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41 Cards in this Set
- Front
- Back
Types of Markets
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- Money Markets: the market where short-term securities are bought and sold
- Capital Market: the market where long-term securities such as stocks and bonds are bought and sold - Primary Market: the market in which new issues of securities are sold to the public - Secondary Market: the market in which securities are traded after they have been issued |
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Initial Public Offering (IPO)
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- First public sale of a company’s stock
- Requires SEC approval |
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Three Choices to Market Securities in Primary Market
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- Public offering
- Rights offering - Private Placement |
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Going Public: The IPO Process - 1) Underwriting the offering:
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promoting the stock and facilitating the sale of the company’s shares
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Going Public: The IPO Process - 2) Prospectus:
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registration statement describing the issue and the issuer
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Going Public: The IPO Process - 3) Red Herring:
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preliminary prospectus available during the waiting period
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Going Public: The IPO Process - 4) Quiet Period:
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time period after prospectus is filed when company must restrict what is said about the company
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Going Public: The IPO Process - 5) Road Show:
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series of presentations to potential investors
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The Investment Banker’s Role - Underwriting the Issue:
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purchases the security at agreed-on price and bears the risk of reselling it to the public
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The Investment Banker’s Role - Underwriting Syndicate:
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group formed by investment banker to share the financial risk of underwriting
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The Investment Banker’s Role - Selling Group:
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other brokerage firms that help the underwriting syndicate sell issue to the public
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The Investment Banker’s Role - Tombstone:
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public announcement of issue and role of participants in underwriting process
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The Investment Banker’s Role - Investment Banker Compensation:
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typically in the form of a discount on the sale price of the securities
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Secondary Market:
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the market in which securities are traded after they have been issued
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Role of Secondary Markets
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- Provides liquidity to security purchasers
- Provides continuous pricing mechanism |
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Securities Exchanges:
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forums where buyers and sellers of securities are brought together to execute trades
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Nasdaq Market:
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employs an all-electronic trading platform to execute trades
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Over-the-counter (OTC) Market:
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involves trading in smaller, unlisted securities
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Broker Markets:
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Consists of national and regional securities exchanges
- 60% of the total dollar volume of all shares in U.S. stock market trade here - New York Stock Exchange (NYSE) is largest and most well-known - Trades are executed when a buyer and a seller are brought together by a broker and the trade takes place directly between the buyer and seller |
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Dealer Markets:
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Consists of both the Nasdaq market and the OTC market
- Trades are executed with a dealer (market maker) in the middle. Sellers sell to a market maker at a stated price. The market maker then offers the securities to a buyer. |
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Broker Market - New York Stock Exchange (NYSE)
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- Largest stock exchange—over 2,700 companies
- Over 350 billion shares of stock traded in 2005 - Accounts for 90% of stocks traded on exchanges - Specialists make transactions in key stocks - Strictest listing policies |
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Broker Market - NYSE Amex (formally American Stock Exchange)
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- More than 500 companies listed
- Major market for Exchange Traded Funds - Typically smaller and younger companies who cannot meet stricter listing requirements for NYSE |
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Broker Market - Regional Stock Exchanges
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- Typically lists between 100–500 companies, usually with local and regional appeal
- Listing requirements are more lenient than NYSE - Often include stocks that are also listed on NYSE or NYSE Amex - Best-known: Midwest, Pacific, Philadelphia, Boston, and Cincinnati |
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Broker Market - Options Exchanges
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- Allows trading of options
- Best-known: Chicago Board Options Exchange (CBOE) |
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Broker Market - Futures Exchanges
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- Allows trading of financial futures
- Best-known: Chicago Board of Trade (CBT |
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Dealer Markets
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- No centralized trading floor; comprised of market makers linked by telecommunications network Both IPOs and secondary distributions are sold on OTC
40% of the total dollar volume of all shares in U.S. stock market trade here Both IPOs and secondary distributions are sold on OTC - Bid Price: the highest price offered by market maker to purchase a given security - Ask Price: the lowest price at which a market maker is willing to sell a given security |
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Dealer Markets - Nasdaq
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- Largest dealer market
- Lists large companies (Microsoft, Intel, Dell, eBay) and smaller companies |
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Dealer Markets - Over-the-counter (OTC) Bulletin Board
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- Lists smaller companies that cannot or don’t wish to be listed on Nasdaq
- Companies are regulated by SEC |
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Dealer Markets - Over-the-counter (OTC) Pink Sheets
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- Lists smaller companies that are not regulated by SEC
- Liquidity is minimal or almost non-existent - Very risky; many nearly worthless stocks |
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Alternative Trading Systems
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- Third Market
Large institutional investors go through market makers that are not members of a securities exchange Institutional investors (mutual funds, life insurance companies, pension funds) receive reduced trading costs due to large size of transactions - Fourth Market Large institutional investors deal directly with each other to bypass market makers Electronic Communications Networks (ECNs) allow direct trading ECNs most effective for high-volume, actively traded securities |
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General Market Conditions
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- Bull Market
Favorable markets Rising prices Investor/consumer optimism Economic growth and recovery Government stimulus - Bear Market Unfavorable markets Falling prices Investor/consumer pessimism Economic slowdown Government restraint |
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Globalization of Securities Markets
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- Diversification: the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risks
- Use of International Securities Improves Diversification - International Investment Performance - Indirect Ways to Invest in Foreign Securities - Direct Ways to Invest in Foreign Securities |
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Risks of International Investing
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- Usual Investment Risks Still Apply
- Government Policies Risks - Currency Exchange Rate Risks |
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Trading Hours of Securities Markets
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- Regular Trading Session for U.S. Exchanges and Nasdaq
9:30 A.M. to 4:00 P.M. Eastern time - Extended-Hours Electronic-Trading Sessions NYSE: 4:15 to 5:00 P.M. Eastern time Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time Regional exchanges also have after-hours trading sessions Orders only filled if matched with identical opposing orders |
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Regulation of Securities Markets
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- Insider Trading
Use of nonpublic information about a company to make profitable securities transactions - Blue Sky Laws Laws imposed by individual states to regulate sellers of securities Intended to prevent investors from being sold nothing but “blue sky” - Securities Act of 1933 Required full disclosure of information by companies - Securities Act of 1934 Established SEC as government regulatory body - Maloney Act of 1938 Allowed self-regulation of securities industry through trade associations such as the National Association of Securities Dealers (NASD) - Investment Company Act of 1940 Created & regulated mutual funds - Investment Advisors Act of 1940 Required investment advisers to make full disclosure about their backgrounds and their investments, as well as register with the SEC - Securities Acts Amendments of 1975 Abolished fixed-commissions and established an electronic communications network to make stock pricing more competitive - Insider Trading and Fraud Act of 1988 Prohibited insider trading on nonpublic information - Sarbanes-Oxley Act of 2002 Tightened accounting and audit guidelines to reduce corporate fraud |
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Basic Types of Securities Transactions - Long Purchase
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- Investor buys and holds securities
- “Buy low and sell high” - Make money when prices go up |
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Basic Types of Securities Transactions - Margin Trading
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- Uses borrowed funds to purchase securities
- Currently owned securities used as collateral for margin loan from broker - Margin requirements set by Federal Reserve Board Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement, investor puts up $2,222.50 and broker will lend remaining $2,222.50 - Can be used for common stocks, preferred stocks, bonds, mutual funds, options, warrants and futures |
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Margin Trading - Advantages and Disadvantages
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- Advantages
*Allows use of financial leverage *Magnifies profits - Disadvantages *Magnifies losses *Interest expense on margin loan *Margin calls |
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Basic Margin Formula
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Margin = (Value of Security - Debit balance)/Value of Securty
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Basic Types of Securities Transactions - Short Selling
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- Investor sells securities they don’t own
- Investor borrows securities from broker - Broker lends securities owned by other investors that are held in “street name” - “Sell high and buy low” - Investors make money when stock prices go down |
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Short Selling - Advantages and Disadvantages
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- Advantages
*Chance to profit when stock price declines - Disadvantages *Limited return opportunities: stock price cannot go below $0.00 *Unlimited risks: stock price can go up anunlimited amount *If stock price goes up, short seller still needs to buy shares to pay back the “borrowed” shares to the broker *Short sellers may not earn dividends |