Ch 5: Stock Market

Question 1

The primary market is …

Answer 1

the market where firms issue new securities to finance their business. Stocks can be offered in several ways

Question 2

IPO:

Answer 2

Initial public offering (IPO) occurs when a company sells its equity to the public for the first time

Question 3

Seasoned new issues

Answer 3

are offered by firms that already have shares issued to the public

Question 4

Private placement is …

Answer 4

involves selling shares directly to investors by the company.

Question 5

Venture capital firms…

Answer 5

obtain funds from investors (individuals, pension funds , insurance firms or corporations) and invest in new ideas of entrepreneurs (with high failure rate). Successful startup firms offer IPO on a stock exchange after investments from venture capital firms.

Question 6

The secondary market

Answer 6

is the market where investors trade previously issued securities. Examples of secondary markets include the NYSE, NASDAQ and TMX

Question 7

IPO Process:

Answer 7

1. The company appoints an investment banking firm
2. The company prepares a preliminary prospectus
3. The Investment banker circulates the preliminary prospectus
4. Upon obtaining SEC approval, the company finalizes the prospectus

Question 8

investment banking firm XXX for an IPO

Answer 8

acts as the lead manager. The investment banker designs the stock issue such as size, timing and price.

They form a syndicate to spread risk, and arranges underwriting with bought deal (guaranteed purchase at fixed price) or best effort (issuer assumes risk of unsold stocks).

Question 9

List requirements for NYSE

Answer 9

most restrictive listing requirements:
min $100 million market cap,

$2 million dollar pre-tax earnings in previous two years and

min 1 million shares held by the public.

Question 10

List requirements for TMX (Toronto Stock Exchange )

Answer 10

) has different listing requirements for mining, energy, medical, industrial and technology stocks.

Question 11

When may stocks be de-listed from a market?

Answer 11

Stocks may be delisted for failing to meet criteria such as total market value

Question 12

A Broker is …

Answer 12

an agent for his clients to buy or sell stocks and earns a commission for his service.

Question 13

A dealer …

Answer 13

acts as principle to trade for his own (or company) account by providing stock quotations and buying or selling stocks for his own inventory

Question 14

1. Bid price

2. Ask Price

Answer 14

1. the price dealers are willing to buy from investors

2. the price dealers are willing to sell to investors

Question 15

1. Transaction Price:

2. Bid - Ask Spread:

Answer 15

may differ from the bid or the ask

is the difference between the bid price and the ask price

Question 16

1. A market order

2. A limit order

Answer 16

1. order for immediate execution at the current market price

2. an order to buy or sell a stock at the specified price or better

Question 17

1. A stop order

2. A stop-limit order

Answer 17

1. an order to buy or sell a stock when the stock pricesurpasses atrigger price, at which the stop order is converted into a market order and executed immediately
2. an order to buy or sell a stock when its pricesurpasses atrigger price, at which the stop order is converted into a limit order.

Question 18

National stock exchanges vs. Regional Exchanges

Answer 18

National: Includes (NYSE), American Stock Exchange (NYSE Amex) and Nasdaq Stock Market

Regional: Chicago, Cincinnati, Philadelphia and Boston

Question 19

Name 4 features of an organized Exchange

Answer 19

1. Trading is done in a physical location
2. Securities are bought and sold on the exchange trading floor or by electronic trading
3. Brokers act as agents for buyers and sellers
4. Consolidated tape allows brokers to see prices of transactions on other exchanges. Composite price data increases market efficiency and keeps prices competitive

Question 20

Designated Market Makers are

Answer 20

They provide competitive price execution, quoting, and liquidity to NYSE stocks.

With the development of electronic trading technology, the importance of DMMs has decreased significantly over time.

DMMs must have a minimum capital of $500,000 and capacity to buy 5,000 shares of assigned stock.

Question 21

Electronic Communications Networks

Answer 21

ECNs are websites that allow investors to trade directly with one another by matching buy and sell orders at specified prices for automatic execution - Can Bypass brokers

Question 22

Third and Fourth Market

Answer 22

The third market refers to the market for off-exchange trading of exchange-listed securities

The fourth market refers to the market where investors trade directly with one another for exchange-listed securities

Question 23

Which of the following will usually be listed in a propectus?

A. Names of the underwriters
B. Name of the issuer
C. Offering price
D. Value of the issue

Answer 23

All of the above

Question 24

The regulation stating that a short sale can only be executed if the last price change moved the market price of the security higher is called the ____ rule.

Answer 24

Uptick

Question 25

With a market order:

Answer 25

the broker tries to obtain the best possible price at the time the order is executed.

Question 26

______ orders are often placed in conjunction with short sales in order to limit potential losses.

Answer 26

Stop-buy