LiquidAssets10

An order to sell a security at the best price available is most likely a:

A) limit order.

B) market order.

C) stop order.

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A market order is an order to buy or sell a security immediately at the best available price. A limit order is an order to buy at the specified limit price or lower, or to sell at the limit price or higher. A stop order is an order to buy if the market price increases to the specified stop price, or to sell if the market price decreases to the stop price.

LiquidAssets10

Which of the following statements about securities markets is least accurate?

A) A limit buy order and a stop buy order are both placed below the current market price.

B) Characteristics of a well-functioning securities market include: many buyers and sellers willing to trade at below market price, low bid-ask spreads, timely information on price and volume of past transactions, and accurate information on supply and demand.

C) Secondary markets, such as the over-the-counter (OTC) market, provide liquidity and price continuity.

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A limit buy is placed below the current market price, but a stop buy order is placed above the current market price (stop buy orders are often placed to protect a short sale from a rising market).
The other choices are true. A well-functioning securities market includes the following characteristics:

• timely and accurate information on price and volume of past transactions.
• timely and accurate information on the supply and demand for current transactions.
• liquidity (as indicated by low bid-ask spreads).
• marketability.
• price continuity.
• depth (many buyers and sellers willing to transact above and below the current price).
• operational efficiency (low transaction costs).
• informational efficiency (rapidly adjusting prices).

LiquidAssets10

A primary market transaction involves:

A) the direct trading of securities between institutional investors.

B) primarily preferred stocks.

C) the sale of new securities to investors.

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A primary market is a market for new issues of securities.

LiquidAssets10

Which of the following statements about securities markets is least accurate?

A) A market that features low transactions costs is said to have operational efficiency.

B) Initial public offerings (IPOs) are sold in the secondary market.

C) In a continuous market, a security can trade any time the market is open.

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IPOs are sold in the primary market.

LiquidAssets10

Which of the following is least likely a service provided by an underwriter in the primary market?

A) Origination.

B) Diversification.

C) Risk Bearing.

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The underwriter provides the following services to the issuer:

• Origination, which involves the design, planning, and registration of the issue.
• Risk bearing, which means the underwriter guarantees the price by purchasing the securities.
• Distribution, which is the sale of the issue.

LiquidAssets10

Which of the following statements regarding primary and secondary markets is least accurate?

A) Prevailing market prices are determined by primary market transactions and are used in pricing new issues.

B) Secondary market transactions occur between two investors and do not involve the firm that originally issued the security.

C) New issues of government securities can be sold on the primary market.

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Prevailing market prices are determined by the transactions that take place on the secondary market. This information is used to determine the price of new issues sold on primary markets.

LiquidAssets10

Which of the following statements about primary and secondary markets is least accurate?

A) The proceeds from a sale in the secondary market go to the issuer.

B) A primary market is a market in which new securities are sold.

C) The primary market benefits from the liquidity provided by the secondary market.

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Proceeds in a primary market go to the issuing firm. Proceeds from a sale in the secondary market go to the current owner who is selling the securities.

LiquidAssets10

Which of the following is a difference between primary and secondary capital markets?

A) Primary markets are where stocks trade while secondary markets are where bonds trade.

B) Primary capital markets relate to the sale of new issues of bonds, preferred, and common stock, while secondary capital markets are where securities trade after their initial offering.

C) Secondary capital markets relate to the sale of new issues of bonds, preferred, and common stock, while primary capital markets are where securities trade after their initial offering.

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Bonds and stocks are traded on both the primary and secondary markets.

LiquidAssets10

Which of the following statements regarding secondary markets is least accurate? Secondary markets are important because they provide:

A) investors with liquidity.

B) firms with greater access to external capital.

C) regulators with information about market participants.

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Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital.

LiquidAssets10

A trading system that matches buyers and sellers based on price and time precedence is most likely a(n):

A) quote-driven market.

B) brokered market.

C) order-driven market.

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In an order-driven market, buy orders and sell orders are matched up by the exchange according to order matching rules. In a quote-driven market, customers trade with dealers at bid and ask prices set by the dealers. In a brokered market, brokers organize trades among their clients.