Chapter 2 Lecture Notes

Question 1

What has led to increased competition throughout the world?

Answer 1

Technological advances in computers and telecommunications, along with the globalization of banking in commerce

Question 2

How has technology transformed financial markets?

Answer 2

• computer algorithms to buy and sell securities
• crowdfunding
• robo-advisors
• using technology for payment (Bitcoin, PayPal, etc.)

Question 3

How do local economies be disrupted?

Answer 3

Large amounts of capital move quickly around the world in response to changes in interest and exchange rates

Question 4

How can derivatives be used?

Answer 4

To reduce risks or for speculation which increases risk

Question 5

Direct Transfers

Answer 5

Businesses sell securities (stocks, bonds)

Savers give dollars

Question 6

Indirect Transfers through Investment Bankers

Answer 6

Businesses sell securities, Investment Banking Houses sell securities to savers
Savers give dollars to Investment Banking Houses give dollars to businesses

Question 7

Indirect Transfers through a Financial Intermediary

Answer 7

Businesses sell business securities, Financial Intermediary, sell intermediary’s securities to savers
Savers give dollars to Financial Intermediary, give dollars businesses

Question 8

Examples of investment banking houses

Answer 8

JPMorgan Chase, Goldman Sachs, BofA Securities, Morgan Stanley, Citigroup, Credit Suisse, Barclays Investment Bank, Deutsche Bank, UBS

Question 9

Financial Intermediaries

Answer 9

1. Literally create new products
2. Investors diversify while gaining the benefits of economy of scale
3. Innovative combinations of products (life insurance and savings together)

Question 10

When did the tech bubble burst?

Answer 10

March of 2000

Question 11

Glass-Steagall Act of 1933

Answer 11

Commercial banks used to be different from investment banks

(repealed in 1999) under Reagan

Question 12

SPACS

Answer 12

Special Purpose Acquisition Companies
For private equity companies
Put out IPO on the market, SEC gives 2 years to get capital invested
BOB PISANI THINKS THIS IS STUPID

Question 13

Hedge Funds

Answer 13

less regulated, large minimum investments, large fees, higher risk level, for the VERY VERY WEALTHY

Question 14

ETFs

Answer 14

SPY
DIA
QQQ

Question 15

New York Stock Exchange Origin

Answer 15

1792
24 brokers-NY Stock Exchange Board
Buttonwood Agreement (but actually a Sycamore tree)

Question 16

NYSE Architecture

Answer 16

George Post
96’ x 50’ window
30’ x 30’ skylight inside
one of the first buildings to have air conditioning

Question 17

2006 NYSE

Answer 17

Had to computerize, went public
Let go of traders
Round columns with computers

Question 18

What causes spikes in the market?

Answer 18

Large orders

Question 19

2007 NYSE

Answer 19

NYSE Euronext

Question 20

2008 NYSE

Answer 20

Bought AMEX

Question 21

2009 NYSE

Answer 21

Integrated AMEX

Question 22

2013 NYSE

Answer 22

ICE bought NYSE Euronext

Question 23

2014 NYSE

Answer 23

Spun off Euronext

Question 24

What is another term for AMEX?

Answer 24

“curb exchange”

Question 25

Regional exchanges

Answer 25

List stocks in their geographical areas

Question 26

NASD

Answer 26

National Association of Securities Dealers | brokers and dealers are members

Question 27

NASDAQ

Answer 27

A computer network links the dealers and brokers | National Association of Securities Dealers Automated Quotation

Question 28

What is the dealer's profit?

Answer 28

The bid-ask spread

Question 29

What market has a higher dollar volume?

Answer 29

NYSE

Question 30

What market has a higher share volume?

Answer 30

NASDAQ

Question 31

When did NASDAQ and AMEX merged?

Answer 31

1998, later split in 2005

Question 32

What market is market weighted and which one is not?

Answer 32

S&P 500 Index and NASDAQ Composite Index are market weighted | Dow Jones is not

Question 33

Market Weighted

Answer 33

Big companies are more of the index than the little ones

Question 34

IPO

Answer 34

Initial Public Offering on the primary market by a privately held firm

Question 35

Dutch Auction

Answer 35

A public auction where the stock price is set at the highest price bid that would manage to sell ALL of the shares to be sold I the offering; all bids at or above that price are executed

Question 36

Who has used a dutch auction?

Answer 36

Google in 2004 | Federal government to sell treasury bills, note, and bonds

Question 37

Where are additional new shares sold?

Answer 37

Primary market

Question 38

Where are outstanding shares traded?

Answer 38

Secondary market

Question 39

Efficient Markets Hypothesis

Answer 39

1. stocks are always in equilibrium | 2. it is impossible for an investor to consistently beat the market

Question 40

What is an efficient market?

Answer 40

Market Price = Intrinsic Value