Fabozzi Chapter 18

Front 1

What is preferred stock?

Back 1

owners are entitled to a fixed dividend, paid out before it is paid to owners of common stock

Front 2

What are the two types of secondary market trading in common stocks?

Back 2

1. exchanges- trading floors, auction system; central auction specialist systems
2. over-the-counter (OTC) trading- negotiated system; linked by telecommunication systems; multiple market-maker systems

Front 3

What are electronic communications networks (ECNs)?

Back 3

privately owned broker/dealers that operate as market participants in the Nasdaq system; alternative to exchanges and OTC; offer transparency to limit order book; reduced prices; good for small orders;

Front 4

What is the Big Board?

Back 4

the New York Stock Exchange

Front 5

What is Nasdaq?

Back 5

National Association of Securities Dealers Automated Quotation System; run by NASD, an SRO controlled by SEC

Front 6

What are the 4 major types of markets on which sotck are traded?

Back 6

1. first market- trading on exhcanges of listed exchange stocks
2. second market- trading in OTC market of stock not listed on an exchange
3. third market- trading in OTC market of stock listed on an exchange
4. fourth market- private transactions; no broker-dealer intermediary

Front 7

What are listed stocks?

Back 7

individually approved stocks traded on an exchange; stocks traded on in the OTC market are considered unlisted

Front 8

What is a seat on the exchange?

Back 8

become a member of the exchange; right to trade securities and make markets on the exchange floor; 2001- 1,366 seats costing $2million per

Front 9

What is a post?

Back 9

where centralized continuous auction markets occurs; designated location on the floor

Front 10

What is a specialist?

Back 10

single market maker for each stock; conduct auction process; can be broker or agent

Front 11

What is a limit order book?

Back 11

list on which the specialist keeps the limit and stop orders that are given to them; only specialist can see it

Front 12

What are discount brokers?

Back 12

arisen after introduction of negotiated commissions; offer no advice and charge lower commissions

Front 13

What are the two non-Nasdaq OTC markets?

Back 13

1. the OTC Bulletin Board (OTCBB)- includes stocks not traded on the NYSE, Amex, or Nasdaq
2. Pink Sheets- often called pejoratively penny stocks; dealer quotations once disseminated by paper copy only; operated by National Quotation Bureau

Front 14

What are Consolidated Quotations Service (CQS)?

Back 14

electronic display system providing data on trades of listed stocks in different market centers

Front 15

What are alternative trading systems (ATSs)?

Back 15

divided in electronic communications networks and crossing networks; comprise the fourth market; direct trading of stocks

Front 16

What are crossing networks?

Back 16

allow institutional investors to cross trades- match buyers and sellers directly- typically via computer; excecute aggregate orders; lower trading costs; anonymity

Front 17

What is Rule 144A?

Back 17

permits the issue of nonregistered securites and their purchase by qualified institutions

Front 18

What is a market order?

Back 18

an order to be executed at the best price available in the market; simplest type of order

Front 19

What are priority rules?

Back 19

1. buyers bidding a higher price are given a high priority
2. first orders are first orders executed
3. public orders have priority

Front 20

What are public orders?

Back 20

orders made by the public not specialists or nonspecialists

Front 21

What is a stop order?

Back 21

order is not to be executed until the market moves to a designated price, at which time the order will become a market order; good for investor who cannot watch market constantly; danger is stock price shifts are only temporary- could result in premature trading

Front 22

What is a market if touched order?

Back 22

order becomes a market order if a designated price is reached; a market if touched order to buy becomes a market order if the market falls to a given price, a stop order to buy becomes a market order if the market rises to a given price

Front 23

What is a fill or kill order?

Back 23

order that must be immediately executed or it is dead

Front 24

What is an open order?

Back 24

order that is good until the investor specifically terminates the order

Front 25

What is a round lot?

Back 25

typically order of 100 shares of a stock

Front 26

What is an odd lot?

Back 26

order of less than 100 shares, less than round lot; or 350 shares would be 50 odd lost

Front 27

What are tick-test rules?

Back 27

restrictions as to when a short sale may be executed;
1. uptick trade- sale price of stock is higher than last trade price
2. zero uptick- if no change in last trade of stock, the previous trade price must be higher than the trade price that preceded it

Front 28

What is buying on margin?

Back 28

a transaction in which an investor borrows to buy shares using the shares themselves as collateral

Front 29

What is the call money rate?

Back 29

the interest rate that banks charge brokers for funds to allow clients to buy on margin

Front 30

What is the initial margin requirement?

Back 30

proportion of the total market value of the securities that the investor must pay as an equity share, and the remainder is borrowed from the broker

Front 31

What is a maintenance margin requirement?

Back 31

minimum proportion of the equity in the investor's margin account to the total market value

Front 32

What is an impact cost?

Back 32

change in market price due to supply/demand imbalances caused by the presence of the trade

Front 33

What are timing costs?

Back 33

price change between the time the order his the trading desk and when the trade is completed

Front 34

What are block trades?

Back 34

orders requiring the execution of a trade of a large number of shares of a given stock; orders of at least 10,000 shares or market value of at least $200k

Front 35

What are program trades?

Back 35

orders requiring the execution of trades in a large number of different stocks at as near the same time as possible

Front 36

What is the upstairs market?

Back 36

network of trading desks of major securities firms and other institutional investors to communicate with each other; provides liquidity and arbitrage activities

Front 37

What are basket trades/program trades?

Back 37

trades involving a "basket" of stocks; large number of names simultaneously; at least 15 stocks with a total value of $1 million or more

Front 38

What does frontrun the transaction mean?

Back 38

take foreknowledge of a program trade and benefit by buying a stock for their own account before filling the customer buy order

Front 39

What are stock market indicators (indexes)?

Back 39

benchmarks for evaluating the performance of professional money managers and answer question of how market did today; Dow Jones Industrial Average

Front 40

What are the three main approaches to weighting stocks?

Back 40

1. market capitalization- value of the number of shares times price per share
2. weighting by the price of the stock; e.g. DJIA
3. equal weighting for each stock

Front 41

What are the three different forms of pricing efficiency?

Back 41

1. weak form- prices reflect past prices
2. semistrong form- pricing reflects all public information
3. strong form- public information and inside information

Front 42

What are positive abnormal returns?

Back 42

whether or not historical price movements can be used to project future price movements in a way to produce above normal returns

Front 43

What are technical analysts or chartists?

Back 43

investors who follow a strategy of selecting stocks solely on the basis of price and volume patterns

Front 44

What is fundamental security analysis?

Back 44

analyzing financial statements, quality of management, economic environment of the company

Front 45

What are anomalies in the market?

Back 45

patterns of pricing inefficiency over long periods of time