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Derivative Security
Financial contract whose value derives from an underlying asset.
Financial Intermediary
Entity that facilitates transactions between investors and markets.
Real Assets
Tangible assets used to produce goods and services.
Financial Asset Creation
New financial asset generated from loan agreements.
Share Price Reaction
Price rises when market optimism increases about a firm.
Capital Resource Allocation
Distribution primarily managed by financial markets.
Agency Problem
Conflict of interest between stakeholders and management.
Risk Exposure Adjustment
Firms manage business risks through commodity and derivative markets.
Financial Intermediary Examples
Includes investment companies, banks, and insurance firms.
Historical Stock Returns
Highest return in 1933; lowest in 1931.
CDS Contracts
Credit default swaps sold by AIG before 2008 crash.
Nonconforming Mortgage Loans
Higher default risk; also known as subprime loans.
Debenture
Unsecured bond with no collateral backing.
Federal Funds
Deposits of commercial banks at the Federal Reserve.
Money Market Securities
Safe, marketable instruments with low returns.
Municipal Bonds
Debt obligations issued by state or local governments.
Dow Jones Industrial Average
Index measuring stock performance of 30 large companies.
Call Option
Contract giving the holder the right to buy stock.
Promissory Note
Written promise to pay a specified amount at a future date.
Economies of Scale
Cost advantages gained by large-scale operations.
Investment Risk
Potential for loss in investment value.
Securitization
Process of pooling various types of debt to sell as securities.
Capital Markets
Markets for buying and selling equity and debt instruments.
Claims on Income
Rights to a portion of a company's earnings.
Market Optimism
Positive sentiment affecting stock prices and fundraising.
Interest Income Exemption
Municipal bond interest exempt from federal taxation.
Callable Bond
Bond that can be redeemed by issuer before maturity.
Value-weighted average
Average based on market capitalization of stocks.
Price-weighted average
Average based on stock prices of selected stocks.
DJIA
Price-weighted average of 30 large industrial stocks.
FTSE
U.K. stock index representing top companies.
Wilshire 5000
Broadest U.S. stock market index, value-weighted.
Nasdaq Composite
Market value-weighted index of Nasdaq stocks.
S&P 500
Market value-weighted index of 500 large companies.
NYSE Composite
Value-weighted index of all NYSE listed stocks.
SIPC
Insures investors against brokerage firm failures.
Underwriting syndicate
Group of investment banks underwriting securities.
Firm-commitment underwriting
Underwriter assumes full risk of unsold shares.
Primary market
Market for new stock issues.
Investment bankers
Professionals providing underwriting services.
Initial public offerings (IPOs)
First sale of stock to the public.
Underpriced IPOs
Stocks priced lower than market value initially.
Gross trading profit
Profit calculated from trading activities.
Ask price
Price at which a dealer sells a security.
Bid price
Price at which a dealer buys a security.
Stop-loss order
Sell order triggered at a specified price.
Buy stop order
Buy order triggered above a specified price.
Market order
Order to buy/sell at current market price.
Bid-ask spread
Difference between bid price and ask price.
Maintenance requirements
Minimum equity required in margin accounts.
Initial margin requirements
Minimum amount required to open a margin account.
Dealer
Market participant facilitating trades between buyers and sellers.
Trading volume
Total number of shares traded during a period.
Limit order book
List of buy/sell orders at specified prices.
Market value-weighted
Index calculated based on total market value.
Clearing price
Price at which a transaction is settled.
Bid Price
Price buyers are willing to pay for a stock.
Ask Price
Price sellers are willing to accept for a stock.
Transaction Cost
Total fees incurred when buying or selling stocks.
Market Order
Order to buy or sell at current market price.
Limit Order
Order to buy or sell at a specified price.
Stop-Loss Order
Sell order triggered when stock price falls.
Buy Stop Order
Buy order triggered when stock price rises.
Dealer Market
Market where dealers post bid and ask prices.
Broker Market
Market where brokers execute trades for clients.
Electronic Market
Market where trades are matched automatically by computers.
Margin Account
Account allowing borrowing to purchase securities.
Equity in Margin Account
Market value minus amount owed on margin loan.
Short Selling
Selling borrowed shares with intention to buy back cheaper.
Maximum Gain from Short Sale
Proceeds from short sale minus minimum replacement cost.
Stop-Buy Order
Order to buy stock to limit losses on short sale.
Initial Margin
Percentage of purchase price required to be paid upfront.
Maintenance Margin
Minimum equity required to maintain a margin account.
Commission Fee
Flat fee charged for executing a trade.
Implied Transaction Cost
Cost calculated from bid-ask spread and commissions.
Flat Commission
Fixed fee charged per transaction, regardless of size.
Proceeds from Short Sale
Total amount received from selling borrowed shares.
Margin Call
Request for additional funds to maintain margin requirements.
Market Value of Stock
Current price at which stock can be sold.
Amount Owed on Margin Loan
Total borrowed amount used to purchase securities.
Limit Order Book
List of buy and sell limit orders in market.
Transaction Cost Formula
Cost = shares × (ask price - bid price) + commissions.
Short-Seller
Investor who sells borrowed shares expecting price decline.
Cash Deposited with Broker
Funds held by broker to meet margin requirements.
Margin Account
Account for borrowing funds to purchase securities.
Short Sale
Selling borrowed securities to repurchase later.
Maintenance Margin
Minimum equity percentage required in margin account.
Initial Margin
Percentage of purchase price paid upfront.
Margin Call
Demand for additional funds when equity falls.
Net Asset Value (NAV)
Value per share of mutual fund assets.
Rate of Return
Percentage gain or loss on investment.
Hedge Funds
Investment funds using complex strategies for high returns.
REITs
Real Estate Investment Trusts for real estate investments.
Balanced Funds
Mutual funds holding equities and fixed-income securities.
Dividend Yield
Annual dividend payment divided by stock price.
Assets
Total resources owned by an investment fund.
Liabilities
Total debts or obligations of an investment fund.
Equity
Ownership interest in an asset after liabilities.
Cash from Short Sale
Funds received from selling borrowed shares.
Cash for Equity
Funds invested in purchasing equity securities.
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