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Chapter 03 - Securities Markets
CHAPTER 03
SECURITIES MARKETS
1.
An IPO is the first time a formerly privately-owned company sells stock to the
general public. A seasoned equity offering (or seasoned issuance) is the issuance
of stock by a company that has already undergone an IPO.
2.
The effective price paid or received for a stock includes items such as bid-ask
spread, brokerage fees, commissions, and taxes (when applicable). These reduce
the amount received by a seller and increase the cost incurred by a buyer.
3.
The primary market is the market where newly-issued securities are sold, while
the secondary market is the market for trading existing securities. After firms sell
their newly-issued stocks to investors in the primary market, new investors
purchase stocks from existing investors in the secondary market.
4.
The primary source of income for a securities dealer is the bid-ask spread. This is
the difference between the price at which the dealer is willing to purchase a
security and the price at which they are willing to sell the same security.
5.
When a firm is a willing buyer of securities and wishes to avoid the extensive
time and cost associated with preparing a public issue, it may issue shares
privately.
6.
An order that specifies price at which an investor is willing to buy or sell a
security is a limit order, while a market order directs the broker to buy or sell at
whatever price is available in the market.
7.
Many large investors seek anonymity for fear that their intentions will become
known to other investors. Large block trades attract the attention of other traders.
By splitting large transactions into smaller trades, investors are better able to
retain a degree of anonymity.
8.
Underwriters purchase securities from the issuing company and resell them. A
prospectus is a description of the firm and the security it is issuing; it can be
viewed as a marketing tool for the underwriter.
9.
Margin is a type of leverage that allows investors to post only a portion of the
value of the security they purchase. As such, when the price of the security rises
or falls, the gain or loss represents a much higher percentage, relative to the actual
money invested.
10. a. A market order has price uncertainty but not execution uncertainty.
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