Podcast
Questions and Answers
Which of the following best describes a primary market?
Which of the following best describes a primary market?
- The trading of existing securities between investors.
- A market where dealers buy and sell from their own accounts.
- A market where trades happen only once a day when the market opens.
- The issuance of new securities to raise capital. (correct)
What does 'price continuity' refer to in the context of market characteristics?
What does 'price continuity' refer to in the context of market characteristics?
- The presence of numerous buy and sell orders at different price points.
- The accuracy and availability of price and volume data.
- The ease with which an asset can be converted into cash.
- The minimal price fluctuations between trades. (correct)
An investor purchases stock on margin with $5,000 using a 50% margin requirement. Afterwards, the stock value drops to $8,000, with a maintenance margin of 25%. What's the margin call price?
An investor purchases stock on margin with $5,000 using a 50% margin requirement. Afterwards, the stock value drops to $8,000, with a maintenance margin of 25%. What's the margin call price?
- $8,000
- $6,000
- This cannot be determined from the information provided (correct)
- $4,000
If an investor shorts a stock with a market value of $10,000 needing $6,000 of their own funds in equity, what is the percentage margin?
If an investor shorts a stock with a market value of $10,000 needing $6,000 of their own funds in equity, what is the percentage margin?
Which order type is most appropriate for guaranteeing an execution price better than or equal to a set target?
Which order type is most appropriate for guaranteeing an execution price better than or equal to a set target?
What is a key advantage of high-frequency trading?
What is a key advantage of high-frequency trading?
What is a key characteristic of a 'call market'?
What is a key characteristic of a 'call market'?
What is the goal of Regulation NMS?
What is the goal of Regulation NMS?
Flashcards
What is a market?
What is a market?
A market where buyers and sellers come together to trade goods or services. Can be physical (like a farmers market), electronic (like Amazon), or abstract (like the stock market).
What makes a market liquid?
What makes a market liquid?
A market where buyers and sellers can easily convert their assets into cash. This means transactions happen quickly and with minimal price changes.
What is the primary market?
What is the primary market?
The price at which new securities are sold for the first time. This includes initial public offerings (IPOs) and bond issues.
What is the secondary market?
What is the secondary market?
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What is an initial margin requirement?
What is an initial margin requirement?
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What is a margin call price?
What is a margin call price?
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What is a limit order?
What is a limit order?
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What are stop-loss and stop-buy orders?
What are stop-loss and stop-buy orders?
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Study Notes
Market Characteristics
- Markets facilitate the exchange of goods/services, being physical, electronic, or abstract.
- Key characteristics include timely information (accurate price/volume data), liquidity & marketability (easy conversion to cash), price continuity (minimal price change between trades), low costs (brokerage/transaction fees), and adequate depth (varied buy/sell orders at different prices).
- Decimal pricing (2001) replaced fractions, decreasing tick size, spreads, and transaction costs.
Market Types
- Primary Market: Where new securities (e.g., IPOs, bonds) are sold for capital.
- Secondary Market: Facilitates the trading of existing securities, providing liquidity.
Margin Requirements
- Initial Margin Requirement: A percentage of the total transaction value required as initial equity. (Equity = Transaction Value × Margin Requirement)
- Equity Position (%): A measure of funds relative to investment value. (Equity Amount / Stock Value × 100)
- Margin Call Price: The price at which the account equity falls below the maintenance margin, requiring additional funds.
- Percentage Margin (Short Sales): Equity / Market Value of Stock Owed × 100; measures the proportion of funding (investor vs. borrowed).
Return Calculations
- Stock Return: ((New Price - Old Price) / Old Price) × 100
- Margin Return: (Equity Gain / Initial Margin) × 100; measures return from borrowed funds.
Securities Types
- Government Bonds: Treasury bills, notes, and bonds.
- Municipal Bonds: Issued by local governments, often involving competitive bids, negotiated sales, or private placements.
- Corporate Bonds: Frequently involve negotiated arrangements.
Market Structures
- Pure Auction Market: Brokers match bids and asks; prices determined by supply/demand.
- Dealer Market: Dealers buy/sell from their own inventory.
- Call Market: Trades occur at a single price at a set time.
- Continuous Market: Trades occur anytime the market is open.
Order Types
- Market Order: Immediate execution at best available price.
- Limit Order: Specifies a price and time validity for execution.
- Stop-Loss Order: Sell order activated if the price drops below a set level.
- Stop-Buy Order: Buy order activated if the price rises above a set level.
Modern Trading Practices
- High-Frequency Trading (HFT): Accounts for ~50% of trading volume; pros: increased liquidity, lower costs. Cons: Volatility, flash crashes.
- Dark Pools: Private trading venues reducing market impact; represent ~25% of trading volume.
- Algorithmic Trading: Automated trading strategies based on rules.
Regulations
- Rule 144A: Simplifies private placements for sophisticated investors.
- Regulation NMS (2007): Facilitated electronic trading; rules for access, order protection, and sub-penny rules.
- Payment-for-Order-Flow (PFOF): Brokers earn revenue from wholesalers instead of commissions.
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