Trading Securities Flashcards
Purpose of secondary markets, transactions on an exchange (117 cards)
1
Q
What is the primary purpose of the Securities Exchange Act of 1934?
A
To regulate the secondary trading of securities in the United States.
2
Q
True or False: The Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC).
A
True.
3
Q
Fill in the blank: The secondary market allows investors to buy and sell __________ after the initial public offering.
A
securities.
4
Q
What is one key function of the secondary market?
A
To provide liquidity to investors.
5
Q
Multiple Choice: Which of the following is NOT a type of transaction that occurs on an exchange? A) Stock trades B) Bond trades C) Real estate purchases D) Derivative trades
A
C) Real estate purchases.
6
Q
What is the role of the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934?
A
To enforce securities laws and protect investors.
7
Q
True or False: The Securities Exchange Act of 1934 applies only to publicly traded companies.
A
True.
8
Q
Short Answer: Name one requirement that companies must meet to be listed on an exchange.
A
They must file regular financial reports with the SEC.
9
Q
Fill in the blank: The secondary market is essential for __________, allowing investors to sell their securities.
A
market efficiency.
10
Q
What is the difference between the primary market and the secondary market?
A
The primary market involves the initial sale of securities, while the secondary market involves the trading of existing securities.
11
Q
- maintains an inventory of assigned securities and facilitates trades
- will buy into and sell from inventory to keep markets balanced
A
designated market maker (DMM)
12
Q
Securities that trade OTC are called or
A
non-listed or unlisted securities
13
Q
True or False: The OTC is a decentralized market. There is no trading floor.
A
True
14
Q
What is the primary role of broker-dealers in the over-the-counter (OTC) market?
A
Broker-dealers facilitate the buying and selling of securities by acting as intermediaries between buyers and sellers.
15
Q
True or False: Transactions in the OTC market are conducted through a centralized exchange.
A
False
16
Q
Fill in the blank: Broker-dealers in the OTC market often provide ________ to clients to assist in making informed trading decisions.
A
research and analysis
17
Q
Which of the following is NOT a function of broker-dealers in the OTC market? A) Market making B) Underwriting C) Conducting IPOs D) Providing liquidity
A
C) Conducting IPOs
18
Q
What is one key difference between the OTC market and traditional stock exchanges?
A
The OTC market is decentralized and does not have a physical trading floor.
19
Q
Trades in the OTC are between specialized broker-dealers called
A
market makers
20
Q
A broker-dealer that assists the customer is acting as _ , representing the customer in the trade. They will charge a commission for this service.
A
an agent
21
Q
When an investor buys or sells an OTC security, they are buying and selling from a
A
market maker
22
Q
markup or markdown
A
different terms for ‘the spread’; market makers profit from the difference between what they pay to buy the security and what they sell it for
23
Q
True or False) A broker-dealer may not act as both the agent and a market maker on the same trade.
A
True
24
Q
What is the Third Market?
A
The Third Market refers to the trading of exchange-listed securities in the over-the-counter (OTC) market.
25
True or False: The Fourth Market involves trading through Electronic Communication Networks (ECNs).
True
26
Fill in the blank: The Third Market is primarily associated with __________ trading.
OTC
27
What is one key feature of the Fourth Market?
It allows for direct trading between institutional investors without the need for brokers.
28
Multiple Choice: Which of the following is a characteristic of the Third Market? A) Trades are executed on an exchange B) It operates outside traditional exchanges C) It is only for retail investors
B) It operates outside traditional exchanges
29
Those that trade in the secondary markets fall into two categories:
investors and facilitators
30
Individual investors on the secondary market
buy and sell securities to accomplish personal financial objectives, whatever they may be.
31
Custodians, trustees, guardians, and executors should be considered to be
**fiduciaries**; a person who manages assets (usually financial) for another person, the beneficiary. A fiduciary has a legal and moral obligation to perform their duties in the best interest of the beneficiary.
32
Investment Advisor (IA)
anyone who:
* (1) gives investment advice;
* (2) provides this advice as a regular part of their business; and,
* (3) does so for compensation must register as an investment adviser under the Investment Advisers Act of 1940 (federal registration) or the Uniform Securities Act (state registration).
33
Agents of IAs must register and pass the
Series 65 exam
34
What is the primary role of facilitators in the secondary market?
Facilitators help improve liquidity and efficiency by matching buyers and sellers.
35
True or False: Facilitators of the secondary market include brokers and dealers.
True
36
Fill in the blank: ________ are entities that provide market participants with access to trading platforms in the secondary market.
Intermediaries
37
Which of the following is NOT a type of facilitator in the secondary market? A) Broker B) Dealer C) Investor D) Market Maker
C) Investor
38
Short Answer: Name one benefit of having facilitators in the secondary market.
They enhance market liquidity.
39
- perform securities transactions for their own accounts or for their customers
- generate revenue through commissions and loads
- some specialize in dealing solely with institutional investors
- most firms service retail customers
- operate under a membership agreement with FINRA
Broker-Dealers (BDs)
40
three types of BD firms
carrying firms, fully disclosed firms, and prime brokers
41
- carry customer accounts, and accepts funds and securities from customers
- typically largest among the three firms
- capability to execute trades, settle transactions, and send statements and confirmations to customers
- must segregate (hold separately) customer funds and securities
carrying firm, or clearing firm
42
* introduces its customers to a clearing firm
* may take orders from customers and pass along to clearing firm for execution
* has capability to execute trades but settlement of trades is done by clearing firm
fully disclosed firm, or introducing BD
43
What is a prime brokerage account?
A prime brokerage account is a bundled package of services provided by a prime broker to hedge funds and other institutional investors, allowing them to execute trades, manage risks, and access capital.
44
True or False: Prime brokers only facilitate stock trading for their clients.
False: Prime brokers provide a range of services including securities lending, trade execution, and risk management, not just stock trading.
45
Fill in the blank: The primary purpose of a prime broker in the secondary market is to __________.
facilitate and streamline the trading process for institutional investors.
46
Which of the following is NOT a service typically offered by prime brokers? A) Margin financing B) Trade execution C) Retail banking
C) Retail banking
47
What role do prime brokers play in managing risk for their clients?
Prime brokers help manage risk by providing tools for portfolio management, risk assessment, and leveraging market insights to inform trading strategies.
48
The transfer and registration of stock certificates, by law, cannot be performed by
a single person or single department operating within the same institution
49
True or False: Issuers are prohibited from using commercial banks and trust companies to perform the transfer and registration of stock certificates.
**False**: There must be a level of separation within the institution for the two functions. Issuers will typically use banks and trust companies to handle separating and registering stock certificates.
50
* maintains a count of the total number of shares of a company that are authorized and outstanding;
* maintains records of ownership;
* manages problems related to lost or stolen certificates;
* responsible for canceling old and issuing new certificates
* DO NOT settle trades
transfer agent
51
- the firm that is always separate from issuer and transfer agent;
- licensed by the state
- provide audit and oversight for transfer agents
registrar
52
- intermediary between buy side and sell side of security transactions
- receives and delivers payments and securities for buyer and selller
- can sometimes be a commericial bank or a corporation
- provides custody services for all traded securities EXCEPT those with restrictions (restricted/legended)
Clearing Agencies and Depositories (clearing corporation)
53
DTCC
Depository Trust and Clearing Corporation (DTCC) is the world's largest securities depository
54
- **clearing agent** for listed options contracts;
- primary objectives are to standardize, guarantee the performance of, and issue options contracts
- help maintain uniformity and liquidity in the market place
Options Clearing Corporation (OCC)
55
- highest amount someone is willing to pay
- the price a seller sees
bid
56
ask (offer)
- the price a buyer pays
- the lowest amount someone is willing to sell a security
57
The bid is always
less than the ask.
58
size
- number of shares currently available
- expressed in round lots (units of 100 shares)
- *size 10 = 1000 shares*
59
* the difference between the bid and ask prices
* A market maker is buying at the bid price, the price a customer is selling at.
* A market maker sells at the ask price, the price a customer is paying to buy.
the spread
60
$0.01 (one cent)
smallest change increment that a bid or ask may be adjusted is
61
inside quote or inside market
highest bid and lowest ask
62
- the most common type of order from a retail customer;
- a customer asking for a trade at the best available price when the order reaches the market
market order
63
What is a limit order?
A limit order is an order to buy or sell a stock at a specific price or better.
64
True or False: A market order guarantees the execution of a trade but not the price.
True
65
Fill in the blank: A __________ order is an order to buy a stock once it reaches a certain price above the current market price.
buy stop
66
Which type of order is used to limit losses by selling a stock once it reaches a certain price?
sell stop order
67
What is the primary difference between a market order and a limit order?
A market order executes immediately at the current market price, while a limit order sets a specific price for execution.
68
when the current market value of the stock moves to or through the trigger price
a stop order becomes a market order
69
True or false: Limit orders guarantee a trade will be executed on behalf of the customer.
False: When a limit order is placed, the customer specifies a price that is acceptable to them. The customer is guaranteed the limit price or better but, they ARE NOT guaranteed a trade.
70
How are market orders filled once activated?
Market orders may be filled at any price. Market orders are usually filled at or near the current market price but, it is not guaranteed. Customers won't know the price until the order is filled.
71
A _ is entered with a trigger price **BELOW** the market price.
sell stop limit order
72
A _ is entered with a trigger price **ABOVE** market value.
buy stop limit order
73
long position means
buy to open, sale to close
74
Selling a security that you don't own
being short or having a short position
75
To open a short position
sell
76
to close a short position
buy back the security (also called covering)
77
An investor borrows shares of stock from a stock lender then, sells those shares, in hopes of buying them back at lower price
short sale
| bearish investors
78
Selling price - Buying price =
Profit
79
- representing the customer in a transaction
- assisting a customer in buying or selling securities
- charges commission
BD acting as a broker
80
BD acting as Dealer (principal, Market Maker)
- selling securities from the firm's inventory to a customer,
- buying a security from a customer for inventory
- profits from the markup (spread)
- party to the trade
81
trade date plus one business day
regular way (T+1)
82
- same day settlement (immediate)
- requires delivery of securities and payment on the same day;
- buyer and seller MUST agree to this settlement before trade takes place
- rare
cash settlement
83
What is the primary requirement for the Good Delivery of Physical Certificates?
Physical certificates must be properly endorsed and accompanied by any necessary documents.
84
True or False: Good Delivery of Book Entry Securities involves the transfer of physical certificates.
False
85
Fill in the blank: A __________ is a document that enables the transfer of ownership of a security by signing over the rights to another party.
stock power
86
Which of the following is NOT a condition for Good Delivery of Physical Certificates? A) Proper endorsement B) Accompanying documents C) Payment of taxes D) No defects in the certificate
C) Payment of taxes
87
What must be verified for Good Delivery of Book Entry Securities?
The securities must be recorded in the appropriate account and free of liens or encumbrances.
88
Good Delivery of Physical Certificates states that when a certificate is delivered it must be:
* endorsed (signed) by all owners whose name appears on the face of the certificate and
* signed exactly as the name appears.
89
If they intend to mail out the certificate, what would a customer sign instead of the physical certificate?
It is common to use a **stock power** when certificates will be mailed. A signed certificate is like an endorsed check.
90
street name
when a security is held in electronic form by a BD on behalf of a customer
91
- securities held in electronic form,
- ownership records are kept in a central agency
- more efficient than managing paper records
book entry securities
92
What is the bid price?
The highest amount someone is currently willing to pay for the security.
## Footnote
The bid represents a buyer's interest in purchasing a stock at a specified price.
93
What does the term 'size' refer to in the context of a bid?
The number of shares that someone is willing to buy at the bid, measured in round lots (each lot is 100 shares).
## Footnote
Size indicates the quantity of shares available for purchase at the bid price.
94
What does the bid represent in a transaction?
It represents someone saying, 'I will buy this stock at this price.'
## Footnote
The bid is crucial for sellers as it determines the price they will receive.
95
What is the ask price?
The lowest amount someone is currently willing to sell the security for.
## Footnote
The ask reflects the seller's minimum price for a stock.
96
What does the size refer to in the context of an ask?
The number of shares that someone is willing to sell at the ask.
## Footnote
Similar to the bid size, this indicates the quantity available at the ask price.
97
What does the ask represent in a transaction?
It represents someone saying, 'I will sell this stock at this price.'
## Footnote
The ask is essential for buyers as it indicates the price they will pay.
98
If an investor wants to sell, to whom are they selling?
They are selling to the bidder.
## Footnote
The bid price is the price a seller receives when they sell their shares.
99
If an investor wants to buy, from whom are they buying?
They are buying from the person making the offer.
## Footnote
The ask price is the price a buyer pays when purchasing shares.
100
What does 'bid' refer to in a stock quote?
The bid is the highest price a buyer is willing to pay for a stock.
101
What does 'ask' refer to in a stock quote?
The ask is the lowest price a seller is willing to accept for a stock.
102
True or False: The bid price is always lower than the ask price.
False
103
Fill in the blank: The difference between the bid and ask prices is known as the ______.
spread
104
What is a common format for displaying a stock quote?
A common format is 'Bid: $X.XX, Ask: $Y.YY'.
105
In a stock quote, if the bid is $50.00 and the ask is $52.00, what is the spread?
$2.00
106
Multiple Choice: Which of the following represents a bid price? A) $100 B) $200 C) $150 D) All of the above
D) All of the above
107
What happens to the bid and ask prices during high trading volume?
They can fluctuate more frequently due to increased buying and selling activity.
108
True or False: The ask price is always fixed and does not change.
False
109
Short Answer: Why is the bid-ask spread important for traders?
It indicates the liquidity of the stock and the cost of trading.
110
In order to eliminate a position, long or short, the investor always takes the _ action from the one that began (opened) the position.
opposite
111
- an instruction to fill the entire order immediatley or cancel the order completely,
- there can be no partial execution
fill or kill (FOK)
112
- allows for partial execution,
- must be immediate
- remaining unexecuted portion is canceled
immediate or cancel (IOC)
113
* must be executed in their entirey or not at all
* may be day orders or GTC
* do not have to be filled immediatley
all or none (AON)
114
How is the spread calculated?
By subtracting the highest bid from the lowest ask
115
Fill in the blank: The spread is computed as the difference between the lowest ask and the highest _______.
bid
## Footnote
This is a fundamental concept in understanding market quotes.
116
Regular way settlement is T+1 for everything except
money market securities
117
* the highest price that a buyer is currently willing to pay for the stock
* the best price that someone can sell the security for at the time of quote
the bid
