Chapter 3 (Markets) Flashcards
(18 cards)
What is the primary market, and how does it function?
The primary market is the new issues market, where securities are issued for the first time. It functions to raise capital for issuers, such as companies or governments, by matching surplus funds from investors with investment opportunities.
What is the secondary market, and what role does it play?
The secondary market is where securities that were initially issued in the primary market are bought and sold among investors. It plays a crucial role in providing liquidity, enabling investors to exit their positions and new investors to enter the market.
How are primary and secondary markets connected?
Securities issued in the primary market are traded in the secondary market. The liquidity and price discovery provided by the secondary market help determine the value of new securities issued in the primary market.
What is an IPO, and why is it significant in the primary market?
An IPO, or Initial Public Offering, is when a private company offers shares to the public for the first time. It is significant as it allows companies to raise substantial funds and gain access to public investors.
Who are the key users of the primary market?
Key users include issuers, such as companies and governments, and buyers, including institutional investors and individual investors.
How do institutional investors participate in the primary market?
Institutional investors allocate capital to newly issued securities based on their investment strategies, often focusing on long-term opportunities.
Who uses the secondary market, and why?
Secondary market users include institutional investors, retail investors, short-term speculators, and algorithmic traders.
How does short-term trading differ between institutional and individual users of the secondary market?
Institutional users engage in portfolio reallocation or strategic trades, while individual users may trade for speculative purposes.
What are the primary motivations for companies using the primary market?
Companies use the primary market to raise funds for business expansion, acquisitions, debt repayment, and supporting long-term growth strategies.
What are the motivations for investors in the primary market?
Investors seek opportunities to invest in high-potential companies, diversify their portfolios, and access securities at the initial offer price.
How does the secondary market benefit investors?
The secondary market provides liquidity, price discovery, and investment flexibility.
Why is liquidity important in the secondary market?
Liquidity allows investors to quickly buy or sell securities without causing significant price changes.
How does high-frequency trading (HFT) contribute to secondary markets?
HFT adds liquidity by increasing the volume of trades and narrowing bid-ask spreads.
What is the role of governing authorities in primary markets?
Governing authorities regulate the issuance of new securities by setting listing requirements and ensuring transparency.
What responsibilities do governing authorities have in secondary markets?
Governing authorities monitor trading practices, regulate exchanges, and may suspend trading of securities if needed.
How do regulatory structures differ between countries?
While all markets have similar structures, the specific authorities and rules differ by country.
What obligations do companies have after being listed?
Listed companies must file regular financial reports, disclose material information, and comply with ongoing governance requirements.
How does regulatory oversight protect investors in both markets?
Regulators ensure that investors have access to accurate information and are protected from fraud or unfair practices.
