orders.
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| how much of the activity do specialists participate in at the NYSE | 1/4
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| why do specialist strive to maintain narrow bid-ask price? | 1. a source of their income is frequent trading, too large spread would send investors away 2. they are obligated to provide price continuity to the market.
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| Nasdaq stock market | the computer linked priced quotation system for the OTC market
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| what is the most important dealer market in the U.S.? | NASDAQ
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| what is the most important formal market in the US? | New York Stock Exchange
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| what are the 2 listing options of the NASDAQ | global select market (largest and most actively traded firms), global market, capital market
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| what are the 3 levels of the the Nasdaq? | 1.level 3, firms maintain inventories and are ready to buy or sell shares from public 2. Level 2-can recv bid and ask quotes, but cannot enter their own like level 3 (ex brokerage firms), 3. level 1 recv only inside quotes. not active buyers
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| stock exchanges | secondar markets where already-issued securities are bought and sold by members
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| what is the largest stock exchange in the US? | NYSE
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| Nasdaq stock market | the computer linked priced quotation system for the OTC market
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| what is the most important dealer market in the U.S.? | NASDAQ
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| what is the most important formal market in the US? | New York Stock Exchange
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| what are the 2 listing options of the NASDAQ | global select market (largest and most actively traded firms), global market, capital market
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| what are the 3 levels of the the Nasdaq? | 1.level 3, firms maintain inventories and are ready to buy or sell shares from public 2. Level 2-can recv bid and ask quotes, but cannot enter their own like level 3 (ex brokerage firms), 3. level 1 recv only inside quotes. not active buyers
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| stock exchanges | secondar markets where already-issued securities are bought and sold by members
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| what is the largest stock exchange in the US? | NYSE
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| what happens when an order is desired in the NYSE | it goes to a broker who takes it to a specialist who looks in a display book for current offers from interested traders to buy or sell given numbers of shares for various prices
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| how do brokers get into the NYSE to conduct business? | they used to purchase seats not instead they have an annual license permitting trade.
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| AMEX | American stock exchange, lists smaller and younger firms than the NYSE.
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| what is the stock market venue of choice for large trades | NYSE
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| block transactions | large transactions in which at least 10,000 shares of stock are bought or sold
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| block houses | evolved to aid the placement of larger block trades. these are brokerage firms that specialize in matching block buyers and sellers. If buyer cannot be found house may purchase all of some of block for own acct and resell to the public.
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| superdot | an electronic ordering system the lets NYSE member firms to send market and limit orders directly to specialist over computer lines
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| program trade | a coordinated purchase or sale of an entire portfolio of stocks.
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| clearing house | the trades of all exchange members are recorded ea day, c mbrs transactions netted out, the exchange mbrs only need settle with clearinghouse not each firm it traded with.
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| what are the two largest ECN's | INET AND Archipelago
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| t or f a specialist who observes a better price on another exchange is also expected to either match the price or rout the trade to the other market | true, in face in 2005 the SEC made a rule through reg NMS that requires that investors orders bi filled at the best rpice that can be executed immediately, even it that price is avail in another market. (trade through rule)
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| ABS | automated bond system, an automated trading system that allows trading firms to obtain market information to enter and executed trades over a computer network
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| why do bond deals pose a liquidity risk | it can be difficult to sel one's holdings quickly due to the few investors interested in trading a bond at any particular time
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| name some of the big world exchanges | SETS (stock exch electron trade service)-London; euronext (part of NYSE group); TSE (tokyo stock exch);
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| saitori (like a specialist on the NYSEut, but do not trade for their own acct.) | a public limit order book, matches market and limit orders and is obliged to follow certain actions to slow down price movements in Tokyo.
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| since the saitori cannot buy and sell to slow the movement of inbalances of the market? | he can stop trading temporarily and advertise the imbalance to attract additional trading interest to the weak side of the market
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| full service broker | provide a variety of service often are referred to as account executive or financial consultant, give advice on how to trade
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| discount brokerage services | banks, thrift institutions, and mutual fund management co now offer services. they provide no frills only quotations
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| discretionary acct. | acct with a full service broker, that allows them to make buy ans sell decisions for them the broker can buy and sell prespecified securities whenever deemed fit.
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| broker's call loans | buying on margin.
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| buying on margin | the purchaser borrows part of the purchase price of the stock from the broker.
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| margin | the margin of the account is the part of the purchase price contributed by the investor, the remainder is borrowed from the broker.
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| what is used for security against margin loans with a broker? | the stocks
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| what is the current initial margin requirement (amount the investor must put up) for stock? | 50% paid in cash and the rest borrowed.
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| maintenance margin | if percentage margin falls below the maintenance level the broker will issue a margin cal, which requires the investor to add new cash or securities to the margin acct.
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| what if there is no change in stock price and the investor purchases on margin. What does the investor lose or gain | they would lose the percentage cost of the loan.
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| short sale | normally an investor would first buy a stock and then sell it. in a short sale the order is reversed. first you sell and then you buy the shares. you begin with not shares
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| how does and investor profit from a short sale | from a decline in a security's price. an investor borrows stock and sell it, then he must purchase the stock to replace what he borrowed.
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| covering a short position | buying stocks to cover the stocks you borrowed in a short sell
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| does a short seller have to pay a fee for borrowing stocks to sell to someone else | yes
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| when is it legal to perform a short sale | only after the last price on the stock was an increase. this is meant to prevent waves of speculation against the stock.
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| Can the investor keep the money that he makes on a short sale | no. it must remain on account with the broker.
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| bearish | pessimistic
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| Securities and Exchange Act of 1933 | major governing legislation of security trading. It requires full disclosure of relevant info relating to the issue of new securities.
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| SIPC | Protects investors from losses if their brokerage firm fails just like banks with FDIC or Credit Unions with NCUA. It covers up to $500k per person.
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| blue sky laws | security trading is subject to state laws. These are intended to give investors a clearer view of investment prospects.
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| sarbanes-oxley act of 2002 | passed by congress, created public comp acct oversight brd to oversee public companies, indep fin experts on BOD, CEO & CFO must certify finan rpts, auditors may only audit a firm nothing else,
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| market circuit breakers | used to slow or stop trading during periods of extreme volatility.
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| What are some of the different types of circuit breakers | trading halts: If DJIA falls by 10%, tde stops. Collars: if DJIA moves 2% in either direction from previous day index arbitrage must pass ticket test.
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| ticket test | in a falling market, sell orders may be done in a plus tick or zero plus tick, trade mus be higher price than the last trade (plus tick) or at the last price if last was positive (o+tick)
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| insider information | private information held by officers, directors, or major stockholders that has not yet been divulged to the public.
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| what is required of the officers, directors and major stockholders by the SEC regarding their personal stock? | to report all transactions in their firms stock.
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| where are insider trades posted to keep the public informed? | in the SEC's official Summary of Securities Transactions and Holdings.
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