InvestorQ : Can you highlight some key and special terms pertaining to the capital markets which I need to be familiar with?
Moii Chavate made post

Can you highlight some key and special terms pertaining to the capital markets which I need to be familiar with?

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Sam Eswaran answered.
1 year ago

Actually, that list can go on endlessly but let me assemble a few key concepts for your benefit of better understanding of the capital markets.

Bucket Shop (U.S) a fraudulent brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities that they sell are typically poor investment opportunities, almost always penny stocks. It is a brokerage that makes trades on a client’s behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit. A stock brokerage operation in which the broker accepts the client’s money without ever buying the stock ordered. Instead the money is used for another purpose, the broker gambling that the customer is wrong and that the market price will decline and the stock can be bought at a lower price.

Bucketing is a situation where, in an attempt to make a short-term profit, a broker confirms an order to a client without actually executing it. If the eventual price that the order is executed at is higher than the price available when the order was submitted, the customer simply pays the higher price. On the other hand, if the execution price is lower than the price available when the order was submitted, the customer pays the higher price and the brokerage firm pockets the difference. It also means directly or indirectly taking the opposite side of client’s order into the brokers own account or into an account in which the broker has interest, without open and competitive execution of the order on an exchange.

Covered call option writing is a strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security.

Covered put option writing is a strategy in which one sells puts and simultaneously is short of an equivalent position in the underlying security.

Covered warrant is a stock, basket, or index warrant issued by a party other than the issuer of the underlying stock(s) and secured by the warrant issuer’s holding in the underlying securities or the warrant issuer’s general credit standing.

Dabba trading is trading of securities outside the stock exchanges. The broker instead of routing the trade of his clients in the system of stock exchanges, matches or executes the trades of its clients in a system provided by him outside the stock exchange.

Daisy chain is a kind of fictitious trading, or wash selling, whereby a group of unscrupulous investors artificially inflate the price of a security so that they sell it at a profit. As a stock price rises due to increased volume, investors who didn’t do all their homework may be attracted to the stock in order to participate in the rising price. These investors are typically caught owning a stock that continues to depreciate long after the daisy chain sells out their positions for a profit.

Flip-Over is a provision in a poison pill that gives shareholders the right to buy the company’s shares (or the shares of the surviving company after a merger) at half price. Unlike a Flip-in, a flip-over right does not become effective simply because an interested shareholder buys some stock. Usually it becomes effective when (i) there is an interested shareholder and (ii) the company engages in certain transactions with the interested shareholder or an affiliate, such as a merger or a sale of all or a large part of its assets. Historically, the flip-over poison pill was devised several years before the more powerful flip-in. At that time the essential discrimination against the interested shareholder that the flip-in entails was widely considered illegal. Now the two are generally combined, although under most circumstances the flip-in provision of the pill dominates any potential bidder’s attention.

Flip-In poison pill plan are a plan where shareholders are issued rights to acquire stock in the target at a significant discount which is usually 50%.

Flip-in is the most important characteristic of the most effective rights plan (position pill) in use today. It gives shareholders the right to buy the company’s shares at half price when someone becomes an ‘interested shareholder’, that is, crosses some stock ownership threshold such as 15% or 20%. The interested shareholder’s rights are void. Other shareholders can (typically) use each of their rights to buy a number of shares equal to two times the exercise price (set in advance), divided by the current market price of the target company’s stock. Usually, from the standpoint of a bidder, the flip-in right is a complete show stopper unless the bidder can convince a court that it should intervene. In the text we have tried to describe when courts intervene against poison pills under Delaware law.

Flip-over Poison Pill Plan is the most popular type of poison pill anti-takeover defense. Shareholders of the target firm are issued rights to purchase common stock at an exercise price high above the current market price. If a merger occurs, the rights flip over and allow shareholders to purchase the acquiring firm’s common stock at a substantial discount

Free-rider Paradox is when sometimes benefits and costs cannot be allocated accurately or at all to users by the markets or otherwise. A free rider tries to take advantage of this situation. The paradox is that if everyone tries to free ride no one can and everyone is worse off. An important example is the natural environment. Most industrial users of the natural environment are free riders. Everyone collectively is worse off but no one individually finds it worthwhile to stop. In takeovers, an important recent example is the basic research part of corporate research and development. It is impossible to limit the benefits from basic research to the corporation who pays the bill. Therefore, there will be a strong temptation for companies to free ride. Competition in the product and takeover market should increase this temptation.