Market
Participants
Participants
What’s an Issuer?
What is:
An issuer is defined as a legal entity that sells securities in order to finance its operations.
This market involves the initial sale of securities to investors, with proceeds going directly to the issuer?
What is:
The Primary Market
This federal law regulates the primary market, requiring full and fair disclosure through a prospectus when new securities are offered to the public.
What is the Securities Act of 1933
This type of stock represents basic ownership in a corporation and usually carries voting rights, but is last to be paid in liquidation.
What is:
Common Stock?
This type of security represents a loan from the investor to the issuer, with a promise to repay the principal at maturity plus periodic interest payments.
What is:
A Bond?
There are two primary methods that issuers use to raise capital. Those methods are defined as what?
What is:
Issuing debt securities (bonds) and issuing equity securities (stocks)
True or False
The Securities Exchange Act of 1934 regulates the primary market.
What is:
False
The Securities Act of 1933 regulates the primary market, while the 1934 Act regulates the secondary market.
True or False:
The Securities Exchange Act of 1934 created the SEC and regulates secondary market trading.
What is:
True
This type of stock offers fixed dividends and priority over common stockholders in dividends and liquidation, but rarely carries voting rights.
What is:
Preferred Stock
The par value of most bonds is this amount, which the issuer repays to the investor at maturity.
What is:
$1,000
True of false:
Institutional investors are investors who directly buy stocks or bonds from broker dealers.
What is:
False
After securities are first sold by the issuer, this market allows investors to trade those securities among themselves.
What is
The Secondary Market.
This Act created the Securities Investor Protection Corporation (SIPC), which provides up to $500,000 of coverage per separate customer, including up to $250,000 in cash.
What is:
The Securities Investor Protection Act of 1970 (SIPA)
A shareholder owns 500 shares and there are three board seats up for election. Under this voting method, the investor can cast 1,500 total votes and distribute them however they choose — all for one candidate or split among several.
What is:
Cumulative Voting?
This is the fixed annual interest rate that determines how much income a bondholder receives, based on the bond’s par value.
What is:
The Coupon Rate?
The Securities and Exchange Commission categorizes these investors who, by the nature of their income or assets, as more sophisticated and/or able to assume greater risk. These investors are referred to as:
Whats is:
Accredited Investors
These securities meet exchange listing standards and trade on national exchanges like the NYSE or Nasdaq, unlike unlisted securities that trade over-the-counter.
What are:
Listed Securities.
This Act defines and regulates investment advisers and uses the ABC Test — Advice, Business, and Compensation — to determine who must register.
What is:
The Investment Advisers Act of 1940.
This right allows current common shareholders to maintain their proportional ownership when new shares are issued, usually at a discounted subscription price.
What are:
Preemptive Rights?
This type of bond pays no periodic interest, but is instead sold at a deep discount and redeemed at full face value at maturity.
What is:
A Zero-Coupon Bond?
The SEC classifies large entities such as insurance companies, investment companies, pension plans, and certain corporations as what type of investors?
What is:
Qualified institutional buyers (QIBS)
Exchange-listed securities that trade over-the-counter, away from traditional exchanges, are said to be traded in this market.
What is:
The Third Market?
This Act was passed to combat the misuse of material, non-public information, imposing penalties up to $5 million in fines and 20 years in prison.
What is:
The Insider Trading and Securities Fraud Enforcement Act of 1988
This type of preferred stock accumulates unpaid dividends and must receive all past and current payments before any dividends are distributed to common shareholders.
What is:
Cumulative Preferred Stock?
When interest rates in the market rise, the prices of existing bonds will fall. When rates fall, bond prices will rise.
What is:
The Inverse Relationship between Prices and Interest Rates?
A broker-dealer executes a trade for its own inventory account rather than on behalf of a client.
In what capacity is the firm acting, and how is its compensation determined?
What us:
The firm is acting in a dealer (principal) capacity and earns a markup or markdown on the trade instead of a commission.
This market consists of direct institution-to-institution trading, often conducted through proprietary trading systems (PTSs) and without public exchanges.
What is:
The Fourth Market?
This 2001 legislation strengthened U.S. anti–money laundering measures, requiring firms to maintain Customer Identification Programs (CIPs) and file Suspicious Activity Reports (SARs).
What is:
The USA PATRIOT Act of 2001
This type of derivative security gives investors the right to buy stock above its current market price for several years, often issued as a sweetener with bonds.
What is:
A Warrant.
If an issuer structures a bond issue so that different portions mature in successive years, it’s known as this type of bond issue.
What is:
A Serial Bond Issue?
An investment firm manages $120 million in client assets and provides ongoing portfolio advice for a fee based on assets under management.
With which regulator must the firm register?
How does its compensation model differ from that of a broker-dealer?
What is:
It must register with the SEC (assets exceed $110 million).
It charges advisory fees based on assets under management rather than transaction-based commissions like a broker-dealer.
In this type of introducing firm arrangement, the clearing firm handles trades for multiple customers under a single account and doesn’t maintain individual customer details.
What is:
An Omnibus Account?
This 1938 amendment to the Securities Exchange Act authorized the creation of self-regulatory organizations (SROs) such as FINRA and later, the Municipal Securities Rulemaking Board (MSRB).
What is:
The Maloney Act of 1938
Under SEC Rule 144, affiliates of a company selling stock are subject to this restriction — the greater of 1% of outstanding shares or the average weekly trading volume over the past four weeks.
What is:
The Volume Limitation Rule
This feature gives an issuer the right to redeem bonds before maturity, often paying a call premium to compensate investors.
What is:
A Call Provision?
This type of financial professional provides advice to municipal entities, such as state or local governments, regarding the structure, timing, and terms of their bond offerings.
What is:
A Municipal Advisor
This network provides an electronic matching platform for buyers and sellers of listed securities, allowing trades to occur anonymously, including after-hours, and charging subscribers a usage fee.
What is:
An Electronic Communication Network (ECN)?
This FINRA rulebook section governs how disciplinary actions are taken against members or registered reps who violate regulations, and is often remembered by the phrase “FINRA acts like a COP.”
What is:
The Code of Procedure (COP)?
An investor owns convertible preferred stock with a $100 par value and a $25 conversion price. How many shares of common stock could she receive per preferred share?
What is 4 shares? ($100 ÷ $25 = 4)
A corporation issues bonds that can be exchanged for a set number of common shares at a specified price. This feature allows investors potential equity upside while still earning fixed interest.
What is:
A Convertible Bond?
To be classified as a Qualified Institutional Buyer (QIB), an investor must meet these three SEC criteria:
What is:
1. Be an eligible institution (e.g, insurance company or investment adviser).
2. Be purchasing for their own account or another eligible account.
3. Own and invest at least $100 million in unaffiliated securities.
These off-exchange trading systems provide liquidity for large institutional investors but do not display quotes publicly, allowing block trades to occur with minimal market impact.
What are:
Dark Pools
This self-regulatory organization writes the rules for municipal securities dealers, but has no enforcement authority — instead, its rules are enforced by the SEC, FINRA, or the banking regulators.
What is:
The Municipal Securities Rulemaking Board (MSRB)?
These equity securities represent ownership in a foreign company, but trade in U.S. markets in U.S. dollars and pay dividends in U.S. currency.
What are:
American Depositary Receipts (ADRs)?
If the issuer calls a convertible bond when the market value of the shares exceeds the call price, investors are effectively forced to convert to stock or accept less than market value.
What is:
A Forced Conversion?
A state government plans to issue bonds to fund a major highway project. Since the city council lacks experience in structuring large bond offerings, they hire a financial professional to advise on timing, structure, and terms of the sale. Meanwhile, a separate firm is hired to underwrite and sell the bonds to investors.
What are the role of each firm and how do they differ?
Who are:
The Municipal Advisor (who provides guidance to the issuer) and the Investment Banker or Underwriter (who purchases and distributes the bonds to investors).
A large hedge fund executes millions of dollars in stock trades after regular market hours, using an electronic platform that allows anonymity and low transaction costs. These trades do not appear on public quote systems but match directly with other institutional investors.
What type of trading system is being used and what is its purpose?
What is:
A Dark Pool, designed to provide private, low-impact trading for institutional investors?
A customer keeps $300,000 in a savings account at a local bank and also has $400,000 in a brokerage account at an affiliated investment firm. Both institutions fail during a market downturn.
Which agencies protect this customer’s funds, and up to what limits?
What are:
The FDIC, which insures bank deposits up to $250,000 per depositor, per bank, and the SIPC, which protects brokerage accounts up to $500,000 per customer, including $250,000 for cash.
A corporation repurchases some of its issued shares and holds them in reserve. These shares have no voting rights and don’t receive dividends while held by the company.
What is:
Treasury Stock
A corporation issues 10-year, 8% callable bonds at par. Five years later, market interest rates drop to 4%. The issuer calls the bonds at 102. Explain why the issuer chose to call and how investors are affected.
Who is:
The Issuer, calling the bonds to refinance at lower interest rates
Investors receive their principal plus a 2% call premium, but lose future high-coupon income.