INF Economics Module 4: Wall Street

Asset

Something whose ownership gives the right to future benefits, such as money or services

Stock (share)

An asset that represents partial ownership of a firm

Shareholder

A person or organization that owns shares in a firm

Dividend

A payment of a portion of a firm's profits to its shareholders

Capital gain

Income obtained from an increase in the price of an asset

Capital loss

A loss caused by a decrease in the price of an asset you own

Retained earnings

Profits a firm keeps to finance its operations instead of paying them to its shareholders

Annual return

The amount earned from holding an asset for one year, expressed as a percentage of its purchase price

Financial intermediary

An institution that connects borrowers and lenders in financial markets

Bond

An asset issued by a firm or government that promises scheduled cash payments and a final payment at maturity

Coupon

A promised cash payment made to a bondholder on a predetermined date

Maturity date

The date on which the final payment on a bond is due

Real estate

Property, such as an apartment, that can provide rental income or a place to live

Nominal exchange rate

The price of one currency expressed in terms of another currency

Stock market index

A measure that tracks the prices of a selected group, or basket, of stocks

Stock exchange

Place where stocks are bought and sold

Forward sale

Selling a promise to deliver a stock in the future at a high price in the present then buying the stock after the price has fallen

Price level

A measure of the average prices of goods and services in the economy

Inflation

a general increase in prices and fall in the purchasing value of money.

Home bias

Preference for domestic over foreign investments.

Discounted present value

V₁ = [E(V₂ + Flow₁₂)]/(1 + r_f + ρ)

Interest factor

1 + interest rate

Return on an asset

(Price 2 - price 1 + dividend)/Price 1

Times 100 gives percent

Risk premium

An addition to the return on an asset that is demanded by a

risk-averse investor to compensate for the riskiness of the asset

1 + Return = Interest factor + Risk premium.

Arbitrage

The act of buying and then selling an object, such as a stock, with the intention of making a profit, strictly, buying and selling where there is no risk, meaning that profits can be made with certainty

Portfolio

a collection of stocks that is owned by an investor

Diversification

Spreading out investments in a portfolio to reduce risk

Efficient market

market where the price of an asset accurately reflects the best forecast of the value of the asset. The value of the asset is in turn the discounted present value of the flow benefits.

Market capitalization

Total market value of a company's outstanding shares.

Behavioral finance

the application of psychology to make financial decisions