Markets Ch 8 Stock Markets Notes

on exam 3

Corporate Stock

serves as a source of financing for firms, in addition to debt financing.

Common Stock

fundamental ownership claim in a public or private corporation, and many characteristics differentiate it from other types of securities.

• discretionary dividend payments

• residual claim status

• limited liability

• voting rights

Residual Claim

common stockholders have the lowest priority claim in the event of bankruptcy.

Senior Claims 

may be payments owed to creditors such as the firm’s employees, bond holders, the government (taxes), and preferred stockholders.

Limited Liability 

implies that common stockholder losses are limited to the amount of their original investment in the firm if the company’s asset value falls to less than the value of the debt it owes. 

only what you invest is what you get. 

Voting Rights

control the firm’s activities indirectly by using their voting rights in the election of the board of directors.

Typically, one vote per…

share of common stock

Dual-Class Firms

where two classes of common stock are outstanding, with different voting and/or dividend rights for each class.

Cumulative Voting 

# of shares * # of directors to be elected = # of votes assigned to stockholder

Straight Voting

one share = one vote per chair seat

Proxy

a voting ballot sent by a corporation to its stockholders.

Preferred Stock

a hybrid security that has characteristics of both bonds and common stock.

-dividends paid quarterly

-generally do not have voting rights

-can be converted to common stock at any time the investor chooses. 

Nonparticipating Preferred Stock

the dividend is fixed regardless of any increase or decrease in the issuing firm’s profits.

Participating Preferred Stock

actual dividends paid in a year may be greater than promised.

Cumulative Preferred Stock

if the dividend cannot be paid in any year, it accrues until it can and is paid before common dividends.

Noncumulative Preferred Stock

dividend does not accumulate and is never paid.

Typically, preferred stock is…

nonparticipating and cumulative.

Primary Stock Markets

where corporations raise funds through new issues of stock.

Investment Banks

can conduct a primary sale using either a firm commitment or best efforts underwriting basis.

Firm Commitment Underwriting

investment bank guarantees the corporation a price for the newly issued securities.

Best Efforts Underwriting

occurs when the underwriter does not guarantee a price to the issuer.

An Underwriter

a financial professional who evaluates risk for a company.

Syndicate

a group of investment banks working in concert to sell and distribute a new issue.

Originating House 

the lead bank in the syndicate. 

Initial Public Offering (IPO)

the first public issue of a financial instrument by a firm.

Seasoned Offering

the sale of additional securities by a firm whose securities are currently publicly traded. 

Preemptive Rights

give existing stockholders the ability to maintain their proportional ownership.

Red Herring Prospectus

a preliminary version of the prospectus that describes a new security issue.

Shelf Registration

allows firms that plan to offer multiple issues of stock over a two-year period to submit one registration statement.

Secondary Stock Markets

where stocks are traded by investors.

-original issuer of stock is not involved. 

-securities broker acts as an intermediary between the buyer and the seller.

New York Stock Exchange

the largest stock exchange in the world.

famous for its physical trading floor.

auction market (buyers and sellers trade with each other)

NASDAQ

second largest stock exchange in the world. 

fully electronic, no physical trading floor.

dealer market (investors trade through dealers)

Trading Post 

all transactions occurring on NYSE occur at a specific place on the floor of the exchange. 

Specialist 

a special market maker each stock is assigned. 

Market Order

buy or sell right now at the best available price.

Limit Order

buy or sell only if the price reaches what i want.

Program Trading

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 trades. 

Circuit Breakers

a temporary halt in trading to curb panic-selling on stock exchanges.

Limit up-limit down rules

halts trading on individual stocks if the stock price moves outside the following price band equation.

Flash Trading

a practice in which, for a fee, traders are allowed to see incoming buy or sell orders milliseconds earlier than general market traders. 

Naked Access 

allows some traders to rapidly buy and sell stocks directly on exchanges using a broker’s computer code without exchanges or regulators always knowing who is making the trade. 

SEC banned this in the late 2010s. 

Dark Pools of Liquidity

trading networks that provide liquidity but that do not display trades on order books. 

Over the Counter (OTC)

securities not sold on one of the organized exchanges. 

does not have a physical trading floor.

transactions are completed via an electronic market. 

Small Order Execution System 

provides automatic order execution for individual traders with orders of less than or equal to 1,00 shares. 

Electronic Communication Networks

computerized systems that automatically match order between buyers and sellers and serve as an alternative to traditional market making and floor trading.