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FINA3307 - Trading in markets & securities > Week 1 - The Trading Process > Flashcards

Week 1 - The Trading Process Flashcards

1
Q

What is the basic function of markets?

A

Bring together buyers and sellers

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2
Q

What is the importance of capital allocation?

A
  • Allows access to capital for economic growth
  • Allows for secondary markets
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3
Q

What are secondary markets?

A

Trading between buyers and sellers after an initial offering

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4
Q

What is price discovery?

A

The adjusting of an asset’s price to true value

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5
Q

Are investment decisions and trading decisions the same thing?

A

no

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6
Q

What is an investment decision?

A

The rational to buy or sell an asset

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7
Q

What is a trade decision and the steps?

A

Trade decision:
How to execute a trade

Steps:
1. Gather information about the trade decision
2. Routing of order through market
3. Execution of the trade
4. Confirmation, clearance and settlement

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8
Q

What are the steps of a trade?

A
  1. buyer/sell instructs advisor to buy/sell
  2. operator submits buy/sell order
  3. Trading mechanism matches order and executes the trade
  4. Settlement of funds and shares through clearing house
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9
Q

What is a trading mechanism?

A

Stock exchange

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10
Q

What is a clearing house?

A

Third-party entity that handles the transaction of assets between parties

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11
Q

What is the “buy side”?

A

People or firms that use financial services

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12
Q

What is “sell side”?

A

Those who provide the financial services

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13
Q

What is a utilitarian trader?

What are some examples?

A

Defined:
People that trade for reasons other than profit

Examples:
Investors
Borrowers
Asset exchange

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14
Q

What are profit-motivated traders?

What are some examples?

A

Defined:
People that trade purely for profit

Examples:
Speculators
Arbitragers

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15
Q

What are real assets

A

assets that directly generate cashflows

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16
Q

What are financial assets

A

assets that represent ownership of real assets

17
Q

What is a derivative contract?

A

Contract that derives value from other instruments

18
Q

What details are always specified in an order?

A
  1. item to be traded
  2. Quantity
  3. buy or sell
19
Q

What additional details may be specified in an order?

A

Price
Expiration
Method
timing
market
counter party

20
Q

What is a limit order?

A

Instructions for a broker to trade at best available price without violating limit price conditions

buy does not go above
sell does not go below

If it does not execute => goes in limit order book and provides liquidity

21
Q

What is a market order?

A

Orders that are executed immediately at market price

consumes liquidity

22
Q

What is a stop order?

A

Buy/sell order with contingent orders
- activate when contingency is met
- Almost always at market price
- typically used to close losing conditions

23
Q

What is a Walrasian auction?

A

A theoretical auction where buyers submit demand and suppliers submit supply at every possible price

24
Q

What is an English auction?
Does it allow price discovery?

A

Public oral action that leads to price discovery once high willingness to pay is found

25
Q

What is a first-price Sealed-bid auction?

Does it allow price discovery?

A

All bidders submit prices that are unknown to other bidders

Does not allow price discovery. Introduces “winners curse” as they do not know if they over paid

26
Q

What is a Dutch Auction?

Who famously used this auction?

A

auction where bidders submit demand specifying price and quantity

Seller uses data to derive a “clearing price” that sells the most volume at highest possible price

google IPO

27
Q

What is a continuous double auction?

A

Auction where buyers submit bids and sellers submit offers.

bids/offers are ranked by price and transactions occur when highest bid and lowest offer match

28
Q

What is a periodic auction ?

why are they used?

A

auction where bids and offers are matched in batches

used to overcome high frequency traders

FINA3307 - Trading in markets & securities (11 decks)

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