Understanding Markets and Securities

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a key feature of the American Stock Exchange (AMEX)?

It focuses on trading primarily domestic stocks.

It exclusively trades stocks listed on NYSE.

It started as the Outdoor Curb Market. (correct)

It has merged with the London Stock Exchange.

Which of the following is true about the Tokyo Stock Exchange (TSE)?

It only trades foreign stocks.

It only trades stocks electronically.

It is the smallest exchange in Japan.

It was established in 1878 and is the largest exchange in Japan. (correct)

What distinguishes the Fourth Market from other markets?

It requires brokers for all trades.

It involves direct trading between two parties without brokers. (correct)

It facilitates small trades primarily for retail investors.

It is a formal exchange with strict listing requirements.

Which statement accurately describes the London Stock Exchange (LSE)?

It classifies stocks into Alpha, Betas, and Gamma groups. Signup and view all the answers

What role do investment firms play in the Global Twenty-four Hour Market?

They maintain nearly continuous trading by passing the book globally. Signup and view all the answers

What is one characteristic of the Over-the-Counter (OTC) Market?

It has nearly 5,000 actively traded issues on Nasdaq’s NMS. Signup and view all the answers

Which type of trading is primarily associated with the Third Market?

It deals with shares listed on an exchange, mainly well-known stocks. Signup and view all the answers

What is a primary advantage for institutional investors in the Fourth Market?

Transaction costs can be significantly reduced. Signup and view all the answers

What defines a market in the context of transferring goods and services?

It brings together buyers and sellers. Signup and view all the answers

Which characteristic ensures transactions can happen quickly and at favorable prices?

Marketability Signup and view all the answers

Which of the following is NOT a method by which municipal bonds are sold?

Direct public offerings Signup and view all the answers

What is a primary difference between seasoned new issues and initial public offerings (IPOs)?

Seasoned new issues involve companies with existing shares. Signup and view all the answers

Why are secondary markets crucial for investors?

They provide an avenue for obtaining cash and investment choices. Signup and view all the answers

What function does an underwriter serve in the primary capital markets?

They assist in designing the issue and bear risk. Signup and view all the answers

What is one characteristic of a good market regarding transaction costs?

They need to be low to ensure internal efficiency. Signup and view all the answers

What primarily affects the liquidity provided by secondary markets?

The ability for buyers to find cash quickly Signup and view all the answers

Study Notes

What is a Market?

Markets facilitate the exchange of goods and services between buyers and sellers.
They do not require a physical location and do not own the goods or services.
Both buyers and sellers benefit from participating in the market.

Characteristics of a Good Market

Availability of past transaction information that is timely and accurate
Liquidity, which refers to the ease with which a security can be bought or sold quickly at a fair price
Low transaction costs, ensuring internal efficiency
Market prices that reflect all relevant information, ensuring external efficiency

Organization of the Securities Market

Primary Markets: Markets where new securities are issued.
Secondary Markets: Markets where existing securities are bought and sold.

Primary Capital Markets - Government Bonds

Government bonds are sold regularly through auctions.
Treasury bills have a maturity of one year or less.
Treasury notes have maturities of two to ten years.
Treasury bonds have original maturities of more than ten years.

Primary Capital Markets - Municipal Bonds

Municipal bonds are sold through three methods:
- Competitive bid sales: sealed bids
- Negotiated sales: contractual arrangements with an underwriter
- Private placements: Direct sales to investors.
Underwriters provide services such as:
- Origination: designing the bond issue.
- Risk-bearing: purchasing the bond issue.
- Distribution: selling the bond issue.

Primary Capital Markets - Corporate Bonds

Corporate bonds are sold through negotiated arrangements with investment banking firms.
The underwriting firm may organize a syndicate to distribute the bonds.

Primary Capital Markets - Common Stock

New common stock issues are divided into two groups:
- Seasoned new issues: new shares offered by firms that already have stock outstanding.
- Initial public offerings (IPOs): firms selling their stock to the public for the first time.

Secondary Markets

Secondary markets involve trading of existing securities.
They provide liquidity for sellers and offer buyers investment choices.

Importance of Secondary Markets

Secondary markets provide liquidity for investors who bought securities in the primary market.
Liquidity in secondary markets helps issuers raise funds in the primary market.
Secondary markets help determine market pricing for new issues in the primary.

National Stock Exchanges

National stock exchanges have a large number of listed securities.
Listing on a national exchange is often seen as a sign of prestige.
They have a wide geographic dispersion of listed firms and a diverse clientele of buyers and sellers.
Firms must meet listing requirements to qualify for trading on a national exchange.

American Stock Exchange (AMEX)

AMEX started as the Outdoor Curb Market trading unlisted stocks.
It has an emphasis on foreign securities.
It does not trade stocks listed on the NYSE.
AMEX merged with Nasdaq in 1998, but operations remain separate.

Tokyo Stock Exchange (TSE)

TSE is the largest of eight exchanges in Japan.
It dominates the Japanese market.
It trades both domestic and foreign stocks.
The most active 150 stocks are traded on the floor, while others are traded electronically.

London Stock Exchange (LSE)

LSE is the largest securities market in the United Kingdom.
It trades both listed and unlisted securities.
It has the largest listing of foreign stocks on any exchange.
LSE stocks are divided into three groups:
- Alpha: The 65 most active stocks.
- Betas: The next 500 most active stocks.
- Gamma: Bids are indicative only.

The Global Twenty-four Hour Market

Investment firms “pass the book” around the world to maintain almost continuous trading.
The interconnectivity of markets creates a single world market.

Over-the-Counter (OTC) Market

The OTC market is not a formal organization or a single location.
It trades in unlisted and listed stocks (third market).
Listing requirements for OTC are lenient.
Nasdaq's NMS (National Market System) actively trades almost 5,000 issues.
It has higher trading volume but less dollar trading compared to the NYSE.

Third Market

The third market involves OTC trading of shares listed on an exchange.
It primarily trades well-known stocks like GM, IBM, AT&T, and Xerox.
The third market represents competition between the OTC market and organized exchanges.
It can be important to investors when exchanges are closed or when trading is suspended on exchanges.

Fourth Market

The fourth market involves direct trading of securities between two parties without a broker.
Both parties are typically large, institutional investors making large trades.
Direct trading helps reduce transaction costs.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz explores the concepts of markets, their characteristics, and the organization of the securities market. It covers primary and secondary markets along with government bonds and their attributes. Test your knowledge and understanding of how markets operate and facilitate transactions.