Chapter 1 Flashcards
(30 cards)
Examples of money market instruments?
Treasury bills, certificate deposit, commercial paper, called CASH because of their liquidity and safety.
Examples of government fixed income securities?
Federal bond, provincial bond.
Examples of corporate fixed income securities?
Corporate bond, mortgage backed securities and preferred stock.
What are common stocks classification?
Size(market capitalization) , style and sector.
How are firms classified based on their size?
Large cap. stocks 10 bln and up
Medium cap stocks between 2 bln and 10bln
Small cap stocks less than 2 bln.
How are firms classified based on their style?
Growth companies –> Tech. companies
Value companies –> Like Mcdonalds and Pepsi or some major banks
Cyclical companies –> (sensitive to business cycle) auto manufacturing, home building…
How are firms classified based on their sector?
10 sectors (consumer, health, technology, financials, utilities…)
- ->Healthcare and technological tend to be the fastest growing
- ->Consumer, financials and utilities tend to be more stable with moderate growth
- ->The other sectors tend to be cyclical.
What is the primary market?
Its where securities are created, for example, IPO, Private placement…
What is the secondary market?
The financial market in which previously issued financial instruments such as stock, bonds, and options are bought and sold.
Characteristics of the first market?
Organized exchange, auction, large firms, listing requirements. For example the NYSE or TSX.
Bleu chips
Old and elite firms (found in first market of the secondary market).
Round lot
=100 shares
Odd lot
More than 100 shares.
Duties of a specialist
1 specialist per stock.
Record all the bid and ask and come up with the spread (bid-ask).
Act as market maker (dealer) for a given stock
Act as broker
Purpose is to maintain stability and continuity in the market.
Characteristics of the second market?
Dealers purchase assets for their own accounts, and sell them for a profit from their inventory. Example: Nasdaq (computer linked network).
They trade second tier stocks, emerging stocks(high potential with high risk).
Differences of the first market with the second market?
No central location, negotiated market, dealers market (no specialist), dealer can have more than 1 stock to trade.
Full service broker
Execution plus advice and research.
Discount broker
Takes spread: cost of trading with dealer.
Bid: price at which dealer will buy from you
Ask: price at which dealer will sell to you
3rd market
Stocks traded on the first market and on the second market.
4th market
Trading directly without brokers
Stock market indexes
Measure the return of a basket of securities.
Why are indexes important?
- Measure general performance of the economy
- Bench mark for portfolio managers
- Assess the direction of the market (speculation).
- Used to estimate beta, σ
How to construct an index?
Price weighted average of 30 blue chip stocks out of more than 3000 stocks.(sensitive to higher price stocks)
Market order
Buy/sell at the best current price.
Market buy, buy at the lowest ask price.
Market sell, sell at the highest bid price.
