SIE

Primary and Secondary Markets

The primary market is where securities are first issued and sold to investors, such as in an initial public offering (IPO). The issuer receives the proceeds, minus underwriting fees and costs. The secondary market is where previously issued securities trade among investors on exchanges and over the counter; the issuer receives nothing from these trades. A company raises capital only in the primary market, but a liquid secondary market supports the primary market by assuring investors they can sell.

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Creates new securities

Distributes the issue

Investors pay the issuer

Investors trade with each other

Exchanges, Dealer Markets, and the OTC Market

Venue	HowItWorks	KeyParticipantsandFacts
Auctionmarket(NYSE)	Buyandsellordersarematchedbyprice thentime ,	DesignatedMarketMakers(DMMs)maintainfair
	priority;openingandclosingauctionssetofficial	andorderlymarketsinassignedstocksandtrade
	prices	fortheirownaccountswhenneeded;theNYSEisa
		hybridofelectronicandfloortrading
Dealermarket(Nasdaq)	Competingmarketmakerspostbidandaskquotes	Thebestbidandofferacrossallvenuesformthe
	andtradefrominventory	NationalBestBidandOffer(NBBO)
OTCmarket	Securitiesnotlistedonanexchangetradethrough	OTCMarketsGrouptiers:OTCQX(highest
	dealernetworks	standards) OTCQB(venturestage) Pink(limitedor , ,
		nodisclosure);mostbonds municipals and , ,
		governmentstradeOTC
ECNsandATSs	Electronicsystemsmatchbuyandsellorders	ATSs register as broker-dealers under Regulation
	automatically	ATS;darkpoolsdonotdisplayordersbefore
		execution

The difference between the bid (the highest price a buyer will pay) and the ask or offer (the lowest price a seller will accept) is the spread, which compensates market makers. Market makers must be willing to buy and sell at their posted quotes. Much market making is now done by automated systems, and trading is fragmented across more than a dozen exchanges, many ATSs, and dealers, so regulation focuses on getting orders the best available price wherever it is displayed. Regional venues such as NYSE Chicago (formerly the Chicago Stock Exchange) and Nasdaq PHLX (formerly the Philadelphia Stock Exchange) remain part of the national market system.

Regulation NMS

The National Market System is the SEC framework for U.S. equity trading. Regulation NMS promotes competition among trading venues while ensuring that investors receive the best displayed prices.

Rule	Requirement
OrderProtectionRule(Rule611)	Prohibits trade-throughs: executing at a price inferior to a protected quotation displayed on
	anothervenue
AccessRule(Rule610)	Requiresfairaccesstoquotationsandcapsthefeesforaccessingthem
Sub -Penny Rule (Rule 612)	Prohibitsquotesinincrementssmallerthanonecentforstockspricedat$100ormore .
MarketDataRules	Requireconsolidatedmarketdata(theconsolidatedtape)showingtradingacrossallvenues

Trading Hours, Auctions, and Circuit Breakers

Regular trading hours for U.S. equities are 9:30 a.m. to 4:00 p.m. Eastern Time, Monday through Friday, with a 1:00 p.m. early close on certain days such as the day after Thanksgiving and Christmas Eve. Pre-market sessions may begin as early as 4:00 a.m. and after-hours sessions typically run to 8:00 p.m. on some platforms. Extended-hours trading carries extra risks: lower liquidity, wider spreads, greater volatility, and quotes that may reflect only one trading system. Opening and closing auctions aggregate orders to set official opening and closing prices, which are used for index values and fund pricing. Market-wide circuit breakers halt trading temporarily when the S&P 500 falls by preset percentages (7%, 13%, and 20%) to curb panic selling.

Monetary Policy

Monetary policy is the Federal Reserve's management of money and credit to promote maximum employment and stable prices (the dual mandate), with moderate long-term interest rates as a related goal. The FOMC meets about eight times a year. Its main policy signal is the federal funds rate target, the rate banks charge one another for overnight loans of reserves.

Tool	Easing(Stimulative)	Tightening(Restrictive)
Federalfundstarget	Lowerthetarget	Raisethetarget
Openmarketoperations	FedbuysTreasuries addingreserves;ratesfall ,	FedsellsTreasuries drainingreserves;ratesrise ,
Discountrate	Lower the rate on discount-window loans to	Raiseit;thediscountratenormallysitsabovethe
	banks	fedfundsrate
Reserverequirements	Lowertherequiredratio(currentlyzero)	Raisetheratio;rarelyusedasapolicytool
Balancesheet	Quantitative easing: buy longer-term securities	Quantitativetightening:reduceholdings which ,
	to lower long-term rates when short rates are	can raise long-term rates
	nearzero

Rising rates generally lower bond prices, raise borrowing costs, pressure stock valuations, and strengthen the U.S. dollar by attracting foreign capital. Falling rates generally have the opposite effects.

Fiscal Policy

Fiscal policy is government spending and taxation, set by Congress and the President through the federal budget. Expansionary policy (more spending or lower taxes) stimulates demand but tends to increase deficits; contractionary policy (less spending or higher taxes) slows an overheating economy. The budget deficit is the annual shortfall of revenue versus spending, financed by issuing Treasury securities; the national debt is the accumulated total. Heavy Treasury borrowing can push interest rates up, and tax policy shapes investor behavior: rates on dividends, capital gains, and interest, tax-advantaged accounts such as IRAs and 401(k) plans, and the tax exemption on municipal bond interest.

The Business Cycle

During expansion, output, employment, and corporate profits rise; extended expansions can bring inflation and higher rates. The peak marks the end of expansion. During contraction (a recession, officially dated by the National Bureau of Economic Research), output falls and unemployment rises. The trough marks the low point before a new expansion. Cyclical sectors such as consumer discretionary, industrials, and materials outperform in expansions; defensive sectors such as utilities, health care, and consumer staples hold up better in contractions. Stagflation is the combination of slow growth, high unemployment, and high inflation.

Inflation, Deflation, and Interest Rates

Inflation is a general rise in prices that erodes purchasing power; central banks typically target about 2% a year. The Consumer Price Index (CPI) is the most widely followed measure (core CPI excludes food and energy); the Producer Price Index (PPI) tracks prices received by producers and can foreshadow consumer prices; the Personal Consumption Expenditures (PCE) price index is the Fed's preferred gauge. Fixed-income investments suffer most from inflation because their payments are fixed; stocks may keep pace if companies can raise prices; real assets and TIPS offer protection. Deflation, a general fall in prices, can be damaging because consumers delay purchases and debtors repay in more valuable dollars. The real interest rate equals the nominal rate minus inflation.

Economic Indicators and the Yield Curve

Type	WhatItDoes	Examples
Leading	Changesbeforetheeconomyturns	Stockprices buildingpermits manufacturers'neworders theyield , , ,
		curvespread consumerexpectations averageweeklyjobless , ,
		claims;combinedintheConferenceBoard'sLeadingEconomic
		Index
Coincident	Moveswiththeeconomy	Nonfarmemployment personalincome industrialproduction , , ,
		manufacturingandtradesales
Lagging	Changesaftertheeconomyturns ,	Averagedurationofunemployment businessloansoutstanding , ,
	confirmingtrends	laborcostperunitofoutput theprimerate CPIforservices , ,

Gross Domestic Product (GDP) is the total value of goods and services produced within a country, the broadest measure of economic activity; real GDP adjusts for inflation. The unemployment rate measures the share of the labor force without work and actively seeking it. Consumer confidence surveys from the Conference Board and the University of Michigan gauge spending intentions. The yield curve plots Treasury yields by maturity. A normal curve slopes upward; an inverted curve, with short-term yields above long-term yields, has often preceded recessions; a flat curve signals uncertainty about the direction of the economy.

The International Economy

Exchange rates affect trade and investment returns. A stronger dollar makes imports cheaper and U.S. exports more expensive, and it reduces the dollar value of returns on foreign investments. A weaker dollar helps U.S. exporters and increases the dollar value of foreign returns. The balance of payments records all transactions between a country and the rest of the world, and the balance of trade, part of the current account, compares exports with imports.