Chapter 8 – Stock Markets

Stock markets

is a place where investors go to trade (buy and sell) equity securities such as common stocks and
derivatives

Common Stock

The fundamental owner-ship claim in a public or private corporations.

Residual Claim

In the event of liquidations, common stockholders have the lowest priority in terms of any cash
distribution.

Limited Liability

No matter what financial difficulties the issuing corporation encounters, neither it nor its creditors can
seek repayment from the firm’s common stockholders. This implies that common stockholders’ losses
are limited to the original amount of their investment.

Dual-Class Firms

Two classes of common stock are outstanding, with differential voting and/or dividend rights assigned to
each class.

Cumulative Voting

All directors up for election are voted on at the same time. The number of votes assigned to each
stockholder equals the number of shares held multiplied by the number of directors to be elected.

Proxy

A voting ballot sent by a corporation to its stockholders. When returned to the issuing firm, a proxy
allows stockholders to vote by absentee ballot or authorizes representatives of the stockholders to vote
on their behalf.

Preferred Stock

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

Net Proceeds

The price at which the investment bank purchases the stock from the issuer.

Gross Proceeds

The price at which the investment bank resells the stock to investors.

Underwriter’s spread

The difference between the gross proceeds and the net proceeds.
Syndicate

The process of distributing securities through a group of investment banks.

Originating Houses

The lead banks in the syndicate, which negotiate with the issuing company on behalf of the syndicate.

Initial Public Offering (IPO)

The first public issue of financial instrument by a firm.

Seasoned Offering

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

Preemptive Rights

A right of existing stockholders in which new shares must be offered to existing shareholders first in
such a way that they can maintain their proportional ownership in the corporation.

Red Herring Prospectus

A preliminary version of the prospectus describing a new security issue distributed to potential buyers
prior to the security’s registration.

Shelf Registration

Allows firms that plan to offer multiple issues of stock over a two-year period to submit one registration
statement summarizing the firm’s financing plans for the period.

Secondary Stock Markets

The markets in which stocks, once issued, are traded (i.e. rebought and resold).

Trading Post

A specific place on the floor of the exchange where transactions on the NYSE occur.

Specialists

Exchange members who have an obligation to keep the market going, maintaining liquidity in their
assigned stock at all times.

Market Order

An order to transact at the best price available when the order reaches the post.

Limit Order

An order to transact at a specified price.

Order Book

A DMM’s record of unexecuted limit orders.

Flash Trading

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 trades.

Dark Pools of Liquidity

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

Penny Stocks

Stocks that trade for less than $5 per share.

Market Efficiency

The speed with which financial security prices adjust to unexpected news pertaining to interest rates or
a stock-specific characteristic.