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Chap003 - Chapter 03 Securities Markets CHAPTER 03...

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Chapter 03 - Securities Markets 3-1 CHAPTER 03 SECURITIES MARKETS 1. An IPO is the first time a formerly privately owned company sells stock to the general public. A seasoned issue 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 seller. 3. The primary market is the market for new issues of securities, while the secondary market is the market for already-existing securities. Corporations sell stock in the primary market, while investors purchase stock from other investors in the secondary market. 4. One source of the specialist’s income is frequent trading at the bid and ask prices, with the spread as a trading profit. Since the specialist also takes a position in securities and maintains the ultimate diary of buys and sells, the trader has the ability to profit by trading on information not available to others. 5. When a firm as a willing buyer of securities and wishes to avoid the extensive time and cost associated with preparing a public issue, they may issues shares privately. 6. A stop order is a trade is not to be executed unless stock hits a price limit. The stop-loss is used to limit losses when prices are falling. An order specifying a 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. Block orders are the buying and selling or large quantities of stock, usually by institutional investors. The advent of electronic trading now permits trades to be broken into smaller units, thus avoiding the negative impact on prices usually experience by block trades. 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. 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.
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Chapter 03 - Securities Markets 3-2 10. a. In principle, potential losses are unbounded, growing directly with increases in the price of IBM. b. If the stop-buy order can be filled at $128, the maximum possible loss per share is $8. If the price of IBM shares go above $128, then the stop-buy order would be executed, limiting the losses from the short sale.
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