Chapter 3

Question 1

Primary market

Answer 1

A market in which issues of securities are offered to the public.

Question 2

Secondary market

Answer 2

Already existing securities are bought and sold on the exchange or in the OTC market.

Question 3

Private Placement

Answer 3

Bonds sold directly to a limited number of institutional investors. Similar to public offering.

Question 4

Public offering

Answer 4

Bonds sold in the primary market to the general public. Similar to private placement.

Question 5

Underwriting by investment bankers

Answer 5

Underwriters (investment bankers) purchase securities from the issuing company and resell them. Usually a syndicate of investment bankers is organized behind a lead firm.

Question 6

Investment dealers

Answer 6

Person or firm in the business of buying and selling securities for their own account, through a broker or otherwise. A dealer is defined by the fact that it acts as principal in trading for its own account, as opposed to a broker, which acts as an agent in executing orders on behalf of its clients. Public offerings of both stocks and bonds in Canada are typically marketed via an underwriting by investment dealers (investment bankers).

Question 7

Underwriting syndicate

Answer 7

A group of other investment dealers that a lead firm forms in order to share the responsibility for a stock issue.

Question 8

Prospectus

Answer 8

A final and approved registration statement including the price at which a security issue is offered.

Question 9

Initial public offering (IPO)

Answer 9

Stock issued to the public for the first time by a formerly privately owned company.

Question 10

Direct search market

Answer 10

A market in which buyers and sellers seek each other directly and transact directly.

Question 11

Brokered market

Answer 11

A market where an intermediary (a broker) offers search services to buyers and sellers.

Question 12

Block transactions

Answer 12

Large transactions in which at least 10,000 shares of stock are bought or sold. Brokers or block houses often search directly for other large traders rather than bringing the trade to the stock exchange.

Question 13

Dealer markets

Answer 13

Markets where traders specializing in particular commodities buy and sell assets for their own accounts. The over the counter (OTC) market is an example.

Question 14

Auction market

Answer 14

A market where all traders in an asset meet at one place to buy or sell. The TSX is an example.

Question 15

Bid price

Answer 15

The price at which a dealer is willing to purchase a security.

Question 16

Ask price

Answer 16

The price at which a dealer will sell a security.

Question 17

Stop loss orders

Answer 17

Conditional sell orders to be executed if the price of the stock fall below a stipulated level.

Question 18

Over the counter (OTC) markets

Answer 18

Informal networks of brokers and dealers who negotiate sales of securities.

Question 19

Nasdaq Stock Market

Answer 19

The automated quotation system for the OTC market, showing current bid-asked prices for thousands of stocks.

Question 20

Electronic communication networks (ECNs)

Answer 20

Direct links between traders that avoid the formal exchanges and dealer markets.

Question 21

Specialist

Answer 21

Traders who make a market in the shares of one or more firms and who maintain a fair and orderly market by dealing personally in the stocks; known as specialists in the United States.

Question 22

Registered traders

Answer 22

Traders who make a market in the shares of one or more firms and who maintain a fair and orderly market by dealing personally in the stock; known as specialists in the US.

Question 23

Desk Traders

Answer 23

Representatives of securities firms who are limited to executing traders on behalf of clients of the firms; they may not trade for their firm’s accounts.

Question 24

Street name

Answer 24

Describes securities held by a broker on behalf of a client but registered in the name of the firm.

Question 25

Stock exchanges

Answer 25

Secondary markets where already issued securities are bought and sold by members.

Question 26

Stock exchanges

Answer 26

Secondary markets where already issued securities are bought and sold by members.

Question 27

Latency

Answer 27

The time it takes a trading system to detect an arbitrage opportunity and to successfully exploit that opportunity. Low latency refers to the rapid execution of a transaction.

Question 28

Block transactions

Answer 28

Large transactions in which at least 10,000 shares of stock are bought or sold. Brokers block houses often search directly for other large traders rather than bringing the trade to the stock exchange.

Question 29

Dark pools

Answer 29

Trading venues or trading systems in which participants can buy or sell large blocks of securities without showing their activities. Buyers and sellers in dark pools are hidden from the public. If dark pool traders are reported, they may be lumped with other traders to obscure information about particular participants. While they preserve anonymity, they also affect market liquidity.

Question 30

Discretionary account

Answer 30

An account of a customer who gives a broker the authority to make buy and sell decisions on the customer's behalf.

Question 31

Bid asked spread

Answer 31

The difference between a dealer's bid price and asked price.

Question 32

Margin

Answer 32

Describes securities purchased with money borrowed from a broker. Current maximum margin is 50 percent.

Question 33

Short sale

Answer 33

The sale of shares not owned by the investor but borrowed through a broker and later repurchased to replace the loan. Profit comes from initial sale at a higher price than the repurchase price.

Question 34

Inside information

Answer 34

Non-public knowledge about a corporation possessed by corporate officers, major owners or other individuals with privileged access to information about a firm.