Chapter 3 - Investments
A market order has:
A market order has price uncertainty but not execution uncertainty
What are the differences between a stop-loss over, a limit sell order, and a market order?
A stop order is a trade is not to be executed unless stock hits a price limit. The stop-loss is used to limit losses when prices are falling. An order specifying a price at which an investor is willing to buy or sell a security is a limit order, while a market order directs the broker to buy or sell at whatever price is available in the market.
What is the difference between an IPO and an SEO?
An IPO is the first time a formerly privately-owned company sells stock to the general public. A seasoned issue is the issuance of stock by a company that has already undergone an IPO.
Where would an illiquid security in a developing country most likely trade?
In Broker Markets
Why have average trade sizes declined in recent years?
Many large investors seek anonymity for fear that their intentions will become known to other investors. Large block trades attract the attention of other traders. By splitting large transactions into smaller trades, investors are better able to retain a degree of anonymity
How do margin trades magnify both the upside potential and downside risk of an investment portfolio?
Margin is a type of leverage that allows investors to post only a portion of the value of the security they purchase. As such, when the price of the security rises or falls, the gain or loss represents a much higher percentage, relative to the actual money invested.
What are some different components of the effective costs of buying or selling shares of stock?
The effective price paid or received for a stock includes items such as bid-ask spread, brokerage fees, commissions, and taxes (when applicable). These reduce the amount received by a seller and increase the cost incurred by a buyer
What is the difference between a primary and secondary market?
The primary market is the market where newly-issued securities are sold, while the secondary market is the market for trading existing securities. After firms sell their newly-issued stocks to investors in the primary market, new investors purchase stocks from existing investors in the secondary market
How do security dealers earn their profits?
The primary source of income for a securities dealer is the bid-ask spread. This is the difference between the price at which the dealer is willing to purchase a security and the price at which they are willing to sell the same security.
What is the role of an underwriter? A prospectus?
Underwriters purchase securities from the issuing company and resell them. A prospectus is a description of the firm and the security it is issuing.
In what circumstances are private placements more likely to be used than public offerings?
When a firm is a willing buyer of securities and wishes to avoid the extensive time and cost associated with preparing a public issue, it may issue shares privately.