2.

1 Differentiate between each of the following pairs of terms:

a._Money market and capital market
The money market is a type of securities market that allows for the trading of short-term debt
securities. It is a financial market in which short-term securities with a maturity of less than a year are
borrowed and lent. In contrast, the capital market allows for the circulation of long-term securities
through borrowing and lending. Traders can engage in long-term financial transactions, such as the
purchase and sale of securities such as stocks and, as well as the purchase and sale of other financial
instruments with a longer maturity or more than a year.

b._Primary market and secondary market

The capital market is divided into two categories: the primary market and the secondary market.
Traders can more efficiently transact applicable securities when the market is classified, which is
advantageous because a wide variety of financial transactions can be performed. Investors can sell
their newly issued securities in the primary market, which is where they first trade. The issuer can
receive the proceeds of its sale directly. Securities are exchanged in the secondary market after they
have been issued. The issuer is not a party to secondary-market transactions. In this way, an investor
can exchange his or her assets for a new one. It's possible to continuously price assets on the
secondary market, making sure that prices always represent the best available information. A
company's capacity to deal quickly and fairly in the secondary market is referred to as its liquidity.

c._Broker market and dealer market

Broker markets and dealer markets are the two parts of the secondary market that are distinguished
by the way securities are exchanged. Broker markets are made up of national and regional securities
exchanges, whereas dealer markets are made up of the Nasdaq OMX (National Association of
Securities Dealers Automated Quotation System), and over the counter (OTC) trading venues. In broker
markets, there is a centralized trading floors where all trading can take place while dealers market
has no such trading floor. Instead, many market makers are linked together via a vast
telecommunications network, rather than just one.

2.2 Briefly describe the IPO process and the role of the investment banker in underwriting a
public offering. Differentiate among the terms public offering, rights offering, and private
placement.
The initial public offering (IPO) is the most significant transaction in the primary market since it
represents the first public sale of a company's stock and results in the company becoming publicly
traded. Before going public, a corporation must first obtain the approval of its current shareholders,
who own its privately issued stock. The documents' legitimacy must then be certified by the
company's auditors and lawyers. The corporation then hires an underwriter. Investment bankers
assist companies in the issuance of new securities and advise them on large financial transactions.
An investment banker's main duty is underwriting. Buying securities from the issuing firm at a fixed
price and then reselling them to the market at a loss. He also advises the issuer on pricing and other
essential aspects of the offering. This bank serves as the primary underwriter, promoting and
facilitating the sale of the company's initial public offering (IPO) shares. Other investment banking
firms frequently assist in the underwriting and advertising of the company's stock.
In addition, the underwriter assists the company in filing with the SEC. This statement includes the
prospectus. It summarizes the management and financial status of the issuer, as well as the
securities to be issued.
After submitting a prospectus to the SEC, a company enters a quiet period during which it is limited
in what it can tell investors. While the registration statement is being approved by the SEC, investors
can obtain a preliminary prospectus. The red herring version gets its name from a notice printed in
red on the front cover indicating that the offer is tentative. The quiet period is intended to ensure
that all potential investors have access to the same information about the company, but not to any
previously unpublished data that would give an unfair advantage.
During the registration period and prior to the IPO day, an IPO road show is a series of
presentations made to potential investors, typically institutional investors, across the country and
sometimes abroad. Road shows assist investment bankers in determining the item's demand and an
expected price range. The SEC must approve all agreements, including the price, before the IPO can
take place.
​ During a public offering, the company makes its securities available for purchase by
members of the general public.
​ A right offering occurs when a company offers shares to existing stockholders on a pro rata
basis (each outstanding share receives an equal proportion of new shares).
​ A private placement is a transaction in which a company sells shares to specific groups of
private investors, such as insurance companies, investment management firms, and pension funds,
without first registering with the Securities and Exchange Commission.

2.3 For each of the items in the left-hand column, select the most appropriate item in the
right-hand column. Explain the relationship between the items matched.
a. NYSE Amex 5. Is second largest organized U.S. exchange -
b._CBT 2. Is a futures exchange
c. NYSE 6. Has the most stringent listing requirements
d. Boston Stock Exchange 4. Is a regional stock exchange
e. CBOE 3. Is an options exchange
-
f._ OTC 1. Trades unlisted securities
- OTC markets allow unlisted securities to be traded in this kind of market. Since this kind of
market is unregulated, companies are not required to file anything to the Securities and Exchange
Commission’s listing requirements.

2.4 Explain how the dealer market works. Be sure to mention market makers, bid and ask
prices, the Nasdaq market, and the OTC market. What role does the dealer market play in initial
public offerings (IPOs) and secondary distributions?

2.5 What are the third and fourth markets?

2.6 Differentiate between a bull market and a bear market.

2.7 Why is globalization of securities markets an important issue today? How have international
investments performed in recent years?
Globalization of securities markets corresponds to the expansion of coverage for securities to be
traded. It simply means that there is an increase in the span of investments. With the foregoing
advancement of technology and leaning towards the digital word, it is easier for traders and
investors to participate in the global securities market. Critically assessing the potential of a globally
open markets allows investors to receive a positive and increased return on their investments. It is
easier for investors to maximize the opportunities offered by international market and a lower cost
for transactions. The digital market secures those transactions can be done in one click. Through the
diversification of portfolios, it increases the potential returns and lower the risks of investments.
In the recent years, securities exchanges spread to over 100 countries in the world. It does not limit
the size of the stock exchange markets available thus, wider range of securities and industries
available.

2.8 Describe how foreign security investments can be made, both indirectly and directly.
Foreign security transactions can be made directly or indirectly. To indirectly invest in foreign
security investments, an investor can purchase securities through firms that have substantial foreign
operations and receiving 50% on their revenue from foreign or domestic operations. It is easier for
an investor to have an international diversification of security portfolios. An investor can also
purchase foreign security through mutual funds that have stocks from overseas firms. To directly
invest in foreign security, investors can purchase shares from foreign firms that are traded either
over the counter or stock exchanges.

2.9 Describe the risks of investing internationally, particularly currency exchange risk.
Investing in foreign countries means that there are a lot of risks to consider. Investors in international markets must
shoulder the risks of foreign trade regulations, labor laws, taxes, and political instability. Although investing
internationally provides higher returns and diversification, the risks can be as diverse as the former. Accounting standards
differ from each country, so profitability may be compromised as well. The reality is that international investment
involves foreign currency securities. Currency fluctuations effect trading earnings and losses as well as securities price
movements. The currency exchange rate is the price of one currency compared to another. The value of the world's
major currencies fluctuates every day, and this can have a considerable impact on the return on international securities.
It is expected for foreign investors to consider the currency exchange risk due to the varying exchange rates between the
currencies of two countries.

2.10 How are after-hours trades typically handled? What is the outlook for after-hours trading?
Orders placed after hours (After-hours orders) will normally only be filled if the prices are the same as those placed
during regular business hours. Customers can trade after business hours at several well-known brokerage firms, both
physically and online. Institutional investors such as brokerage firms and pension funds rely on ECNs for after-hours
trading. When placing an order, be sure to be as specific as possible. The two investors appear to have divergent financial
objectives or price movement expectations for the future. Continuous stock trading is a direct result of financial market
globalization. Trading after hours is more volatile and riskier than regular trading. Because trading hours are shorter,
there is less liquidity available.
2.11 Briefly describe the key requirements of the following federal securities laws:
a. Securities Act of 1933
It ensures that new security issues are fully disclosed. It requires the issuer of a new security to file a
registration statement with the Securities and Exchange Commission (SEC). Unsold securities must
be held for 20 days for SEC approval before being sold. The SEC's approval of the registration
statement merely indicates that the facts provided appear to reflect the firm's true position.

b. Securities Exchange Act of 1934

It supports the establishment of the Securities and Exchange Commission that serves as an agency
that will administer the different federal securities law. It imposes the power of the agency to
regulate the exchanges and over-the-counter market as well as their members, brokers and dealers,
and the securities that is being traded in the market.

c. Maloney Act of 1938

The Securities Exchange Act of 1934 was amended to permit self-regulation by trade associations.
The only one established is the National Association of Securities Dealers (NASD). Almost all
securities firms with a public face in the United States are NASD members. The NASD is a
self-regulatory organization governed by the Securities and Exchange Commission. It lays down
guidelines and regulations for securities trading and ethical conduct, monitors and enforces
compliance, and represents the industry. Non-NASD member businesses must now consent to
direct SEC surveillance.

d. Investment Company Act of 1940

It gave the SEC formal authority to regulate the activities and operations of investment businesses. It
mandated that investment businesses register with the Securities and Exchange Commission (SEC)
and disclose specific information. An investment corporation sells its shares to investors to purchase
securities. Whereas investment firms are prohibited from paying excessive fees to advisers and
commissions to stock buyers under a 1970 amendment.

e. Investment Advisers Act of 1940

Investment advisers, or anyone hired by investors to advise them on securities investments, are
required under the Investment Advisers Act of 1940 to disclose all relevant information about their
backgrounds, conflicts of interest, and any investments they recommend. The Securities and
Exchange Commission (SEC) requires advisers to register and file reports on a regular basis. The
SEC's powers to review investment advisers' records and to cancel the registration of advisers who
violate the act's restrictions were expanded by a 1960 amendment.
f. Securities Acts Amendments of 1975
SEC and the securities industry must build a competitive nationwide trading system under the 1975
Securities Act Amendments. First, the SEC eliminated fixed-commission schedules, allowing for
negotiated fees. Second, it created the Intermarket Trading System (ITS), an electronic network
integrating nine exchanges and trading approximately 4,000 qualified items.

g. Insider Trading and Fraud Act of 1988

The Insider Trading and Fraud Act of 1988 made it illegal to profit from securities transactions by
using nonpublic information. Insiders include directors, officers, major shareholders, bankers,
investment bankers, accountants, and attorneys who have access to nonpublic data. Insiders must
report all stock transactions to the SEC monthly. Insider trading sanctions were recently enhanced,
and the SEC was given more authority to investigate and prosecute claims of illegal insider trading.
h. Sarbanes-Oxley Act of 2002

Investors are protected by the Sarbanes-Oxley Act of 2002, which prohibits corporate fraud,
particularly accounting fraud. It increased the SEC's authority and budgets for auditors and
investigators, strengthened accounting disclosure requirements and ethical guidelines for financial
officers, established corporate board structure and membership guidelines, established guidelines
for analyst conflicts of interest, and strengthened accounting disclosure requirements and ethical
guidelines for financial officers. CEOs were also compelled to declare stock sales immediately under
the statute.

2.12 What is a long purchase? What expectation underlies such a purchase? What is margin
trading, and what is the key reason why investors sometimes use it as part of a long
purchase?
A long purchase is a transaction in which investors purchase securities with the expectation of
selling them for a profit later. The idea is to buy low and sell high. A long purchase is the most
common transaction. Because investors expect a security's price to rise during their ownership
period, their return is made up of dividends or interest, as well as the difference (capital gain or loss)
between the purchase and selling prices. This return is lowered by conversion losses. Margin trading
entails borrowing money to purchase securities. Investors can use margin to invest with less of their
own money. This allows the investor to purchase additional securities. Borrowing money creates
leverage, which magnifies both gains and losses. When the investor sells his investment, any residual
earnings are returned to him. Margins are risky because the investor may lose more than they
invested.

2.13 How does margin trading magnify profits and losses? What are the key advantages and
disadvantages of margin trading?
Buying on margin necessitates the investor putting up some money. This is the equity component of
the investor. The remaining funds are then lent by the investor's brokerage firm. Earnings are
maximized through margin trading. When an investor borrows money to buy assets, this is referred
to as financial leverage. Despite only funding a portion of the investment, the investor receives all
capital gains (minus costs), maximizing the return on his personal cash. Leverage enables investors
to increase their total investment or purchase more assets with less money. Margin trading can also
be used to increase diversification or allow investors to purchase more securities that they like. The
main disadvantage is risk. If the value of the investment falls, the investor's losses grow. The initial
investment of an investor may be lost. Furthermore, interest on the debit balance can be
substantial, reducing the investor's returns.
2.14 Describe the procedures and regulations associated with margin trading. Be sure to explain
restricted accounts, the maintenance margin, and the margin call. Define the term debit balance,
and describe the common uses of margin trading.
An investor must first open a margin account in order to trade on margin. Although the Federal
Reserve establishes the minimum equity requirement for margin transactions, brokerage firms
frequently impose their own, more stringent requirements.
Following the establishment of a margin account, the investor must provide the necessary equity at
the time of purchase. The first margin. Its purpose is to put a stop to excessive trading. If the
investor's account value falls below the initial margin requirement, the account becomes restricted,
and the investor is prohibited from making new purchases until the account's equity reaches the
initial margin requirement. The absolute minimum equity required in a margin account at all times is
known as the maintenance margin. If the account value falls below the maintenance margin, the
investor is notified and has a limited time to replenish the equity. If an investor fails to meet the
margin call, a broker may sell the investor's securities. Margin calls are typically provided but are not
required prior to a forced sale.
The debit balance, along with the value of the margined securities, is used to calculate an investor's
margin (collateral). Margin is typically used to boost long-term returns. A margin account with excess
equity can be used to purchase additional securities. You can take the concept of magnifying returns
to a whole new level with pyramiding.

2.15 What is the primary motive for short selling? Describe the basic short-sale procedure.
Why must the short seller make an initial equity deposit?
To generate income from short selling, investors must'sell high and buy low,' as the saying goes. This
is the transaction that comes after the standard (long purchase) one. When an investor borrows
shares, he or she sells them in the hopes of repurchasing them at a lower price later. When the
shares are purchased, they are returned to the lender. The Securities and Exchange Commission
(SEC) regulates short sales.

2.16 What relevance do margin requirements have in the short-selling process? What would
have to happen to experience a margin call on a short-sale transaction? What two actions
could be used to remedy such a call?
The short seller must make an equity deposit with the brokerage. It is the same as the first margin
set by the broker. This margin, along with the proceeds from the short sale, assures the broker that
the shares can be repurchased even if prices rise. If the stock price rises sufficiently to reduce the
short seller's margin to maintenance, a margin call is issued. The short seller has two options: deposit
initial margin (and bet on a share price decline) or closeout their position by buying back the shares (and take the loss).

2.17 Describe the key advantages and disadvantages of short selling. How are short sales
used to earn speculative profits?

The primary advantage of short selling is the potential profit from falling stock prices. The main disadvantage is
the high-risk exposure, which results in limited returns and unlimited losses. Short sellers also bet against the
market and are required to pay dividends while the short position is open. When investors expect the price of
a security to fall, they short sell to profit speculatively because the short seller is betting against the market,
this strategy is fraught with danger.