Financial Markets

Common stock

Also known as equity security, represents ownership in a company and can have capital appreciation or receive cash dividends.

Retained earnings

Profits that a company reinvests into the business instead of paying out as dividends.

Stock dividends

Dividends paid out in the form of additional shares of stock, which increase the number of shares but not the value of the stock position.

Board of directors

Responsible for hiring/firing senior level employees, managing compensation, creating company policies, and approving dividend payouts.

Voting structures for BOD

Statutory (stockholders apply votes to each BOD position) and Cumulative (stockholders apply total votes to any BOD position).

Inspection of books and records

Investors have the right to inspect company books and records, which are enforced by the SEC through annual and quarterly reports.

Dilution of ownership

Companies can dilute ownership by issuing new shares or convertible securities, which can be offset by stock repurchases or pre-emptive rights.

Pre-emptive right

Gives investors the right to buy newly-issued shares before they are publicly offered, with fractional rights potentially rounded up to purchase additional shares.

Warrants

Provide the right to purchase shares from a publicly traded company at a fixed price, typically issued as a sweetener during the sale of another security.

Stock splits

Used to adjust the number of outstanding shares, with forward splits increasing the number of shares and decreasing the price, and reverse splits decreasing the number of shares and increasing the price.

Assets upon liquidation

In the event of liquidation, unpaid wages, taxes, secured creditors, unsecured creditors, junior unsecured creditors, preferred stockholders, and common stockholders have priority in order of payment.

Transfer of ownership

Stockholders can freely sell their shares, and transfer agents are responsible for updating ownership and maintaining accurate records of shareholders.

Primary market

Issuers offer securities to investors in return for capital, including private placements and initial public offerings (IPOs).

Secondary market

Trading of securities between investors, including listed stocks on stock exchanges, over-the-counter trades, and market makers.

Settlement

The process of finalizing transactions, with regular-way settlement occurring two days after the transaction and cash settlement occurring before 2:30 pm ET.

Cash dividends

Dividends declared by the board of directors, with specific dates including declaration, record, ex-dividend, and payable dates.

Selling short

A strategy to profit from falling market values by borrowing and selling securities, with the obligation to repurchase and return the securities later.

American Depositary Receipts (ADRs)

Represent ownership in foreign companies and are created by domestic financial firms, with dividends converted to US dollars and subject to foreign government tax withholding.

Tender offers and buybacks

Used to obtain a significant portion of a company's stock, with tender offers aimed at acquiring shares and buybacks involving the repurchase of shares by the issuer.

Suitability

Assessing the benefits and risks of securities, including market risk, inflation risk, non-systematic risk, financial risk, business risk, regulatory risk, legislative risk, political risk, and liquidity risk.

Fundamental analysis

Examining a company's products/services, management, and finances through financial statements, balance sheets, income statements, footnotes, and PE ratios.

Preferred stock

A type of stock that has added characteristics or functions and provides benefits to both stockholders and issuers.

Dividend rate

The annual income from dividends divided by the par value of the stock.

Discount

When a stock trades below par value, resulting in a higher yield than the dividend rate.

Premium

When a stock trades above par value, resulting in a lower yield than the dividend rate.

Bonds

Debt securities that have similarities to preferred stock and are generally less risky due to no Board of Directors approval required for dividends.

Interest rate fluctuations

When interest rates go up, market prices of fixed income securities go down, and vice versa.

Rising interest rates

Cause fixed income market prices to decline.

Falling interest rates

Cause fixed income market prices to increase.

Preferred stock features

Added characteristics or functions that can be beneficial to stockholders or issuers, resulting in different dividend rates, market prices, and yields.

Cumulative preferred stock

Requires the issuer to eventually pay skipped dividends and is associated with lower dividend rates, higher market prices, and lower yields.

Straight (non-cumulative) preferred stock

Does not require the issuer to pay skipped dividends and is associated with higher dividend rates, lower market prices, and higher yields.

Participating preferred stock

Allows investors to receive more than the stated dividend rate and is associated with lower dividend rates, higher market prices, and lower yields.

Call features

Allow issuers to end an investment by paying back a specified amount, typically exercised when interest rates fall.

Call protection

The number of years before a security can be called.

Call premium

The amount above par required to call shares.

Convertible preferred stock

Can be converted into common stock of the same issuer and is associated with lower dividend rates, higher market prices, and lower yields.

Conversion ratio

Determines how many common shares are received at conversion and is set at issuance and stays fixed.

Benefits of preferred stock

Provides fixed dividend income and potential for capital gains, especially if convertible.

Preferred stock risks

Dividends are not guaranteed, no legal recourse for skipped dividends, lower liquidation priority, and subject to various risks such as interest rate, reinvestment, call, and inflation risk.

Preferred stock typical investors

Those seeking income as the primary benefit, accepting moderate risk for higher income, and having long-term time horizons.

Bond fundamentals

Loans that require borrowers to pay back principal and interest, with investors essentially acting as the bank.

Payment intervals

The specific dates on which bond interest payments are made.

Zero coupon bond

A bond that pays interest only at maturity and is sold at a discount.

Short-term maturities

Safer than long-term bonds but offer lower rates of return.

Money markets

Debt securities with one year or less to maturity.

Long-term maturities

Riskier than short-term bonds but offer higher rates of return.

Secured bonds

Backed by something of value and collateralized, making them safer with lower returns.

Full faith and credit (unsecured) bonds

Backed by the promise to repay the loan, making them riskier with higher returns.

Call feature

Allows bond issuers to pay back the principal before maturity, often motivated by refinancing.

Put feature

Allows bondholders to sell bonds back to the issuer before maturity, typically used when interest rates rise.

Bond issuance

Bonds can be issued in term, serial, series, or balloon maturities, depending on the specific characteristics and needs of the issuer.

Underwriting

The process of marketing securities to the public on behalf of issuers, with firm commitment and best efforts commitment underwritings being the two main types.

Bond trading

Bond values decrease when interest rates rise and increase when interest rates fall.

Volatility

Bonds with longer maturities and lower coupons experience the most price volatility.

Bond issuers

US Government bonds settle one business day after trade, while municipal and corporate bonds settle two business days after trade.

Accrued interest

The interest that accrues up to, but not including, the settlement date of a bond transaction.

Trading flat

Bonds that trade without accrued interest, such as zero coupon bonds or bonds settling on the payment date.

Yield

Nominal yield is the annual income divided by the par value, current yield is the annual income divided by the market price, and YTM and YTC represent the overall rate of return assuming held until maturity or call, respectively.

Discount bond yield relationships

Current yield, YTM, and YTC are higher than the coupon.

Premium bond yield relationships

Current yield

Commercial paper

A primary security issued by a corporation to borrow short-term funds, typically in large denominations suitable for institutional investors.

Funded debt

Long-term corporate debt.

Debentures

Long-term, unsecured corporate debt with higher coupons and trade at higher yields.

Guaranteed bonds

Bonds "guaranteed" through subsidiaries, but still considered unsecured.

Income bonds

Risky debt securities that emerge from bankruptcy, paying interest only when the company has sufficient earnings.

Mortgage bonds

Secured bonds that pledge real estate as collateral, commonly used by utility companies.

ETCs

Secured bonds that use equipment as collateral, typically issued in serial format due to depreciation.

CTCs

Secured bonds that are backed by marketable assets such as portfolio investments or subsidiaries.

Convertible bonds

Corporate bonds that can be converted into stock, with conversion ratios and prices set by the issuer.

Stock parity price

The equivalent stock cost if a bond is bought and converted.

Bond parity price

The stock price multiplied by the conversion ratio.

Mezzanine debt

Debt that maintains liquidation priority between senior level debt and equity/stock.

Liquidation priority

The order in which claims are paid in the event of liquidation, starting with unpaid wages and ending with common stockholders.

OTC trade

A trade that takes place outside of an exchange.

Corporate bond market

Most trades occur in the OTC markets, with a small number of trades on exchanges.

Corporate bond quotes

Provided in the percentage of par format, with specific conventions for denominations and coupon rates.

Certificates of deposit (CDs)

Fixed-rate deposits issued by banks, not traded in the market.

Jumbo (negotiable) CDs

Traded in the secondary market, with minimum denominations of $100,000 or more.

FDIC insurance

Insurance that covers the loss of funds due to bank failure, up to $250,000 per customer per bank.

Bankers acceptances

Facilitate international trade and are considered money market instruments.

Eurodollar deposit

US dollars held in an account outside of the US.

Eurobond

A debt security that pays interest and principal in a different currency than the country it was issued in.

Eurodollar bonds

Bonds that pay interest and principal in US dollars but are issued outside of the US.

Municipality

Bonds issued by state, city, county, and political subdivisions.

General obligation (G.O.) bonds

Municipal bonds that support projects without generating revenue, repaid through property taxes.

Limited tax bonds

Municipal bonds that have access to predetermined tax allotments and are riskier than typical G.O. bonds.

Revenue bonds

Municipal bonds that finance self-supporting ventures and are paid off with revenues from those ventures.

Feasibility studies

Studies that forecast the profitability of a municipal venture, created by independent consultants.

Short-term notes

Municipal debt issued for short-term funding needs, such as anticipation notes and variable rate demand notes.

Municipal bond market

The market for municipal bonds, which has liquidity risks and is generally not sold short.

Municipal bond quotes

Typically quoted in yields and may be quoted in eighths like corporate bonds.

Suitability

Municipal bonds are suitable for investors seeking income and with high tax brackets to justify the investment.

US government debt

The largest securities issuer in the world, with virtually no liquidity or default risk.

Treasury Bills

Short-term, zero-coupon debt securities issued by the US Department of Treasury.

Treasury Notes

Intermediate-term debt securities issued by the US Department of Treasury, paying semiannual interest.

Treasury Bonds

Long-term debt securities issued by the US Department of Treasury, paying semiannual interest.

STRIPS

Long-term debt securities with deep discounts and zero coupon, not suitable for income investors.

TIPS

Long-term debt securities that adjust payments based on inflation, with the par value adjusted but the coupon fixed.

Federal agency products

Debt securities issued by federal agencies, such as the Federal Farm Credit System and Mortgage Agencies.