Chapter 1 Vocabulary - Corporate Finance and the Financial Manager

Sole Proprietorship

A business owned and run by one person

Partnership

A business owned and run by more than one owner

Limited Partnership

A partnership with two kinds of owners: general partners and limited partners

Limited Liability

Liability that is limited to a person’s investment

Limited Liability Company (LLC)

Like a limited partnership but without a general partner

Corporation

A legally defined, artificial being (a legal entity), separate from its owners

Stock

The ownership or equity of a corporation divided into shares

Equity

The collection of all the outstanding shares of a corporation

Shareholder / Stockholder / Equity Holder

An owner of a share of stock or equity in a corporation

Dividend Payments

Payments made at the discretion of the corporation to its equity holders

S Corporations

Those corporations that elect subchapter S tax treatment and are exempted by the US Internal Revenue Service’s tax code from double taxation

C Corporations

Corporations that have no restrictions on who owns their shares or the number of shareholders; they cannot qualify for subchapter S tax treatment and are subject to direct taxation

Board of Directors

A group of people elected by shareholders who have the ultimate decision-making authority in the corporation

Chief Executive Officer (CEO)

The person charged with running the corporation by instituting the rules and policies set by the board of directors

Agency Problem

When managers, despite being hired as the agents of shareholders, put their self-interest ahead of the interests of those shareholders

Stock Market / Stock Exchange / Bourse

Organized market on which the shares of many corporations are traded

Liquid

Describes an investment that can be easily turned into cash because it can be sold immediately at a competitive market price

Primary Market

When a corporation issues new shares of stock and sells them to investors

Secondary Market

Markets, such as NYSE or Nasdaq, where shares of a corporation are traded between investors without the involvement of the corporation

Market Makers

Individuals or companies at an exchange who match buyers with sellers

Specialists

Market makers at the NYSE

Bid Price

The price at which a market maker is willing to buy a security

Ask Price

The price at which a market maker is willing to buy a security

Liquidity

Extent to which the market for an asset is liquid, meaning that assets can be easily turned into cash because they can be sold immediately at competitive market prices

Bid-Ask Spread

The amount by which the ask price exceeds the bid price

Transaction Cost

In most markets, an expense such as a broker commission and the bid-ask spread investors must pay in order to trade securities

Limit Order

Order to buy or sell a set amount of a security at a fixed price

Limit Order Book

Collection of all current limit orders for a given security

Market Orders

Orders to trade immediately at the best outstanding limit order available

High Frequency Traders (HFTs)

Traders who place, update, cancel, and execute trades many times per second

Dark Pools

Trading venues in which the size and price of orders are not disclosed to participants

Listing Standards

Outlines of the requirements a company must meet to be traded on the exchange

Financial Institutions

Entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans