Introduction to Business: Financial Markets and Allocating Financial Resources

Vocabulary practice flashcards covering Chapter 10 of Introduction to Business: Financial Markets, securities, regulatory acts, market operations, and investment strategies.

Financial Markets

Markets that transfer funds from savers to borrowers, helping firms meet payrolls, invest in new facilities, develop new products, and compete effectively in global markets.

Depository Institutions

Financial intermediaries that obtain funds by accepting checking and savings deposits and lending them to borrowers.

Credit Unions

Depository institutions that are owned by their depositors.

Savings and Loan Associations

Financial institutions that accept savings account deposits and use those funds to issue mortgage loans.

Institutional Investors

Nondepository financial institutions that amass financial capital to acquire a portfolio of different assets.

Securities Brokers

Agents who act on behalf of investors wanting to buy and sell financial securities.

Securities Dealers

Financial intermediaries who participate directly in securities markets by buying and selling stocks for their own accounts.

Investment Banks

Financial institutions that help firms raise financial capital by issuing securities in primary markets.

Federal Reserve Act of 1913

Federal legislation passed following the 1907 panic that established the Federal Reserve System as the central bank of the United States.

Banking Act of 1933 (Glass-Steagall)

Law that established the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits and prohibited commercial banks from selling insurance or performing the functions of investment banks.

Securities Act of 1933

Federal law that required firms issuing new stocks in a public offering to file a registration statement with the Securities and Exchange Commission (SEC).

Securities and Exchange Commission (SEC)

The federal agency with primary responsibility for regulating the securities industry.

Securities Exchange Act of 1934

Legislation that established the Securities and Exchange Commission (SEC) and regulated the securities secondary market, insider trading, and other fraud protection.

Financial Services Modernization Act of 1999

Act that overturned the section of the Banking Act of 1933 that prohibited commercial banks from selling insurance or performing the functions of investment banks.

Sarbanes-Oxley Act of 2002

Legislation designed to ensure that external auditors offer fair, unbiased opinions when examining a company's financial statements.

Dodd-Frank Act of 2010

Federal legislation that expanded the Federal Reserve's regulatory authority over nondepository financial institutions.

Primary Market

The financial market in which newly issued securities are bought and sold.

Public Offering

A primary market transaction in which new securities are offered to any investors who are willing and able to purchase them.

Initial Public Offering (IPO)

The very first time a company issues stock that may be bought by the general public.

Registration Statement

A long, complex document that firms must file with the SEC when selling securities through a public offering.

Best Efforts

An arrangement in which an investment bank acts as an agent to sell as many securities as possible without guaranteeing the sale of the entire issue.

Firm Commitment (Underwriting)

An underwriting arrangement in which an investment bank purchases the entire issue of new securities from a corporation and resells them to investors.

Private Placement

The sale of securities negotiated directly between the issuing corporation and a small group of accredited investors, which is quicker, simpler, less expensive, and exempt from SEC registration.

Accredited Investors

Organizations or individual investors who meet specific criteria established by the SEC, qualifying them to invest in unregistered securities.

Secondary Market

The financial market where previously issued securities are traded among investors.

Stock (Securities) Exchange

An organized venue for trading stocks and securities that meet specific listing requirements, such as the NYSE and NASDAQ.

Over-the-Counter Market (OTC)

A decentralized, less active market where stocks that do not meet the listing requirements of larger exchanges, such as penny stocks, are traded.

Electronic Communications Networks (ECN)

Automated, computerized securities trading systems that automatically match buyers and sellers, enabling trades outside regular market hours.

Common Stock

The basic form of ownership in a corporation, typically granting voting rights, the right to dividends, and a residual claim on assets.

Preemptive Right

The right of common stockholders to purchase newly issued shares in proportion to their existing holdings to avoid dilution of ownership.

Dividends

Distributions of earnings paid to a corporation's stockholders if approved by the board of directors.

Capital Gains

The return on an investment achieved when the market price of a stock rises above the initial purchase price.

Preferred Stock

A class of corporate ownership that gives holders preference over common stockholders regarding dividend payments and claims on assets, typically without voting rights, and sometimes featuring a cumulative provision.

Mutual Fund

An institutional investor that raises funds by selling shares to investors and pools the money to buy a diversified portfolio of securities under professional management.

Diversification

A risk-reduction strategy that involves investing in a wide variety of securities rather than concentrating capital in a single asset.

Net Asset Value per Share (NAV)

The value of a mutual fund share, calculated as: $\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Number of Shares Outstanding}}$

Exchange-Traded Fund (ETF)

A fund holding a basket of individual stock certificates or securities that trades on an exchange like common stocks, typically featuring lower operating costs due to not being actively managed.

Full-Service Broker

A brokerage firm that provides a wide range of services, including research and financial advice, in addition to executing trades.

Discount Broker

A broker that provides the basic trade execution services needed to buy and sell securities but offers fewer additional advisory services.

Market Order

An order instructing a broker to buy or sell a specific security immediately at the best currently available market price.

Limit Order

An order instructing a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level.

Dow Jones Industrial Average (DJIA)

A prominent stock market index that tracks the stock prices of $30$ large, well-known U.S. corporations.

Standard & Poor's 500 (S&P 500)

A benchmark stock index tracking the stock performance of $500$ major U.S. corporations across a wide range of industries and market sectors.

Bond

A formal debt instrument issued by a corporation or government entity that creates a legal obligation to repay the borrowed amount with interest.

Maturity Date

The designated date on which a bond comes due and the issuer must repay the principal par value to the bondholder.

Par Value

The face value of a bond that the issuer promises to pay back to the bondholder upon maturity (typically $\$1{,}000$).

Coupon Rate

The fixed annual interest rate paid on a bond, expressed as a fixed percentage of the bond's par value.

Current Yield

The amount of annual interest earned on a bond expressed as a percentage of its current market price rather than its par value: $\text{Current Yield} = \frac{\text{Annual Interest}}{\text{Current Market Price}}$

Bond Discount

The condition occurring when a bond's trading market price falls below its stated par value (often due to rising market interest rates).

Bond Premium

The condition occurring when a bond's trading market price rises above its stated par value (often due to falling market interest rates).

Investing for Income

An investment strategy centered on buying bonds and dividend-paying stocks to generate a steady, predictable stream of cash flow.

Market Timing

An active investment strategy that attempts to forecast and exploit short-term price fluctuations by analyzing when specific stocks are likely to rise and fall.

Investing for Growth

A strategy focused on investing in companies that possess the potential to grow earnings and revenue significantly faster than the market average over a sustained period.

Value Investing

An investment strategy that seeks out and invests in stocks that appear to be undervalued by the market relative to their intrinsic worth.

Buying and Holding

A passive, long-term investment strategy that involves purchasing a diversified portfolio of securities and holding them over an extended timeframe regardless of short-term market fluctuations.