Chapter 3 Flashcards
(46 cards)
How many shareholders can privately held firms have?
2,000
Where do purchases of new issues of stock take place?
In the Primary Market
What are Secondary Markets?
transactions that do not involve the original issue of securities
What is Seasoned Equity Offering?
If the company plans to sell more shares, there will be more shares available in the market
When a company is already trading in a stock market, all the shares in the market are called the ________ _____ of the company’s stock
outstanding shares
What is “Underwriting Syndicate”?
describes the investment banks that participate in the underwriting
Who assumes the full risk that the shares cannot be sold to the public at the stipulated offering price?
The underwriter
What is a Firm-Commitment Underwriting Arrangement?
the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price
What are the first steps when a firms decides to sell securities?
it must first ensure the preliminary registration statement is approved by the SEC
What is Book Building?
the process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO)
The bulk of most IPO’s of equity securities goes to ___________ ________
institutional investors
Initial public offerings (IPOs) are usually _________ relative to the levels at which their ______ _________ after they begin trading in the ________ ______
underpriced, prices stabilize, secondary market
IPOs generally have been ____ ____ ____ investments
poor long-term
IPOs usually provide ____ ____ ______ ______ to investors
very good initial return
What is a good example of Brokered markets?
the primary market where new security issues are offered to the public
Name the types of markets from least to most integrated and organized
direct search markets
brokered markets
dealer markets
continuous auction markets
What is / happens in Dealer Markets?
Dealers focus on different types of assets, buy them to keep in their own inventory, and later sell them for a profit.
They make money from the difference between the price they buy at (bid) and the price they sell at (ask)
What does a Continuous Auction Market require and give one example
requires: the greatest level of trading activity to be cost-effective
example: New York Stock Exchange
What is a Market Order?
an order to buy or sell a security at the current price
Why does the Bid-Ask Spread exist?
because of the need for dealers to cover expenses and make a profit
The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the ______ _____
bid-ask spread
Why do specialist try to maintain a small bid-ask spread?
- if the spread is too big, not a lot of trades will happen, losing commission income
- the exchange requires specialists to maintain price continuity
What does Inside Quotes mean?
refers to the difference between the highest bid price and the lowest ask price in the limit order book
What does the cost of buying and selling stock include?
- broker’s commissions
- dealer’s bid-ask spread
- price concessions that investors may be forced to make
