Financial Markets and Competitive Analysis Review

Comprehensive vocabulary flashcards covering financial market structures, investment positions, behavioral anomalies, indexing methods, competitive strategy frameworks, and market efficiency forms based on the lecture notes.

Quota-Driven (Dealer) Market

A market where traders transact with dealers who quote bid/ask prices and supply liquidity by holding inventory in assets like bonds or currencies.

Order-Driven (Exchange) Market

A market where buyers and sellers submit orders to a central book that are matched based on specific rules, common in stock trading.

Long Position (Futures/Forwards)

A position representing an obligation to buy the underlying asset.

Short Position (Options)

A position representing the obligation to perform if the option is exercised by the holder.

Exposure

The direction in which a trader makes money; for example, long exposure means making money when the asset price goes up.

Brokered Market

A market for illiquid or complex assets, such as real estate or large private equity, where brokers find counterparties because dealers are unwilling to make markets.

Alpha

A measure of risk-adjusted performance that determines if an active manager underperformed or overperformed the market after accounting for risk.

Loss Aversion

A behavioral finance concept where investors dislike losses more than they like equivalent gains, which can explain overreaction anomalies.

Herding

The tendency of investors to follow the crowd rather than using their own information, leading to price distortions and anomalies.

January Effect

A calendar-based anomaly where small-cap stocks outperform in early January due to tax-loss selling or window dressing.

Value Effect

A cross-sectional anomaly where value stocks, characterized by low P/E or high B/M ratios, outperform growth stocks.

Fama-French 3-Factor Model

An asset pricing model that adds size and value factors to the CAPM to explain market anomalies.

Reconstitution

The process of changing the specific securities that make up an index.

Rebalancing

The process of forcing index weights back to a predetermined target, such as selling outperforming stocks to maintain an equal-weighted index.

Price Weighted Index

An index construction method that is biased toward higher priced stocks and is distorted by stock splits.

Porter’s Five Forces

A framework consisting of Threat of New Entrants, Threat of Substitutes, Bargaining Power of Customers, Bargaining Power of Suppliers, and Rivalry Among Existing Competitors.

PESTLE Framework

A tool used to assess external influences on an industry including Political, Economic, Social, Technological, Legal, and Environmental factors.

Cost Leadership

A generic competitive strategy where a firm aims to be the lowest-cost producer through strict cost control and scale advantages.

Differentiation

A strategy of offering unique features, innovation, or premium quality for which customers are willing to pay a higher price.

Ex-Dividend Date

The first day a stock trades without the dividend; price typically drops by the dividend amount, calculated as $\text{Previous closing price} - \text{dividend}$.

Cumulative Voting

A voting mechanism where votes equal shares multiplied by board seats, allowing small shareholders to concentrate votes on a single candidate.

Participating Preferred Shares

Preferred shares that entitle the holder to receive bonus dividends if company profits exceed a specified threshold.

Callable Preference Shares

Shares that give the issuer the right to redeem them early at a preset price, adding risk for the investor if interest rates fall.

Putable Preference Shares

Shares that give the investor the right to sell them back to the issuer at a predetermined price, resulting in lower risk and lower dividends.

Emerging Markets

Countries with rapidly developing economies and increasing market accessibility, but generally lower income levels than developed markets.

Market Order

An order filled immediately at the best available price, providing high execution certainty but low price certainty.

Limit Order

An order that only executes at a specific price or better, providing high price certainty but low execution certainty.

Iceberg Order

An execution instruction where only a portion of the total order is visible to the public, while the remainder is hidden.

Weak-form Efficiency

A level of market efficiency where past prices and volume data are reflected in current prices, making technical analysis ineffective.

Semi-strong-form Efficiency

A level of market efficiency where all public information and past market data are reflected in prices, making fundamental analysis ineffective.

Strong-form Efficiency

A level of market efficiency where all public, past, and private (insider) information is reflected in prices.

Efficient Market

A market where consistent, superior, risk-adjusted returns, net of all expenses, cannot be achieved.