Ch 2

• liquid assets are easy to trade
• examples of liquid assets are stocks of fortune 500 companies, US treasury bonds, gold, silver
• illiquid are assets difficult to trade
• examples of illiquid assets are real estate, fine art, other collectibles, and stocks and bonds of small companies
• stock market includes two markets: primary market and secondary market
• primary market is the original sales of securities
• primary market examples: IPO or SEO, new bond, treasury auction
• IPO stands for initial public offering
• SEO stands for seasoned equity offering
• secondary market is the sales between investors of already issued securities
• secondary market is generally referred to as "stock market"
• two main types in secondary market: OTC market and physical stock market
• OTC market has no centralized location, meaning traders are linked electronically
• OTC market is also called "dealer market"
• example of OTC market is NASDAQ
• physical stock market has traders meeting at a location
• physical stock market is also called "auction market"
• example of physical stock market is NYSE
• NASDAQ OMX is the largest OTC market
• NASDAQ stands for National Association of Security Dealers Automated Quotation System
• dealers post their bid in NASDAQ and ask prices for each stock they handle
• bid price is the price at which dealers are willing to buy a security from you
• ask price is the price at which dealers are willing to sell a security to you
• the ask price is always higher than the bid price
• spread is the difference between bid and ask price
• NYSE is the largest physical market
• in the NYSE, specialists match buyers and sellers
• specialists have to maintain an orderly market where bid/ask prices cannot get too far apart
• NYSE has higher listing standards than NASDAQ, so typically companies come to NYSE as they become more established
• stock market indexes are used to show performance of stock market
• three leading US indexes: Dow Jones Industrial Average, S&P 500 Index, NASDAQ Composite Index
• Dow Jones Industrial Average began in 1896 with 10 stocks
• in 1928, 30 stocks were included in the Dow Jones Industrial Average
• price weighted average is constructed by adding up prices of stocks in Dow and dividing it to get average
• stocks that have been in Dow Jones Industrial Index the longest are P&G, Exxon, United Tech
• Dow stocks are blue-chip industrial companies
• S&P 500 Index was established in 1957 and contains 500 stocks
• S&P 500 Index is a measure of large-cap US stock market performance
• S&P 500 Index has a market-value weighted index, meaning larger companies have greater influence
• S&P 500 Index is the most commonly used US benchmark