Flash Cards #2

Flash Cards #2 - The Primary market is the market where...

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The Primary market is the market where investors purchase newly issued securities Initial public offering (IPO) : An initial public offer occurs when a company offers stock for sale to the public for the first time Seasoned equity offering (SEO): If a company already has public shares, an SEO occurs when a company raises more equity An IPO (and an SEO) involves several steps Company appoints investment banking firm to arrange financing, Investment banker designs the stock issue and arranges for fixed commitment or best effort underwriting, Company prepares a prospectus (usually with outside help) and submits it to the Securities and Exchange Commission (SEC) for approval. Investment banker circulates preliminary prospectus (red herring), Upon obtaining SEC approval, company finalizes prospectus, Underwriters place announcements (tombstones) in newspapers and begin selling shares The Secondary market is the market where investors trade previously issued securities. An investor can trade: Directly with other investors, Indirectly through a broker who arranges transactions for others, Directly with a dealer who buys and sells securities from inventory Dealer A trader who buys and sells securities from inventory. A dealer maintains an inventory and stands ready to buy and sell at any time. Broker An intermediary who arranges security transactions among investors. A broker brings buyers and sellers together but does not maintain an inventory The bid price The price dealers pay investors. The price investors receive from dealers The ask price : The price dealers receive from investors. The price investors pay dealers Spread The difference between the bid and ask prices is called the bid-ask spread specialists —an exclusive dealer, or intermediary, for a set of securities. They posted bid and ask prices for securities assigned to them. They were obligated to make and maintain a fair, orderly market , They stood ready to buy at bid prices and to sell at ask prices when there is a temporary disparity between the flow of buy and sell orders for a security. They also acted as brokers In 2009, aiming to stay competitive, the NYSE replaced the role of specialists with two classes of market makers : designated market makers (DMMs) and supplemental liquidity providers (SLPs). What were specialists are now the DMMs The DMMs are assigned a set of securities and are obligated to maintain a fair and orderly market in these stocks A newly created class of market maker is called the supplemental liquidity provider (SLP) SLPs can trade the same stocks as the DMMs SLPs can trade only from offices outside the exchange. DMMs are located on the floor of the exchange The largest number of NYSE members are registered as commission brokers . Commission brokers execute customer orders to buy and sell stocks. When commission brokers are too busy , they may delegate some orders to floor brokers, or two- dollar brokers, for execution A small number of NYSE members are floor traders
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Flash Cards #2 - The Primary market is the market where...

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