Chapter 2: Financial Markets and Institutions (2-4)
Stocks are traded using a variety of market procedures, but there are two basic types:
1) physical location exchanges, which include the NYSE and several regional stock exchanges, and 2) electronic dealer-based markets, which include the NASDAQ, the less formal over-the counter market, and the recently developed electronic communications networks (ECNs)
The dealer market consist of:
1) the relatively few dealers who hold inventories of these securities and who are said to "make a market" in these securities 2) the thousands of brokers who act as agents in bringing the dealers together with investors 3) the computers, terminals, and electronic networks that provide a communication link between dealers and brokers
What is an over-the-counter (OTC) market?
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities
What are physical location exchanges?
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.
What is the purpose of an ECN (electronic communication network)?
It's a system that uses electronic technology to bring buyers and sellers together.
What is the computerized network used by FINRA?
NASDAQ
Who are the two leaders in the stock market?
NYSE Euronext and NASDAQ
What does FINRA do?
The Financial Industry Regulatory Authority (FINRA) licenses brokers and oversees trading practices.
What does the bid-ask spread represent?
The dealer's markup, or profit.
How do the exchanges in a physical location stock exchange operate as auction markets?
The exchange members with sell orders offer the shares for sale, and they are bid for by the members with buy orders.
What are the differences between the physical location exchanges and the NASDAQ stock market?
The main difference is their markets. NASDAQ is a dealer's market, with participants trading through a dealer than directly with each other, while NYSE is an auction market, which enables individuals to transact between each other on an auction basis.
What is the most active secondary market, and the most important to financial managers?
The stock market - where the prices of firms' stocks are established.
What are dealer markets?
They include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
True or false: A dealers risk increases when the stock is more volatile or when the stock trades infrequently.
True
True or false: The rise of ECNs accelerated the move toward 24-hour trading.
True
True or false: because more of the larger companies trade on the NYSE (vs NASDAQ), the market capitalization of NYSE-traded stocks is much higher than those for stocks traded on NASDAQ.
True
What is a financial market?
a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds
What is the bid ask spread?
the difference between the bid price and the ask price