Security Market Basics

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Questions and Answers

What is the primary function of the money market?

To trade in primary market securities
To buy and sell long-term securities
To facilitate initial public offerings
To buy and sell short-term securities (correct)

What is the main difference between primary and secondary markets?

Primary market is for existing firms, while secondary market is for new firms
Primary market is for short-term securities, while secondary market is for long-term securities
Primary market deals with new issues of securities, while secondary market deals with existing securities (correct)
Primary market deals with long-term securities, while secondary market deals with short-term securities

What is an Initial Public Offering (IPO)?

A rights offering to existing shareholders
A new firm offering new shares to raise capital (correct)
A direct listing of existing shares on a stock exchange
A private placement of shares to specific investors

What is the purpose of a rights offering?

To offer new shares to existing shareholders (C) Signup and view all the answers

What is a private placement?

A private offering of shares to specific investors (C) Signup and view all the answers

What is an example of a foreign company whose stock is traded on the NYSE through an ADR?

Mitsubishi (B) Signup and view all the answers

What is an example of a local investment bank that allows operation in a foreign country?

Maybank Invest (A) Signup and view all the answers

What is a consequence of currency exchange rate fluctuations on international investments?

The value of foreign investments can go up or down with exchange rate fluctuations (A) Signup and view all the answers

What is the example of an IPO given in the content?

Nationsgate Holding Berhad (C) Signup and view all the answers

What is the main characteristic of a direct listing?

It involves the listing of existing shares on a stock exchange (A) Signup and view all the answers

What is the formula to calculate IPO underpricing?

($IPO Price - $Offer Price)/$Offer Price (C) Signup and view all the answers

What is a risk associated with investing in international securities markets?

Government policy risks due to unstable foreign governments (B) Signup and view all the answers

What is the primary purpose of an American Depositary Receipt (ADR)?

To hold stocks of foreign companies in vaults of banks (D) Signup and view all the answers

What is the purpose of the primary market?

To provide a platform for firms to raise capital (D) Signup and view all the answers

What is a characteristic of American Depositary Receipts (ADRs)?

They are dollar-denominated receipts for stocks of foreign companies (C) Signup and view all the answers

What is the advantage of investing globally in securities markets?

Diversification and increasing returns or reducing risks (A) Signup and view all the answers

What is the term for the money left on the table in an IPO?

Money left on table (D) Signup and view all the answers

What is the calculation for gross proceeds in an IPO?

Number of shares offered * IPO offer price (D) Signup and view all the answers

How much equity must Wolfgang provide in the transaction if the value is $9375 and the margin is 45%?

$4218.75 (D) Signup and view all the answers

Which of the following is an indirect way to invest in foreign securities?

Purchasing shares of local-based multinational with substantial foreign operations (A) Signup and view all the answers

Which of the following stock exchanges is NOT among the top four securities markets by dollar volume?

Shanghai Stock Exchange (A) Signup and view all the answers

What happens if the price of HD stocks falls to $142 per share?

A margin call is triggered. (B) Signup and view all the answers

What is the term for the inclusion of a number of different investment vehicles in a portfolio?

Diversification (D) Signup and view all the answers

What is the benefit of technology advancement in global securities markets?

Easier access to global securities markets (C) Signup and view all the answers

What is the value of the transaction if the price of a unit is $37.5 and the number of units is 250?

$9375 (C) Signup and view all the answers

What is the original value of the transaction if Barbara purchased 100 shares of HD stock for $187 per share?

$18700 (A) Signup and view all the answers

What is the percentage of equity value required to maintain the margin in the example provided?

45% (D) Signup and view all the answers

How much is the margin call if Barbara must have an equity of $6390?

$605 (C) Signup and view all the answers

What is the debit balance of the transaction if the value is $9375 and the margin is 45%?

$5156.25 (D) Signup and view all the answers

If the stock price drops below the maintenance margin, what will the investor face?

Margin call (B) Signup and view all the answers

What is the initial margin percentage used by Amy when buying 100 shares of stock?

50% (A) Signup and view all the answers

What is the debit balance in the initial transaction when an investor buys 100 shares of stock at $50 per share with a 75% margin?

$8,750 (B) Signup and view all the answers

What is the value of the stock when Amy faces a margin call?

Less than $70 (A) Signup and view all the answers

If the stock price rises to $55, what will happen to the investor's margin position?

It will increase (D) Signup and view all the answers

What happens to the equity value when the stock price drops to $45?

It decreases (B) Signup and view all the answers

What is the formula to calculate the equity value required to meet the margin requirement?

Equity value = Equity value at margin requirement - Equity value from current position (A) Signup and view all the answers

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Study Notes

Securities Market

Types of security markets:
- Money Markets: short-term securities are bought and sold
- Capital Market: long-term securities such as stocks and bonds are bought and sold
  - Primary Market: new issues of securities are sold to the public
  - Secondary Market: securities are traded after they have been issued

Primary Markets

Choices to Market Securities in Primary Market:
- Initial Public Offering (IPO): new firms offering new shares to raise capital
- Rights Offering: existing firms offering new shares to existing owners
- Private Placement: new/existing firms offering new shares to specific owners
- Direct Listing: private companies transfer existing shares directly to a stock exchange

IPO Underpricing

Example: Netshoes IPO on April 12, 2017
- IPO offer price: $18
- Closed at $20 on the first day of listing
- Calculated underpricing: 21.91%

Globalization of Securities Markets

Advantages of investing globally:
- Diversification: inclusion of different investment vehicles in a portfolio
- Securities denominated in different currencies
- Opportunities in rapidly expanding economies
- Easier with the advancement of technology
Top four securities markets (based on dollar volume) worldwide:
- New York Stock Exchange (NYSE)
- Nasdaq
- London Stock Exchange
- Tokyo Stock Exchange
Indirect ways to invest in foreign securities:
- Purchase shares of local-based multinational with substantial foreign operations
Direct ways to invest in foreign securities:
- Purchase securities on foreign stock exchanges
- Buy securities of foreign companies that trade on local stock exchanges
- American Depositary Receipts (ADRs): dollar-denominated receipts for stocks of foreign companies

Risks of International Investing

Usual investment risks still apply
Government policies risks: unstable foreign governments, different laws, and economic conditions
Currency exchange rate risks: value of foreign currency fluctuates compared to local dollar

Basic Types of Securities Transactions

Margin Trading:
- Example: Barbara purchased 100 shares of HD stock for $187 per share, using a 55% initial margin requirement and a 45% maintenance margin requirement
- If the price of HD stocks falls to $142 per share, Barbara faces a margin call
Formula 1: Equity value at margin requirement = (Total Value at Margin requirement - Debit Balance)
Formula 2: Margin call = Equity value at margin requirement - Equity Value from current position

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