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31 Cards in this Set

  • Front
  • Back
process of how securities are issued to the public
secondary market
-the aftermarket
-the resale of outstanding securities
-this is what occurs every day on the exchanges and in the OTC market
-provides liquidity to individuals who acquired securities in the primary market
Securities Exchange Act of 1934
-SEC created
-outlines the powers of the SEC to interpret, supervise, & enforce the securities laws
listed exchanges
-stock exchange
-national stock exchanges
-regional stock exchanges
What is a stock exchange?
-private association of brokers
-provides a central meeting place for its member - brokers called the floor
What comprises the national stock exchange?
-New York Stock Exchange (NYSE)
-American Stock Exchange (AMEX)
What comprises the regional stock exchange?
-Philadelphia Exchange
-Chicago Exchange
-Pacific Exchange
-Boston Exchange
-Cincinnati Exchange
listed stock
-stock of a company traded on a securities exchange and for which a listing application & registration statement have been filed with the SEC and the exchange itself
-stocks that are traded on an exchange
individual employed by a member firm that conducts the auction that determines the price of stocks
How is the price of stock determined on the stock exchange?
-price is determined in a free & open auction type of trading
-price depends on the supply & demand relationship of that security at a particular time
over-the-counter market
-handles any transaction that does not take place on the floor of an exchange
-national negotiated market without a central marketplace, without a trading floor, composed of a network of thousands of brokers & dealers who make securities transactions for themselves & their customers
-professional buyers & sellers seek each other out electronically & by telephone to negotiate prices
-largest market in terms of numbers of securities issues traded
In an over-the-counter market, how do buyers & sellers seek each other out to negotiate prices?
Electronically & by telephone
What are the 5 types of securities traded exclusively on the OTC?
-government bonds
-municipal bonds
-mutual funds
-new issues (primary distributions)
-variable annuities
market makers
-an NASD broker/dealer ready to provide continuing bids & offers for a given security in the secondary market
-main player in the OTC
-act as principals in a securities transaction & buy & sell securities for their own account & risk
-do not receive any commission for their services
How do dealers make a profit on a security?
-buy at one price & sell at a higher price making a profit from mark-up on the seucity price
-has a position in a stock when he purchases & holds a security in inventory
-assumes risk that market price of the security he holds may decline in value
NASDAQ system (National Association of Securities Dealers Automated Quotation System)
-NASD regulates trading in the OTC
-an electronic data terminal device furnishing subscribers with instant identification of market-makers & their current quotations, updated continuously
-transactions are reported within 90 seconds of the trade
-utilizes a quotation machine
-scans all of the market maker bids & all of hte market maker asks (offers) & automatically displays the inside market
pink sheets
-used in the 1960's
-contain a listing, alphabetically, of OTC stocks
-underneath each issue is listed the name of one or more market makers, securities firms willing to trade that stock
-lists bid & ask price
-location of relatively inactive stock no on the Nasdaq system
-prices found not firm quotes
-prices are subject quotes or subject market
bid & ask price
approximate price representing what the dealer is asking & bidding for the stock
How does a quotation machine work?
-push a few buttons & instantaneously see the best bid & best offer that exists right now on over 5,000 of the most active OTC stocks
Nasdaq National Market List (NNM securities))
the investor gets virtually the same detailed trading information as on a NYSE listed stock
inside market
-normally the highest bid and the lowest asked prices and is displayed on Level One of Nasdaq
-quote machine display shows market maker & their current bid & ask price
-prices shown are firm quotes
firm quotes
prices at which the market maker is ready to do business with another NASD member firm
-represents a firm bid & an offer at which an OTC dealer has committed itself to buy or sell at least one round lot (100 shares) of a particular security right now
inside of the spread
highest of bid prices (best bid or inside bid) & the lowest of the ask prices (best ask or inside ask) are referred to as the inside market, that is, the bid & ask price which reflects the narrowest spread
Nasdaq Level 1
-available on the representative's desk top
-provides price information only on the highest bid & lowest offer (the inside market)
-no market makers are identified
-since inside quote, may not be used for giving firm quotes
-can only give a subject quote
Nasdaq Level 2
-provides a large CRT with price information & quotation sizes of all participating registered market makers
-sees who's making a market, their firm bid & ask right now, & the size of their market
-can give firm quotes
Nasdaq Level 3
-allows registered market makers to enter bid & ask prices (quotes) & quotation sizes into the Nasdaq system & to report their trades
-this is the level of service maintained by market makers
Nasdaq Intermarket
-OTC transactions in listed stocks
-3rd market
-when a trade of a listed stock occurs in the OTC
Fourth Market
-one institution swapping securities in its portfolio with another large institution
-no broker/dealer is involved
-no representative is involved
-these trades reporte don a system called Instinct
-securities firm
-brokers act on behalf of others as their agent for which they earn a commission
-dealers act for self as a principal for which they charge a markup
-under certain conditions the firm will as a broker; and in others as a dealer
-securities firm can never act as a broker & a dealer in the same transaction
-only a dealer maintains an inventory
What is a dealer maintained inventory?
firm has an inventory in a particular security, i.e., they own it, the firm is prepared to sell those securities to customers from their own invesntory & act in the capacity of a dealer or principal
Why can't a broker/dealer act in both capacities for the same transaction?
Cannot make a commission and a mark up on the same trade