Chapter 2

  1. What are Securities Markets?
    • Forums that allow suppliers and demanders of securities to make financial transactions.
    • Goal is to permit transactions to be made quickly and at a fair price.
  2. What are Money Markets?
    • S/T debt securities. 
    • Investors use Money Markets for s/t borrowing and lending.
  3. What are Capital Markets?
    • L/T debt securities.
    • e.g. stocks, bonds
    • Either Primary or Secondary
  4. What are Primary Markets?
    • Markets in which new issues of securities are sold to investors.
    • In this market, issuer of equity/debt receives the proceedds from the sales.
    • Also provide forum for the sale of additional stock, called seasoned equity issues, by already Public Companies.
  5. 3 Choices to sell in Primary Markets:
    • 1.Public Offering: where firms offers their securities for sale to public investors.
    • 2.Rights Offering: where firms offers shares to existing stockholders, on pro rata basis.
    • 3.Private Placement: where the firm sells securites directly without SEC registration to select groups of private investors.e.g. insurance companies, investment management funds, pension funds.
  6. What is a Prospectus?
    Describes key aspects of the securites to be issued in IPO, the issuer's management, and the issuer's financial position.
  7. What is a Investor Banker?
    • Financial intermediary that specializes in assisting companies to issue new securities and advising firms with regard to major financial transactions.
    • Main activity: Underwriting - involves purchasing the securities from the issuing firm at an agreed-on price and bearing the risk of reselling them to the public.
  8. What is a Underwriting Syndicate?
    • Shares financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public.
    • Forms in cases of large security issues.
    • Consists of numerous investment banks.
  9. What is a Secondary Market?
    • aka Aftermarket.
    • Market in which securities are traded after they have been issued.
    • Do not involve the corporation that issued the securities.
    • Permits investor to sell their holdings to another investor.
  10. What are Broker Markets?
    • Consists of National and Regional "securities exchanges".
    • e.g. NYSE, NYSE Amex
    • When a trade occurs, the 2 sides of the transaction are brought together, the seller directly sells their shares to the buyer with the help of a broker.
  11. What is a Designated Market Maker and what do they do?
    • The DMM is an exchange member who specializes in making transactions in one or more stocks.
    • They manage the auction process.
    • The DMM buys or sells to provide a continuous, fair, and orderly market in those securities assigned to them.
  12. What are Dealer Markets?
    • Has no central trading floors.
    • Made up of market makers who are linked together via telecommunications networks.
    • Each market maker is a securities dealer who makes a market in oen or more securities by offering to buy or sell them at stated bid/ask prices.
  13. What are Bid/Ask Prices?
    • Bid: Price an investor receives when selling a security.
    • Ask: Price an investory pays when buying a security..
  14. What is a Bull Market?
    Markets normally associated with rising prices, investor optimism, economic recovery, government stimulus
  15. What is a Bear Market?
    Markets Normally associated with falling prices, investor pessimism, economic slowdown, government restraint.
  16. What is a Long Purchase?
    • Transaction in which investors buy securites in the hope that they will increase in value and can be sold at a later date for profit.
    • Buy Low Sell High.
  17. What is Margin Trading?
    • Refers to amount of security that the investory must supply with their own funds.
    • e.g. 75% Margin means investor must supply 75% of the balance.
  18. What is Financial Leverage?
    The use of debt financing to magnify investment returns.
  19. What is a Margin Loan?
    • Official vehicle through which the borrowed funds are made available in a margin transaction.
    • All loans are made at a stated interest rate.
    • Usually 1-3% above the Prime Rate.
  20. What is the Initial Margin?
    • Minimum amount of equity that must be provided by the investor at the time of purchase.
    • Prevents overtrading and excessive speculation.
  21. What is Maintenance Margin?
    • Aboslute minimum amount of margin that an investor must maintain i nthe margin account at all times.
    • When an insufficient amount of maintenance margin exists, investor will receive a Margin Call- gives investor short period of time to bring the equity up above the maintenance margin. If it doesn't happen, the broker is authorized to sell enough of the investor's margined holdings to bring the equity in the account up to this standard.
  22. Basic Margin Formula:
    • Margin = (Value of Securities - Debit Balance)/Value of Securities
    • Debit Balance - Amount Borrowed in Margin Loan
  23. Return On Invested Capital(ROIC):
    =(Total Current Income Received - Total Interest Paid on Maring Loan + Market Value of Securites at Sale - Market Value of Securities at Purchase)/Amount of Equity at Purchase
  24. What is Short Selling?
    • When an investor purchases a stock expecting the value to fall.
    • Start when an investor borrows securities from a broker and sells those securities in the marketplace.
    • When price of issue has declined, the short seller buys back the securities and then returns them to the lender.
    • Buying Low Selling High.
    • Start Sale with Sale and End with Purchase.
Card Set
Chapter 2
Test Review