Chapter 2: Financial Markets and Institutions

Vocabulary flashcards covering capital allocation, financial markets, financial institutions, stock market transactions, IPOs, market efficiency, and behavioral finance.

Suppliers of Capital

Individuals and institutions with excess funds who save money and look for a rate of return on their investment.

Demanders of Capital

Individuals and institutions who need to raise funds to finance investment opportunities and are willing to pay a rate of return on borrowed capital.

Market

A venue where goods and services are exchanged.

Financial Market

A place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.

Derivative Security

A financial security whose value depends on the value of another asset.

Hedging

Taking action now to protect yourself from a possible loss later.

Speculating

Using financial investments to bet on what will happen to prices in the future in hopes of making a big profit.

Primary Market Transaction

A financial transaction where new shares of stock are created and sold to investors, such as a company issuing new stock through an investment banker.

Secondary Market Transaction

A financial transaction where existing shares of stock are traded among investors in the open market without creating new shares.

Initial Public Offering (IPO)

An event that occurs when a private company issues stock in the public market for the first time to raise capital from outside investors.

Stock Market Efficiency

A condition where securities are normally in equilibrium and fairly priced, preventing investors from consistently beating the market except by luck or superior information.

Efficiency Continuum

A spectrum of market efficiency ranging from highly inefficient (small companies with few analysts) to highly efficient (large companies with many analysts and good communications).

Behavioral Finance

A field of study that incorporates psychological insights to explain how cognitive biases and irrational investor behaviors create market inefficiencies.