chapter 3: securities markets

What’s the difference between the primary and secondary markets?

Primary market—where new securities are issued to raise capital, often through underwriters

Secondary market—where previously issued securities are traded among investors

What is an underwriter’s role in an IPO?

Underwriters purchase securities from the issuing firm and resell them to the public at a markup. They assume the risk of distributing shares and help price the offering.

What document must be filed before selling securities to the public?

A prospectus—an SEC-approved document that discloses financial and business information about the issuer.

What are the main types of secondary markets?

Dealer markets, auction markets (like the NYSE), and electronic communication networks (ECNs).

What is a dealer market?

Dealers post bid and ask prices for securities and execute trades from their own inventory.

What is an ECN (Electronic Communication Network)?

A platform that matches buy and sell orders automatically, using a limit order book — trades are electronic and anonymous.

What is a specialist in stock trading?

A person (or firm) maintaining order in a stock by holding an inventory, managing limit orders, and ensuring price continuity (traditional to NYSE).

What is the difference between a bid price and ask price?

Bid is the price buyers are willing to pay; Ask is the price sellers want. The bid–ask spread is the difference between the two.

What are dark pools?

Private trading venues where large blocks of shares (block trades) are exchanged without displaying order book info, minimizing market impact.

What is algorithmic or high-frequency trading?

Using computer programs to place thousands of trades at extremely high speeds, taking advantage of latency (execution speed differences).

What does it mean to buy on margin?

Borrowing money from a broker to buy more securities. Amplifies gains and losses. Can result in a margin call if equity drops below required level.

What is short selling?

Selling securities not owned by borrowing them, aiming to buy them back at a lower price. Requires collateral and the broker holds proceeds in escrow.

What’s a limit order vs. stop order?

A limit order sets a price to buy or sell; a stop order triggers a market order once a price is hit, often used for losses.

What is the role of the SEC in securities markets?`

The Securities and Exchange Commission enforces securities laws, ensures disclosure, and prevents insider trading.

What is inside information?

Non-public, material information that gives a trader unfair advantage—trading on it is illegal.

What is private placement?

A method of raising capital by selling securities directly to a small group of institutional or accredited investors—does not require SEC registration.

What is the NASDAQ and how does it differ from NYSE?

NASDAQ began as a dealer market with no physical trading floor; NYSE is a traditional auction market with specialists. Both are now largely electronic.

What is the Over-the-Counter (OTC) market?

A decentralized market where securities (especially bonds) are traded directly between parties, often via dealers.

What is a stock exchange?

A regulated marketplace where securities are bought and sold (e.g. NYSE, NASDAQ); may be physical or electronic.