Module 2

Primary Market

Where NEW securities are issued and sold for the first time; company receives the funds (e.g., IPO).

Money Market

Market for short-term debt securities (maturity under 1 year), like Treasury bills and commercial paper.

Spot Market

Market where assets are traded for immediate delivery and payment.

Financial Intermediary

Institution that channels funds between savers and borrowers (banks, mutual funds, etc.).

Financial Market

A market where financial assets (stocks, bonds, etc.) are bought and sold, channeling funds from savers to users

Secondary Market

Where EXISTING securities are traded between investors; company receives nothing.

Capital Market

Market for long-term securities (maturity over 1 year), including stocks and bonds.

Futures Market

Market where contracts are made to buy/sell assets at a future date at a predetermined price.

Investment Bank

Helps companies issue securities (IPOs), advises on M&A. Does NOT take deposits.

Index Fund

Type of mutual fund that passively tracks a market index (like S&P 500). Low fees.

Hedge Fund

Private investment fund using complex strategies. For wealthy/institutional investors. Less regulated.

Insurance Company

Collects premiums, pays claims, invests the difference. Pools and manages risk.

Commercial Bank

Takes deposits, makes loans, provides checking accounts. FDIC insured. Earns interest spread.

Mutual Fund

Pools money from many investors to buy diversified portfolio of securities. Investors bear risk.

Exchange-Traded Fund (ETF)

Like mutual fund but trades on exchange like a stock. Can be bought/sold throughout day.

Pension Fund

Invests contributions to pay future retirement benefits. Can be defined-benefit or defined-contribution.

Ask Price

The price at which sellers are willing to SELL a security (higher price).

Market Maker

Dealer who stands ready to buy and sell securities, providing liquidity. Profits from spread.

IPO (Initial Public Offering)

First time a company sells stock to the public. Primary market transaction.

Weak Form Efficiency

Prices reflect all PAST price/volume data. Technical analysis doesn't work.

Bid Price

The price at which buyers are willing to BUY a security (lower price).

Bid-Ask Spread

Difference between ask and bid price. Represents transaction cost and market maker's profit.

Liquidity

How easily an asset can be bought or sold without affecting its price. Cash is most liquid.

Efficient Market Hypothesis

Theory that security prices reflect all available information, making it impossible to consistently beat the market.

Strong Form Efficiency

Prices reflect ALL information, even insider info. No one can beat market.

Overconfidence Bias

Tendency to overestimate one's ability to pick winners, leading to excessive trading.

Defined-Benefit Plan

Pension where employer promises specific retirement payment. EMPLOYER bears investment risk.

Securitization

Bundling loans (like mortgages) into tradeable securities. Created MBS that fueled 2008 crisis.

Semi-Strong Efficiency

Prices reflect all PUBLIC information. Fundamental analysis doesn't work.

Behavioral Finance

Study of how psychology affects investor decisions and market outcomes.

Cost of Capital

Minimum return investors require; set by financial markets OUTSIDE the firm. Firm's hurdle rate.

Defined-Contribution Plan

Pension where employee contributes to personal account. EMPLOYEE bears investment risk (401k).