CH 19 - Using Securities Markets for Financing & Investing Opportunities

These vocabulary flashcards cover the key terms, definitions, and functions of securities markets, including stocks, bonds, regulatory laws, and investment strategies.

Securities markets

Financial marketplaces for stocks, bonds, & other investments.

Securities

A general term for stocks, bonds, and other investments.

Fixed income

A term referring to cash investments.

Primary Markets

Markets that handle the sale of new securities/stock; this is the only time a corporation makes money on the sale of its securities.

Initial public offering (IPO)

The first public offering of a corporation's stock.

Secondary market

Handles the trading of securities between investors, where the proceeds go to the seller rather than the corporation whose stock is sold.

Investment Bankers

Specialists who assist in the issue and sale of new securities by performing financial analyses and potentially underwriting the issue.

Underwrite

A process where investment bankers buy an entire stock or bond issue at a discount and sell it to private or institutional investors at full price.

Institutional investors

Large organizations, such as pension funds, mutual funds, and insurance companies, that invest their own funds or the funds of others.

Stock exchange

An organization whose members can buy and sell securities for companies and investors.

New York Stock Exchange (NYSE)

A floor-based exchange founded in $1792$ where trades historically took place physically on the floor.

Over-the-counter (OTC) Market

An exchange providing a means to trade stocks not listed on national exchanges through a network of approximately $7,000$ brokers.

NASDAQ

Originally known as the National Association of Securities Dealers Automated Quotations, it is the world’s first electronic stock market.

Securities & Exchange Commission (SEC)

The federal agency responsible for regulating various exchanges.

Securities Act of 1933

A law that protects investors by requiring full disclosure of financial info by firms selling bonds or stock.

Securities & Exchange Act of 1934

The law that created the SEC and requires companies trading on national exchanges to register and provide annual updates.

Insider trading

Using knowledge or info gained through a position that allows an individual to benefit unfairly from fluctuations in security prices.

Prospectus

A condensed version of economic and financial info that must be filed with the SEC and sent to prospective investors before issuing stock.

Stocks (Equities)

Shares of ownership in a company.

Stock certificate

Evidence of stock ownership specifying the company name, number of shares, and type of stock being issued.

Par value

A dollar amount assigned to each share of stock by the corporation’s charter, which typically does not reflect current market value.

Dividends

Part of a firm’s profits distributed to stockholders as cash payments or additional shares of stock.

Common stock

The most basic form of ownership in a firm, conferring voting rights and the right to share in profits through dividends.

Preemptive right

The right of common stockholders to purchase new shares of common stock before anyone else.

Preferred stock

Stock giving owners preference in dividend payments and earlier claims on assets during liquidation, but usually no voting rights.

Callable stock

Preferred stock that requires stockholders to sell their shares back to the corporation if requested.

Cumulative preferred stock

Stock where unpaid dividends accumulate and must be paid in full before any common stock dividends can be distributed.

Bond

A corporate certificate indicating that a person has lent money to a firm or government.

Principal

The face value of a bond which the issuing company is legally bound to repay in full on the maturity date.

Maturity date

The exact date the issuer of a bond must pay the principal to the bondholder.

Interest

The payment the bond issuer makes to bondholders for the use of borrowed money.

Coupon rate

The regular interest payment a government or company makes for borrowing money via bonds.

US government bond

A security issued by the federal government, considered the safest type of bond investment.

Treasury bill (T-Bill)

A government security that matures in less than a year and is issued with a minimum denomination of $1,000$.

Treasury note

A government security maturing in $10$ years or less, sold in denominations from $1,000$ up to $1,000,000$.

Treasury bond

A government security maturing in $25$ years or more, sold in denominations from $1,000$ up to $1,000,000$.

Municipal bond

A bond issued by states, cities, or local government agencies that is usually exempt from federal taxes.

Yankee bond

A bond issued by a foreign government that is payable in US dollars.

Debenture bonds (Unsecured bonds)

Bonds that are not backed by any collateral.

Secured bonds (Mortgage bonds)

Bonds backed by collateral, such as land or buildings, pledged to bondholders if payments are not made.

Sinking fund

A reserve account in which the issuer periodically retires part of the bond principal to ensure enough capital to pay off the bond at maturity.

Stockbroker

A registered representative who acts as a market intermediary to buy and sell securities for clients.

Robo-advisors

Automated online tools using advanced algorithms to make investment suggestions and manage portfolios.

Investment risk

The chance that an investment will be worth less at some future time than it is worth now.

Yield

The expected return on an investment, such as interest or dividends, usually expressed over a one-year period.

Liquidity

How quickly invested funds can be converted back into cash.

Diversification

Buying several different investment alternatives to spread the risk of investing.

Bulls

Investors who believe stock prices are going to rise and buy in anticipation of the increase.

Bears

Investors who expect stock prices to decline and sell their stocks in anticipation of falling prices.

Capital gains

The positive difference between the purchase price of a stock and its sale price.

Blue-chip stocks

High-quality company stocks that pay regular dividends and experience consistent price appreciation.

Growth stocks

Stocks of corporations in emerging fields, such as tech or biotech, with earnings expected to grow faster than other stocks.

Income stocks

Stocks of public utilities that offer high dividend yields to keep pace with inflation.

Penny stocks

Stocks representing ownership in high-risk industries like oil exploration, selling for less than $2$.

Market order

An instruction to a broker to buy or sell a stock immediately at the best price available.

Limit order

An instruction to a broker to buy or sell a stock at a specific price if it becomes available.

Stock splits

A company action that gives stockholders two or more shares for each one they own, without changing ownership structure.

Buying stock on margin

Purchasing stocks by borrowing a portion of the purchase cost from a brokerage firm.

Margin call

A requirement from a broker for an investor to provide funds to cover losses if an account's value declines.

Junk bonds (high-yield bonds)

High-risk, high-interest bonds.

Mutual fund

An organization that pools investor money to buy stocks and bonds and then sells shares in those securities to the public.

Exchange-traded funds (ETFs)

Collections of stocks, bonds, and other investments traded on exchanges like individual stocks.

Dow Jones Industrial Avg (The Dow)

The average cost of $30$ selected industrial stocks used to indicate the direction of the stock market.

Program trading

Giving instructions to computers to automatically sell stock if the price dips to a certain point to avoid loss.

Risk-return tradeoff

The principle that higher-risk investments usually require a higher rate of return to attract investors.

1. Assist businesses in finding long-term funding to finance capital needs

2. Provide private investors a place to buy & sell securities that can help them build their financial future

Securities markets serve 2 major functions

1. make regular interest payments to investors

2. repay entire bond amount at a set time

Organizations that issue bonds have the legal obligations too…

Steps of using a stockbroker for investing in securities

(1) first you find what stock or bond you want to buy

(2) find a brokerage firm authorized to trade securities to execute your order

(3) after transaction completed, the trade is reported to your broker, who notifies you