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41 Cards in this Set
- Front
- Back
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Distinguish between the primary market for securities and the secondary market.
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The primary market for securities serves businesses and governments that want to sell new security issues to raise funds. Securities are sold in the primary market either through an open auction or via a process called underwriting. The secondary market handles transactions of previously issued securities between investors. The business or government that issued the security is not directly involved in secondary market transactions. In terms of the dollar value of trading volume, the secondary market is about four times as large as the primary market.
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Distinguish between the primary and secondary markets for securities. Is the primary market or secondary market larger?
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In the primary market, securities are sold to investors for the first time, and the issuing corporation or government receives the proceeds from the sale. The secondary market involves trades between investors of previously issued securities. The secondary market is far larger than the primary market.
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What are the 2 ways in which securities are sold in the primary market.
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The 2 ways in which securities are sold in the primary market are in open auctions and through a process called underwriting.
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How does and open auction work?
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An open auction occurs when the US Treasury sells securities through open auctions. It announces before the auction what types of securities it wants to sell and solicits bids from investors. The higher the bid, the lower the interest rate.
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How does underwriting work in selling securites in the primary market?
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Corporate and municipal securities are sold via underwriting. The securities are sold to a specialized investment firm caled an investment banker, which then sells the securities to investors. Investment bankers charge for their services by paying the issuer less than they charge investors. Investment bankers are specialists in the securities markets, and issuers find it more efficient and easier to use the services of investment bankers.
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Compare money market instruments, bonds, and common stock and explain why particulare investors might prefer each type of security.
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Money market instruments and bonds are debt instruments. Money market instruments are short-term debt securities and tend to be low risk securities. Bonds are longer-term debt securities and pay a fixed amount of interest each year. Bonds are sold by the US Treasury (government bonds), state and local governments (municipal bonds), and corporations. Financial institutions such as Fannie Mae and Freddie Mac sell mortgage pass-through securities--bonds backed by a self-liquidating pool of mortgage loans. Most municipal and corporate bonds have risk-based ratings. Common stock represents ownership ownership in corp. Common stockholders have voting rights and a residual claim on the firm's assets.
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Explain the difference between a money market instrument and a bond.
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All money market instruments mature within one year from the date of issue. Bonds mature anywhere from 2 to 30 years from the say of issue.
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What are the 2 types of bonds issued by state and local governments?
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The 2 types of bonds issued by state and local govenments are general obligation bonds and revenue bonds. General obligation bonds can be issued only by governmental units that have taxing authority (such as cities or states) and are backed by the full faith and credit of the state in which they are issued. Revenue bonds are issued to pay for public projects that generate revenue, such as toll roads.
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Describe the difference between a secured and unsecured bond.
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A secured bond is backed by specific collateral. An unsecured bond is backed only by the financial reputation of the issuer.
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Discuss the major investment characteristics of common stock.
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Common stock represents ownership claims in firms. Common stockholders are often paid cash dividends, but the amount of dividends varies widely from stock to stock. However, the major motivation for buying common stock is expected price appreciation. As a firm's profits grow, so too should the value of its stock.
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Identify the 5 basic objectives of investors and the types of securitite most likely to help them reach each objective.
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The 5 basic objectives are growth in capitla, stability of principal, liquidity, current income, and growth in income. Commmon stocks are the most likely to meet the objectives of growth in capital and growth in income. Historically, common-stock investments have had far higher returns on average than either bonds or money market instruments. Common-stock dividends have also generally risen over time. Money market instruments are the most stable in price and rarely lose value. Money market instruemtns are also the most liquid security. Bonds tend to provide the highest current income of any security. Investment income from gov. bonds, corp. bonds, common stocks, and realized capital gains are usually taxed at the fed. level but often at diff. rates. Interest income from municipal bonds is exempt from federal income taxes but may be subject to state income taxes.
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Who purchases securities?
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Securities are purchased by institutions--such as pension funds and life insurace companies--and individuals. Many individuals purchase securities indirectly through institutions.
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What are the 5 motivations for investing? Are all sources of investment returns taxed equally?
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Income received from government and corporate bonds is taxed as ordinary income. Common-stock dividends, for most individuals, are taxed at a lower rate, as are realized capital gains, which result when a security is sold for more than its purchased price.
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Describe the characteristics of the major stock exchanges.
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Exchanges exist throughout the world. The 2 largest--NYSE and Nasdaque--are located in the US. The NYSE is larger, measured in terms of the total value of stock traded. Larger and better-known companies dominate the NYSE. Buy and sell orders are transmmitted to the trading floor for excecution. The Nasdaq stock market is and electronic market in which buy and sell orders are entered into a computerized communication system for execution. Most of the world's major stock markets today use similar electronic trading systems. Electronic communication networks are electronic markets in which buyers and sellers trade directly without the use of a specialist or market maker.
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Compare and contrast the NYSE and Nasdaq stock markets.
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The NYSE still maintains a trading floor, and all trading takes place on the floor, even though the trading process has become much more automated in recent years. Larger, better-know companies tend to be listed on the NYSE. The Nasdaq Stock Market is an electronic market--it is considered the world's largest intranet--and all trading takes place electronically. Nasdaq-listed stocks tend to be smaller, newer companies. Technology companies especially tend to be listed on Nasdaq. Each NYSE-listed stock has one specialist assigned to it. By contrast, each Nasdaq listed stock has at least two market makers.
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Explain the role of specialists and market makers.
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Specialists and market makers maintain an inventory of their stocks and act as buyers when no other buyers are present and sellers when no other sellers are present. This function adds liquidity to stock markets. Specialists and market makers also track unfilled limit orders.
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What is an ECN?
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ECN stands for electronic communications network. An ECN is a virtual stock market in which buyers and sellers trade with each other without the presence of a market maker or specialist.
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Explain the process of buying or selling a security listed on an organized securities exchange
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Investors use the services of a brokerage firm that is a member of one of the stock exchanges. Afer a broker receives a customer's order, it is sent electronically to the appropriate stock exchange for execution. A marketorder instructs the broker to obtain the best possible price, but a limit order limits the transaction price. Full-service brokers provide the most advice but charge the highest fee. Customers at discount firms and online trading firms have to make their own decisions but are charged lower fees.
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what information is included in stock and bond quotations and stock exchanges.
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Information in a stock quote includes the highest and lowest trading prices during the previous 52 weeks, the dividend, the dividend yield, the price/earnings ration, the trading volume, the stock's highest and lowest prices for the day, and the closing price for that day. A bond quotation includes the maturity date and interest rate, the current yield, the trading volume, and a comparison of the day's closing price with that of the previous days. Stock indexes measure the overall direction of a particular market or particular types of stocks.
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Explain the difference between a market order and a limit order.
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A market order instructs the broker to get the "best" price (lowest if buying or highest if selling). By contrast, a limit order specifies the highest price the investor will pay (if buying) or the lowset price they will accept (if selling).
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Distinguish between full-service and discount brokerage firms.
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Full-service firms provide order execution, record keeping, and extensive investment advice. By comparison, discount firms provide order execution and record keeping but don't necessarily provide investment advice. Most, however, give their clients access to a wide range of independent investment research so that clients can make their own investment decisions. Discount brokerage firms charge lower commissions than full-service firms.
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List some of the information contained in stock price quotations.
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Information contained in stock price quotations includes the 52 week high and low prices, the dividend, the price to earnings ratio, and the closing price.
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What are the 2 most closely followed stock market indexes?
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Dow Jones Industrial Average and Standard and Poor's 500
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Discuss the role of mutual funds and exchange traded funds in the securities markets.
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Mutual funds are professionally managed investment companies that own securities consistent with their overall investment objectives. Investors purchase shares of a mutual fund, which make them part owners of a diversified investment portfolio. Investors can purchase shares of mutual funds for relatively small amounts. Mutual funds have become extremely popular in recent years. More than half of all American households own mutual fund shares. Exchange-traded funds (ETFs) are sponsored by investment companies that esll a fixed number of shares and use the proceeds to buy a portfolio of securities. Shares of ETFs trade on the major stock markets and are generally unmanaged.
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What is a mutual fund? Why are they popular investments?
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A mutual fund is an investment company that sells shares to investors and uses these funds to purchase securities consistent with the fund's investment objectives. Mutual funds are popular because they allow small investors to purchase a piece of a diversified portfolio of securities, thereby reducing the risk associated with holding an individual security. Most mutual funds are professionally managed.
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Explain how an exchange-traded fund differs from a mutual fund.
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An exchange-traded fund is similar to a mutual fund in that a ETF sells shares to investors and uses these funds to purchase securities. However, most ETFs sell only a fixed number of shares in an initial public offering. Afterward, shares of ETFs trade on the major stock markets like individual common stocks. In addition, most ETFs are unmanaged, and many are designed to track one of the major indexes such as the S&P 500 or Dow.
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Evaluate the major features of regulations and laws designed to protect investors.
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In the US, financial markets are regulated at both the federal and state levels. Markets are also heavily self-regulated by the financial markets and professional organizations. The chief regulatory body is the SEC. It sets forth a number of requirements for both primary and secondary market activity, prohibiting a number of practices, including insider trading. The SEC also requires public companies to disclose financial info regularly. Professional organizations and the securities markets also have rules and procedures that all members must follow.
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Is securitites regulation primarily a state or fed responsibility? When was the SEC created?
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In the US, securities regulation is primarily a Fed. responsibility, although the states do have some regulatory authority. The SEC was created in the 1930's.
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Define insider trading.
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Insider trading is the use of material, nonpublic information to make investment profits.
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Full and fair disclosure
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The SEC does not rule on the investment merits of a registered security. It is concerned only that an issuer gives investors enough information to make their own informed decisions.
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Securities
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Financial instruments such as stocks and bonds
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Initial Public Offering (IPO)
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When a company offers stock for sale to the general public for the first time.
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Government bond
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sold by the US treasury. Backed by the full faith and credit of the US gov. considered the least risky.
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debentures
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unsecured bonds backed only by the financial reputation of the issuing corp.
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Bond rating
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Asses the risk of a bond. The bonds with the least risk are assigned a rating of either AAA or Aaa.
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Investment grade bond
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Rating of BBB and above
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Junk bonds
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Ratings less then BB
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Call provision
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Allows the issuer to redeem the bond before its maturity at a prespecified price.
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Institutional investor
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an organization that invests its own funds or those it holds in trust for others.
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price-earnings ratio
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the current market price divided by the annual earnings per state.
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Regulation FD
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requires firms to share information with all investors at the samme time
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