FIL 241 Test 3

What is the benefit of having stock market indexes? Do different indexes have strong correlations with one another?

An index is typically constructed using the shares of leading companies in the economy or in a particular sector. index funds are a low-cost way to invest, provide better returns than most fund managers, and help investors to achieve their goals more consistently.

How is the DJIA and S&P 500 indexes constructed/how many stocks does each include? Be able to calculate a price-weighted and value-weighted index

DIJA is constructed of 30 large stocks in 1928 to represent the overall stock market. (Price weight average) S&P 500 is 500 of the largest on NYSE and NASDAQ. NYSE makes up about 80% of index. (Value Weighted)

What are differences in speed of execution as well as involvement of a central authority/processor

Distributed ledger technology, no central authority/processor, ledger is publicly viewable by many participants, having lots of different people have a copy of the ledger them it makes it much harder to hack in or change, detect fraud and discredit the inaccurate ledger

Proof-of-stake

Ethereum transitioning to this one (Ethereum 2.0), crypto owners use their coins as collateral, willing to validate blocks, requires a whole lot less energy that proof-of-work, validators do not receive a block reward instead, they collect transaction fees as a reward

Describe how dividends for common stock work. Are they guaranteed? What are consequences of missing?

Dividends for stocks aren't guaranteed. After a company pays all expenses and if they have cash flow they could pay out dividends to investors. A company doesn't need to pay out dividend and you cannot force a company to pay out dividends. Although investors may get mad that dividends aren't being paid which could affect the stock price.

How can a US company with only domestic operations be impacted by FX risks?

Events and movements in foreign financial markets can affect the profitability and performance of U.S. firms. -Firms with only U.S. operations still face foreign competition. For example, a U.S. resort competes with European resorts even though the U.S. firm has no foreign operations. If the dollar strengthens against the euro, the cost to come to the U.S. resort increases

Do the number of IPOs and market for IPOs tend to be steady year after year or see cyclical patterns?

IPO's tend to be cyclical and range depending on how the economy is doing. When the economy is doing well you see IPO's performing better and vice versa.

What did Sarbanes-Oxley Act address and what types of rules did it put in place?

Independent auditing oversight board, higher penalties for wrongdoing, more extensive financial disclosure to help protect investors from fraudulent financial reporting by corporations. It mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

What is the main difference in an IPO vs. an SEO? What are preemptive rights as it relates to an SEO? Describe some of the steps involved in doing an IPO.

Initial Public Offering (IPO) is the first issue of stocks for sale by a private company. Seasoned Equity Offering (SEO)- A seasoned issue is an issue of additional securities from an established company whose securities already trade in the secondary market.

In the primary markets, what is the difference in best efforts underwriting and firm commitment underwriting (which is more expensive, which is riskier for the company, which is riskier for the investment bank)?

Investment banks are helping issue and sell off shares. Best efforts underwriting is when an investment bank receives a fee and agree to give their best effort to sell as much IPO shares as possible. Typically riskier for company because if shares aren't being bought they may not issue as much shares and won't raise as much money. Firm Commitment underwriting is when an investment bank purchases shares directly from a corporation and sell them to investors. Firm commitment is typically more money but it's less risk for company. Typically riskier for investment bank because they could be stuck with unsold shares.

What is fintech? What are example of fintech?

Technology-enabled innovation in financial services that could result in new business models, applications, processes or products with associated material affect on provision of financial services. Fintech is used to describe: AI, blockchain, cloud computing, big data, etc. Ex: Peer-to-Peer pmt: venmo, crypto, central bank digital currency, etc.

What are preemptive rights as it relates to an SEO?

Preemptive rights give existing shareholders the ability to maintain their proportional ownership because they get the opportunity to buy shares first and cheaper than market price. Can sell right to buy

How does preferred stock differ from common stock? Are dividends guaranteed?

Preferred stock differs from common stock because they have priority in debt being paid off. Dividends are often very steady with payments but the payments aren't guaranteed. Very similar to a bond. Preferred stock are taxable income. Preferred stock doesn't have any voting rights. But if a company misses a dividend payment they may be able to have a vote. Normally can convert to common stock anytime to get voting rights.

According to WSJ, how have preferred stock performed recently?

Preferred stock has been similar to bonds and has typically underperformed stocks. They have had less volatility. Preferred stock has more of crash risk than bonds. Example: in 2008 preferred stock was down 25 percent while bonds were up 8 percent.

What is the difference in the primary and secondary markets?

Primary Market is when companies want raise new funds and can issue new stock. Secondary market is where those securities are traded by investors.

What is the difference in a spot and forward FX transaction? Which is more commonly done?

Spot FX Transaction- Immediate exchange at "spot" rates. Forward FX Transaction- Exchange of currencies at specified exchange rt on date in future, can help hedge FX risk. (About 2/3 uses forwards)

Does much trading occur on ECNs? Is there a trading floor for ECNs?

Stock market trading from 9:30am-4pm ET. After hours trading using ECN's which are computerized systems that automatically match orders. ECN's are about 1/3 of transactions and nearly all after hours trading.

Is crypto highly regulated? If not, how would you describe the regulation in this area? What has the SEC done recently in regards to crypto regulation?

The SEC intends to examine whether crypto companies meet appropriate standards of care when "making recommendations, referrals or providing investment advice."

What is a net FX exposure?

the offsetting of exposure in one type of currency with exposure in the same or another type of currency. The objective of this is to protect against exchange rate risks.

What type of stocks trade on OTC bulletin board?

Penny Stocks (Under $5 and higher risk/volatile), 30000 stocks trade in the OTC, not a formal exchange

What types of purposes can Ether be used for?

- Can get Ether, the currency of this platform, use apps - Finance: lending a borrowing, token swaps, trading and prediction markets, investments, payments, crowdfunding, insurance, portfolios - Arts and Collectibles: Art and fashion, digital collectibles, music - Gaming: virtual worlds, competition - Technology: utilities, marketplaces, developer tools, browsers - Have a stake in Ether where you utilize your ether as a way to try and verify transactions and get rewarded for it

what features provide strong security in Blockchain?

- Hashes: compare to a fingerprint, identifies a block and all of its contents, useful when you want to detect changes to blocks, HASH OF PREVIOUS BLOCK - effectively creates a chain of blocks -Proof-of-work: mechanism that slows down the creation of new blocks, takes 10 mins to calculate the POW and add a new block to the chain, makes it very hard to tamper with the blocks because if you tamper with one block you will need to calculate the POW for all the following blocks -Being distributed: peer-to-peer network where everyone is allowed to join, when someone joins they get a full copy of the blockchain, use to verify that everything is still in order

What are some of the main concerns with cryptocurrencies? What are some example of recent collapses of exchanges/cyrpto/stablecoins?

-Dramatic volatility in prices - while you may make a lot of money with cryptos, you can also lose it quickly, nothing backing Bitcoin -Impact that mining Bitcoin has on the world and the climate - there is a lot of energy used to mine Bitcoin, a lot of Bitcoin relies on fossil fuels which is a concern Security - if your digital wallet is hacked, can easily have all of your cryptocurrency stolen and can be very harder and possible to recover, crypto is a new favorite for those doing illegal activities because it is harder to track down -Lack of regulation and government oversight - unclear what rules will be put into place in the US, China made crypto transactions illegal in September '21, and crypto can help countries like Iran and Russia evade sanctions

What are the basic characteristics and rights of being a stockholder?

-Have a right to share in the firm's profits -Residual claimants (Get dividends) -Have limited liability(Can't lose anymore than you invested in the stock) -Have voting rights

What are the roles and needs for FX markets and trading?

-facilitate foreign trade -raising capital in foreign mkts -transfer of risk b/n participants -speculation on currency values

Describe some of the steps involved in doing an IPO.

1. Decide to issue 2. Registration statement sent to SEC (Has up to 20 days to request additional information) 3. Red Herring Prospectus sent to prospective buyers (All valuable info regarding the company which intends to raise funds) 4.SEC requests changes or additional info 5. Official Prospectus issued 6.Shares offered to public

How large a market is FX trading per day? What are the most common currencies used in FX trades?

6.6 Trillion in FX per day USD involved in 88% of trades, and EURO used in 32% of trades.

What is a direct listing and why would a company do this?

A direct listing is a process for a company to become public without going through the initial public offering process. The process makes existing stock owned by employees and/or investors available for the public to buy and does not require underwriters or a lock-up period.

Proof-of-Work

Bitcoin relies on this, miners use computing technology and capacity to compete with other folks to try and verify transactions first and if they do so first they get rewarded with Bitcoin, takes a lot of energy and resources to do this, uses a lot of electricity

What was the first widely-adopted cryptocurrency?

Bitcoin- First widely-adopted and most popular crypto Satoshi Nakamoto

How do the returns and volatility of stocks and bonds compare?

Bond rates are lower over time than the general return of the stock market. Individual stocks may outperform bonds by a significant margin, but they are also at a much higher risk of loss. Bonds will always be less volatile on average than stocks because more is known and certain about their income flow.

What is an ADR and how do they work? What are the 3 levels of ADRs? What are the pros and cons of investing in an ADR versus an international stock directly?

Certificate that represents ownership of a foreign stock. -The bank then issues dollar A D R s backed by the shares of the foreign stock, investors earn returns in U.S. dollars. -Can be sponsored or unsponsored Level 1 ADR-trade O T C and are not required to meet U.S. GAAP nor issue annual reports. Level 2 ADR-trade on US exchanges and must meet exchange requirements and adhere to U.S. reporting standards. Level 3 ADR-meet the same reporting standards as Level 2 and must register with the SEC and file the equivalent of 10K forms. These firms are allowed to raise public capital in the U.S. Pros- Easier to invest in foreign markets Cons- Foreign risks, financial reporting may differ

What level of priority do common shareholder have? What does a "residual claim" mean?

Common stockholders have the lowest priority claim in the event of bankruptcy (Which is a residual claim). The rights of shareholders to the remaining assets once the fixed claims on a business have been met. Bond holders will get paid out, than preferred stock, and any other expenses, than common stock holders get what's left.

What is the difference in cumulative versus straight voting? Which method favors minority shareholders?

Cumulative voting is when the # of votes you have equals # of shares you hold*directors being elected. All nominees voted on at the same time, shareholders can vote all for a single person or spread votes out, and candidates with most total votes wins. Cumulative voting favors minority shareholders because they might not have all the votes but they can place all their votes on a single director.

What does it mean to say the US dollar has appreciated or depreciated against another currency? How can these movements impact imports and exports?

Currency appreciation is an increase in the value of one currency in relation to another currency. Imports: If a currency strengthens than it makes imports cheaper. Import more Exports: If a currency strengthens than it makes exports more expensive. Export less currency depreciation occurs when the value of one currency falls compared to the value of another currency. Imports: If a currency weakens than imports are likely to decline Exports: If a currency weakens than exports are likely to increase.

What are regulators considering in regards to stablecoins? What are the different types of collateral that stablecoins use?

Having companies that issue them register as banks. -Flat-collateralized- Backed by fiat currency like USD -Crypto-collateralized- Backed by other cryptos -Commodity collateralized- Backed by commodities -Non-collateralized- Algorithms after the supply of the currency try to keep price pegged to an asset.

What is high frequency trading and dark pools? What is the motivation for using dark pools?

High Frequency Trading is trading using computer algorithms to transact large number of trades in fractions of a second. Changes in market conditions influence trades. Dark pools are private exchanges for trading securities that are not accessible to the investing public. Dark pools were created to facilitate block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades.

How have IPOs traditionally performed on their first day of trading (i.e. what are the returns like)?

IPO's have traditionally performed well on the first day. The average first day in 1999 first day returns were 60 percent and in 2020 returns were over 20 percent.

What happens if current market price differs from "intrinsic value"? Which is undervalued/overvalued? What events could lead to temporary differences?

If a stock is priced higher than what it's intrinsic value is than you would consider it overvalued. If a stock is trading under its intrinsic value than it would be considered undervalued. Events like big news or a lawsuit on a specific company or a CEO leaving a firm could lead to temporary differences in intrinsic value.

What is the difference between cumulative and noncumulative preferred stock?

If dividends are noncumulative and a company misses a dividend payment then it's tough luck and you won't see that dividend payment. Cumulative is when a company will eventually pay back dividends if they want to issue any new dividends going forward.

What makes them "stable"?

Marketing themselves as very stable, tracking something like the dollar or the Euro or some other currency, backed by specific assets

What is program trading and what are some criticisms of it?

Is the simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million using computer programs to initiate the trades. Institutional investors, such as hedge fund managers or mutual fund traders, use program trading to execute large-volume trades. Executing orders in this way helps reduce risk by placing orders simultaneously, and can maximize returns by taking advantage of market inefficiencies. Ex: Long portfolio of stocks, short stock index future contract. Criticism- Impact on stock price volatility

Who is the current owner of the NYSE?

It's owned by intercontinental exchange (ICE) IN 2013

What does a DMM do? What stock exchange or exchanges have a DMM in the US?

It's the Market maker assigned to a stock. -Maintains fair and orderly market -Quotes prices, match orders NYSE uses a DMM

Who are the main players in FX transactions and how are most trades done?

Largest US banks are major players. Transactions are mostly done among dealers in OTC. Increasing use of electronic brokerage.

What are some of the risks of investing in international stocks?

Less complete and timely info vs. US Stocks -May be less familiar with market/stock -political risk foreign exchange risk

Be able to understand order types (market, limit, stop buy, and stop loss) and motivations for using one type of order over another type. What is the limit order book?

Market orders- A Market order is that you want a trade to be executed as soon as possible and would take whatever the best price you could get. Limit order- Only willing to buy for this price or less. If you are trying to sell you are only will to sell if you could sell it at a specific price or more. Stop buy order- Buy if prices rises to certain price (Used in short sales) Stop Loss order- Executes a stock sell if the price falls to a certain level.

What types of other regulations and regulators impact stock markets?

NYSE rules- Adopt code of ethics/corporate governance guidelines, monitoring of NYSE day to day trading activity. FINRA- Largest independent regulator for all securities firms. Dodd Frank- New power to SEC and other agencies to oversee markets (Attempts to prevent "too big to fail"

How does Nasdaq differ from the NYSE in terms of trading logistics, floor vs. electronic trading, dealer(s) and existence of a DMM?

Nasdaq is a dealer market with many market makers in competition with one another, Dealers can trade many stocks, IPO underwriter can become a dealer (differs from NYSE) The Nasdaq, on the other hand, operates electronically and does not have a physical trading floor. market makers maintain inventories of stock to buy and sell from their accounts in transactions with individual customers and other dealers. Market makers give two-sided quotes, meaning that they state the bid and ask prices for a security in which they are making a market.

How does a net long position and net short position benefit from FX movements?

Net long position- Benefits if foreign currency appreciates, loses if USD Appreciates. Ex. US banks are net long Canadian dollars. They have bought more CAD than they have sold. If CAD appreciates vs. USD, then the bank benefits Net short position -profits if foreign currency depreciates, loses if USD depreciates Ex:US banks are net short Euros. If Euro appreciates, then bank loses

Is dollar amount fixed? What is alternative to paying dividends for company?

No, Often times a company will try to keep a steady amount. Double taxation occurs when income is taxed at both the corporate level and personal level, as in the case of stock dividends. An alternative is that a company can reinvest money into the company. This would increase shareholder equity, which could make the company more profitable and could make the share price go up. If you hold a stock longer than a year you will be in a lower tax bracket. (Long-term capital gains)

What is an NFT, how does it work, and what are some examples of NFTs?

Non-fungible tokens (not similar to one another), a way to show ownership of something, make a digital record of that asset, anyone can download and view art, but this conveys ownership to a specific person, uses blockchain technology so that everyone can know who the true owner is, used as especially record keeping transactors that are observable by everyone but uniquely identifiable Ex:Lonely bored ape sold for 1.29 million

What is the difference between nonparticipating and participating preferred stock?

Nonparticipating share dividends are fixed and stay constant regardless of how the company does. Participating shares have a minimum fixed dividend but could be a higher amount based on predetermined condition.

Are the number of potential Bitcoin unlimited?

Number of Bitcoin is limited to be 21 million, 19 millions of these have been put out currently

Compare on-balance-sheet hedging versus off-balance-sheet hedging.

On-Balance sheet hedging- Make changes to assets and liabilities on the Balance sheet to protect profits. Pros: Can ensure positive profits/returns Cons: End return can still vary. Also, loans and profits in other countries may be less favorable abroad than domestically. Off-balance sheet hedging- No changes on the balance sheet and involves taking position in forward or other derivative.

What is PPP and the Law of One Price? Using PPP and inflation rates in two countries, be able to estimate the difference in nominal interest rates between countries.

PPP explains how inflation rate changes lead to FX changes, Assumes real rate of interest is same in countries. Nominal rates= real int+inflation

What is a circuit breaker for the overall market as well as individual stock, what is its purpose?

Pause if abnormally large decline in stock prices. -Circuit breakers attempt to curb in panic-selling and can also be triggered on the way up with manic-buying. They are commonly used for individual securities as well as broad market indexes like the S&P 500. Level 1: 7% drop, 15 minute halt. Level 2: 13% drop, 15 min halt Level 3: 20% drop, trading stopped for the day.

What US agency is the primary regulator of stock markets?

Securities and Exchange Commision- Promote full and fair disclosure of information on securities and ensure fair treatment of investors.

What do shareholders vote on?

Shareholders vote on matters such as the election of the board of directors, the approval of significant corporate actions, like mergers and acquisitions, and the adoption of changes to the company's bylaws.

What is shelf registration? How can this help companies time the market?

Shelf registration allows firms to offer multiple issues of stock over a two-year period with only one registration statement. Helps them time the market by spreading out those issues.

Why are stablecoins popular? What makes them "stable"?

Speed and ease of doing these transactions, verify transactions without a central intermediary, reduces volatility compared to cryptos like Bitcoin, they made it easier to do transactions, especially in other countries, t hird-party intermediaries aren't needed, they use blockchain technology to verify transactions

what happened during March 2020 as it relates to circuit breakers?

The market halted for 15 minutes after the market experienced a 7% drop. 4 market wide stops

Describe what interest rate parity theorem is and be able to interpret the main equation for this.

Theory that the domestic interest rate should be equal to the foreign interest rate minus the expected appreciation of the domestic currency.

Explain the trading process on the NYSE.

There is a trading post location on floor of exchange where trades happen. -DMM trade for own account -Brokers place market orders for customers -Customer calls broker -Broker has person onfloor go to DMM Trading Post

How are Bitcoin and Ether similar and different?

They are both digital currencies, traded online, held in crypto wallets, use blockchain technology to back them. Bitcoin is just a cryptocurrency, Ether is the currency that is utilized for the Ethereum platform, this platform has a variety of decentralized finance applications (not run through a central authority)

What is a dual-class firms and what is some of the recent pushback on this structure?

They have two classes of common share outstanding, with different rights assigned to each class. Examples: Berkshire, Google, Facebook. The push back on this structure is that stockholders don't have as much to say on the day to day investments. The hope is to encourage other companies to have only one class because they would be missing out on different index's being invested in.

What hours and days do FX trading occur at? How do FX trades work compared to futures and forwards? Which method is preferred to eliminate counterparty risk? Which is preferred is flexibility in contract terms is most important?

Trades 24 hours a day Futures- Standardized contracts for size, currencies, and contract expirations once per quarter, Profits/Losses settled daily, Many contracts sold before maturity. Forwards- Customized contracts -Any currency, dates, size -No daily settlement -Delivery occurs in over 90% of forwards. Futures would be preferred to eliminate counterparty risk. Forwards is preferred for flexibility in contract terms.

Compare how traditional financial transactions work compared to blockchain transactions.

Traditional financial transactions can take days and record transactions in a ledger (Distributed ledger). Blockchain transactions has no central authority/processor. Multiple participants involved to verify. "Miners" use complex mathematical problems solved by computers to verify transactions and then adds them to the blockchain ledger. Miners are compensated for this with cryptocurrency. Mining requires large amount of computer power and electricity.

Which country has the largest stock market? Generally, do the stock markets between countries have weak correlations, strong correlations, or does it vary?

US is largest stock market

What does "dollarization" and currency peg mean? What are motivations for these?

Use of a foreign currency in parallel to or instead of, the local currency. When a currency is pegged, or fixed, it is tied to another country's currency. Countries choose to peg their currency to safeguard the competitiveness of their exported goods and services. A weaker currency is good for exports and tourists, as everything becomes cheaper to purchase.

What is "mining", the potential rewards of mining, and the concerns with mining?

Verifying the ledgers, miners use complex mathematical problems solved by computers to verify transactions and then adds them to the Blockchain ledger Rewards: Compensated for this with cryptocurrency Concerns:Mining requires a large amount of computer power and electricity

straight voting

Vote for one director at a time Under the straight voting scheme shareholders elect directors by a majority vote. Each share of stock has one vote. The problem with this situation is that a shareholder that has a majority of the shares (or some combination of shareholders) will be able to elect every member of the board. Can't place all votes for single director

Be able to read and understand the components to a stock quote.

Watch video (slide 31 chapter 8)

What do each of the 3 versions of the EMH mean?

Weak form efficiency- Historical prices, volume info, and technical analysis. Semistrong form efficiency- Publicly available information Strong form efficiency- Private info and insider trading

What is the efficient market hypothesis say?

when new information comes into the market, it is immediately reflected in stock prices and thus neither technical nor fundamental analysis can generate excess returns. The efficient market hypothesis (EMH) or theory states that share prices reflect all information.