Securities Markets Overview
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Questions and Answers

What is a market?

A place where buyers and sellers interact to trade goods or services. It doesn't need to be physical; it can be electronic or abstract.

What are the characteristics of a good market? (Select all that apply)

  • Price Continuity (correct)
  • Convenience
  • Liquidity & Marketability (correct)
  • Timely Information (correct)
  • Low Costs (correct)
  • Transparency
  • Depth (correct)

Decimal pricing replaced fractions in 2001.

True (A)

What is the primary market?

<p>The primary market is where new securities are sold to raise capital. This includes initial public offerings (IPOs) and bond issues.</p> Signup and view all the answers

What is the secondary market?

<p>The secondary market is where already issued securities are traded. Its primary purpose is to provide liquidity to investors.</p> Signup and view all the answers

The [BLANK] margin requirement is the percentage of the transaction value that must be paid by the investor.

<p>initial</p> Signup and view all the answers

How is the equity position percentage calculated?

<p>Equity Amount / Stock Value × 100.</p> Signup and view all the answers

A margin call occurs when a stock's price falls below the [BLANK] margin.

<p>maintenance</p> Signup and view all the answers

How is the percentage margin calculated for short sales?

<p>Equity / Market Value of Stock Owed × 100.</p> Signup and view all the answers

What is the formula for calculating stock return?

<p>(New Price - Old Price) / Old Price × 100.</p> Signup and view all the answers

How do you calculate margin return?

<p>Equity Gain / Initial Margin × 100.</p> Signup and view all the answers

Which of the following are types of securities? (Select all that apply)

<p>Municipal Bonds (B), Equities (C), Corporate Bonds (D), Government Bonds (E)</p> Signup and view all the answers

What is a pure auction market?

<p>A pure auction market is where buyers and sellers submit bids and offers, and transactions occur when the highest bid matches the lowest offer. Prices are determined solely by supply and demand.</p> Signup and view all the answers

What is a dealer market?

<p>In a dealer market, dealers buy and sell securities from their own inventories, providing liquidity to the market.</p> Signup and view all the answers

What is a continuous market?

<p>A continuous market is where trades can occur at any time during the market's open hours.</p> Signup and view all the answers

What is a market order?

<p>A market order is an order to execute a trade immediately at the best available price.</p> Signup and view all the answers

What is a stop-loss order?

<p>A stop-loss order is an order to sell a security if its price drops below a predefined level, limiting potential losses.</p> Signup and view all the answers

High-frequency trading (HFT) accounts for approximately 50% of trading volume.

<p>True (A)</p> Signup and view all the answers

Dark pools facilitate private trades and account for approximately 25% of trading volume.

<p>True (A)</p> Signup and view all the answers

What is algorithmic trading?

<p>Algorithmic trading uses automated, rule-based strategies to execute trades based on predefined parameters.</p> Signup and view all the answers

What is Rule 144A?

<p>Rule 144A simplifies private placements for sophisticated investors, providing a more efficient secondary market for certain unregistered securities.</p> Signup and view all the answers

What are the key features of Regulation NMS, which was implemented in 2007?

<p>Regulation NMS facilitated electronic trading and included rules related to access, order protection, and sub-penny rules.</p> Signup and view all the answers

What is payment-for-order-flow (PFOF) and how does it relate to brokers?

<p>Payment-for-order-flow (PFOF) is a practice where brokers receive payments from wholesalers for directing trades to their platforms instead of charging traditional commissions.</p> Signup and view all the answers

Flashcards

What is a market?

A place where buyers and sellers interact to trade goods or services. It doesn't need to be physical; it can be electronic or abstract.

Characteristics of a good market

Timely information: Accurate price/volume data. Liquidity & Marketability: Easy asset conversion to cash. Price Continuity: Minimal price changes between trades. Low Costs: Includes brokerage fees and transaction costs. Depth: Availability of buy/sell orders at varied prices.

Decimal Pricing

Replaced fractions in 2001. Benefits include reduced tick size, spreads, and transaction costs.

Primary Market

Sale of new securities for capital (e.g., IPOs, bond issues).

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Secondary Market

Trading of already issued securities, providing liquidity.

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Initial Margin Requirement

Equity = Transaction Value × Margin Requirement.

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Equity Position (%)

Equity Amount / Stock Value × 100.

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Margin Call Price

P = Loan Amount / (1 - Maintenance Margin). The stock price at which an investor's account equity falls below the required maintenance margin, triggering a margin call from the broker. At this point, the investor must deposit more funds or securities to meet the margin requirement or sell off assets to cover the shortfall.

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Percentage Margin (Short Sales)

Equity / Market Value of Stock Owed × 100. Indicates how much of the investment is funded by the investor's own money versus borrowed funds.

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Stock Return

The return on your stock investment calculated as: (New Price - Old Price) / Old Price × 100.

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Margin Return

Equity Gain / Initial Margin × 100. It measures the return generated from the investment made using borrowed funds.

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Types of Securities

Government Bonds: Treasury bills, notes and bonds. Municipal Bonds: Competitive bids, negotiated sales, private placements. Corporate Bonds: Typically sold via negotiated arrangements.

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Pure Auction Market

Buyers and sellers submit bids and asks, and transactions occur when the highest bid matches the lowest offer. Prices are determined purely by supply and demand, with no intermediaries.

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Dealer Market

Dealers buy and sell securities from their inventory at their own risk.

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Call Market

A market where all trades of a given security occur at a single price at a specific time.

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Continuous Market

A market where trades occur anytime during market hours.

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Market Orders

An order to execute a trade immediately at the best possible price available in the market.

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Limit Orders

An order to buy or sell at a specific price or better. It ensures that the investor does not pay more (for buys) or receive less (for sells) than a designated price.

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Stop-Loss Order

A type of order to sell a stock when its price falls to a certain level.

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Stop-Buy Order

A type of order to buy a stock when its price rises to a certain level.

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High-Frequency Trading (HFT)

Trading strategies where computers execute trades at very high speeds, taking advantage of tiny price discrepancies.

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Dark Pools

Private trading venues that allow investors to execute trades without revealing their orders to the public. This reduces the market impact and provides a more anonymous way of trading.

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Algorithmic Trading

Automated trading strategies that use algorithms to execute trades based on pre-defined rules.

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Rule 144A

A regulation that allows the issuance of securities in a private placement to a group of sophisticated investors, enabling a more efficient and liquid secondary market for non-registered securities.

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Regulation NMS (2007)

A rule that standardized trading practices to improve efficiency and fairness in the stock market. Key rules include access, order protection, and sub-penny rules.

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Payment-for-Order-Flow (PFOF)

A practice where brokers earn revenue from wholesalers who pay them based on the order flow they generate. This allows brokers to offer commission-free trades, and the wholesalers can use this order flow for their own trading strategies.

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Bid-Ask Spread

The difference between the highest bid and lowest ask. Represents the cost of executing a trade.

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Study Notes

Securities Markets

  • Market: A place where buyers and sellers interact to trade goods or services. Can be physical, electronic, or abstract.
  • Good Market Characteristics:
    • Timely information (accurate price/volume data).
    • Liquidity & marketability (easy asset conversion to cash).
    • Price continuity (minimal price changes between trades).
    • Low costs (brokerage fees, transaction costs).
    • Depth (availability of buy/sell orders at varied prices).
  • Decimal Pricing (2001): Replaced fractions, reducing tick size, spreads, and transaction costs.
  • Primary Market: Where new securities are sold for capital (IPOs, bond issues).
  • Secondary Market: Trading of existing securities, providing liquidity.
  • Margin Requirements:
    • Initial Margin Requirement: Equity = Transaction Value × Margin Requirement.
    • Equity Position (%): Equity Amount / Stock Value × 100.
    • Margin Call Price: Price at which account equity falls below maintenance margin, requiring additional funds.
    • Percentage Margin (Short Sales): Equity / Market Value of Stock Owed × 100. Indicates investment funding (investor vs. borrowed).
  • Stock Return: (New Price - Old Price) / Old Price × 100.
  • Margin Return: Equity Gain / Initial Margin × 100. A measure of return from borrowed funds.
  • Securities Types:
    • Government Bonds (Treasury bills, notes, bonds).
    • Municipal Bonds (competitive bids, negotiated sales, private placements).
    • Corporate Bonds (often negotiated arrangements).
  • Market Structures:
    • Pure Auction Market: Bids and asks matched by brokers; prices determined by pure supply/demand.
    • Dealer Market: Dealers buy/sell from own accounts.
    • Call Market: All trades at a single price at a specific time.
    • Continuous Market: Trades occur anytime the market is open.
  • Order Types:
    • Market Orders: Immediate execution at best available price.
    • Limit Orders: Specify price and time validity.
    • Stop-Loss Order: Sell order activates if price drops below set level.
    • Stop-Buy Order: Buy order activates if price rises above set level.
  • High-Frequency Trading (HFT): Accounts for ~50% of trading volume. Pros: Increased liquidity, lower costs. Cons: Volatility, potential for flash crashes.
  • Dark Pools: Private trades reducing market impact, representing ~25% of trading volume.
  • Algorithmic Trading: Automated trading strategies based on rules.
  • Rule 144A: Simplifies private placements for sophisticated investors.
  • Regulation NMS (2007): Facilitated electronic trading with 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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Description

This quiz covers the fundamental concepts of securities markets, including market characteristics, primary and secondary markets, and margin requirements. Test your knowledge on how market dynamics work and the importance of timely information and liquidity in trading. Gain a deeper understanding of market structure and pricing methodologies.

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