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Flashcards in Financial Markets and Securities Deck (66)
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What are financial markets?

They are not particular places; instead, they are the totality of supply and demand for securities. They facilitate the creation and transfer of financial assets and obligations by bringing together entities who have funds to invest and entities who have financing needs.


List some basic types of instruments for securities.

Stocks, corporate bonds, mortgages, consumer loans, leases, commercial paper, certificate of deposit, governmental securities and derivatives of many kinds.


What are money markets?

Debt securities with maturities of less than 1 year are traded (short-term and marketable; low default risk) in money markets. These are dealer-driven markets because most transactions involve dealers who buy and sell instruments at their own risk.


Where do money markets exist?

London, New York and Tokyo.


List some basic money market securities.

Government treasury bills, notes and bonds
Federal agency securities
Short term tax-exempt securities
Commercial paper
Certificate of deposit; Eurodollar CDs
Repurchase agreements
Bankers' acceptance


List the difference between a dealer and an agent.

A dealer is a principal in most transactions; an agent is a stockbroker.


What are capital markets?

Long-term debt and securities are traded in capital markets; i.e. NYSE.


What are primary markets?

The markets in which corporations and government units raise new capital by making INITIAL offerings of their securities. The issuers receives proceeds of sale in a primary market.


What are secondary markets?

The markets that provide trading of previously issued securities among investors.


List examples of secondary markets.

Auction markets and dealer markets.


What are auction markets?

In auction markets, share prices are communicated immediately to the public. Like NYSE, American Stock Exchange and regional exchanges conduct trading at particular physical sites.


How does a company trade its securities on an exchange?

A company must apply for listing and meet certain requirements such as amount and value of shares outstanding, number of shareholders, earning power and tangible assets.


What are specialists in exchange trading?

Firms who match buy and sell orders and communicate the orders to brokerages with seats on the exchange. They are obliged to buy and sell particular stocks. They maintain an inventory of stocks and set bids and asked prices.


What is the profit margin of a specialist?

It is the spread, which is the excess of the asked over the bid price. Asked prices are the prices at which specialists will buy or sell to keep inventory in balance.


Where are derivates traded at?

Stock exchanges and commodities markets.


What are commodity futures?

Agreements to buy or sell raw material (oil, livestock, metals, grains, fibers, etc.) at a specific price on a specific date in the future.


What are financial futures?

Agreements to buy or sell financial instruments at a specific price on a specific date in the future.


True or false. Commodity and financial futures are both traded on commodity exchanges.

Yes. Both futures are traded on commodity exchanges.


What is the OTC (over-the-counter) market?

OTC market is a dealer market. It conducts transactions in securities not traded on the stock exchanges. Brokers and dealers are trading throughout the country by telecommunicating.


List some transactions that are handled on OTC.

Bonds of US companies
Bonds of federal, state and local governments
Open-end investment company shares of mutual funds
Most secondary stock distributions (whether or not listed on an exchange)


Who is the governing authority of the OTC market?

National Association of Securities Dealers (NASD). Its computerized trading system is the NASD Automated Quotation (NASDAQ) system.


Which market has trading in greater dollar volume?

The exchanges have greater dollar volume in trading because they list the largest companies although majority of stocks are traded on OTC.


Why are bonds of corporations trading primarily on OTC?

Trading is done by large institutional investors (i.e. pension funds, mutual funds and life insurance companies). Very large amounts are exchanged among a few investors, so dealers in the bond markets can feasibly arrange these transactions.


What are financial intermediaries?

They are specialized firms that help create and exchange the instruments of financial markets. They increase efficiency through better allocation of financial resources.


How do financial intermediaries work?

They obtains funds from savers, issues its own securities and uses the money to purchase an enterprise's securities. Thus, they create new forms of capital.


List examples of financial intermediaries.

Commercial banks
Life and casualty insurance companies
Private, state and local pension funds
Nonbank thrift institutions (i.e. credit unions and saving banks)
Mutual funds
Money market funds
Finance companies
Investment banks


What is insider trading?

Trading of securities while possessing nonpublic information about the securities. This type of trading is illegal because it undermines investor confidence in the integrity and fairness of the financial markets.


What is Efficient Markets Hypothesis (EMH)?

1. It states that current stock prices immediately and fully reflect all relevant information. So the market is continuously adjusting to new information and acting to correct pricing errors. Prices are always in equilibrium.
2. It states that it's impossible to obtain abnormal returns consistently with either fundamental or technical analysis.


What is fundamental analysis?

The evaluation of a security's future price movement based on sales, internal developments, industry trends, the general economy and expected changes in each factor.


What is technical analysis?

The evaluation of a security's future price based on the sales price and number of shares traded in a series of recent transactions.