test 3 finance

economic balance sheet

a balance sheet that has the same structure as the accounting balance, but provides a market-value, cash-flow based equivalence between productive assets (left side) and the way those productive assets are financed (the right side)

financial securities

claims on its future cash flow. legal instruments that secure promised payments to the investors

bond

a security representing a debt of the firm.  The company issuing this generally pays a fixed rate of interest on the bond. also has a fixed maturity, and the firm must redeem (or pay off) at its maturity.  It’s cash flows are a fixed commitment of the firm.

Preferred Stock

combines features of both bonds and common stocks. Dividends are fixed and do not change with the company's fluctuating income. People who own this security have access to the firm's cash flows before the common stockholders, but they can only do so after the claims of the bondholders have been satisfied

Common stock

an equity claim. People who won this security are the owners of the firm and, as shareholders, share in the profits and risks of the firm. Dividends are a residual (aka profit) and are not guaranteed by the firm. People who own this security have control of the company through their right to elect the board of directors.

bank loans

These securities represent a claim on the firm's cash flows, but are not directly traded in the financial markets.

Privately held companies

Companies that create and sell securities their own. However, these securities are not registered with the Securities and Exchange Commission (SEC) and thus are not traded in the public financial markets, but rather sold directly to individual investors in a negotiated transaction.

Publicly traded corporations

companies that register their financial securities with the Securities and Exchange Commission and follow stringent rules for providing information to investors.  These registered securities are traded in the US financial markets and can be bought by any investor.

Primary Market Transaction

the company creates the security and sells it to investors, thus raising capital.  

Secondary Market Transaction

one investor sells an already-issued security to another investor. While the company is not directly involved in this transaction, these transactions have a major impact on it.

Initial Public Offering (IPO)

an unseasoned, new issue where a company decides to 'go public' and issue securities that can be bought by investors, and can only be done if issued by the securities and exchange commission (SEC)

Seasoned Public Offering

an issue of new shares of stock by a company that has already issued public stock.  As the company already has a publicly-traded stock, the issuance of additional stock is not as revealing.  

rights offering

accompanies by a seasoned public offering, existing shareholders are offered the ability to purchase the new stock before it is offered to the general public. A rights offering thus allows existing shareholders the ability to preserve their proportional ownership stake in the company.

crowdfunding

a new method of raising capital, where investors and companies connect directly using websites specifically created for this purpose.

primary market transaction

the company stock is created and issued. includes initial public offering, seasoned public offering, and rights offering

secondary market transaction

an investor buys a financial security from another investor. the company issuing the security is not involved in the transaction and does not receive funds. They provide liquidity, determine the ability of the company to raise additional capital, and provide a market price by which managerial and company performance is measured.  

institutional investors

organizations that pool large sums of money and invest those sums in securities, real property securities, and other investment assets. Their role in the economy is to act as highly specialized investors on behalf of others. 

Investors

Those with capital beyond what they currently need and must be rewarded for delaying immediate consumption.

Consumers and businesses

Those who need capital to enhance their current consumption or to invest in profitable ventures.

Direct financing

companies using the financial markets to issue financial securities directly to investors through the financial markets.

Indirect financing

companies going to financial institutions, such as banks, that gather funds from savers and then lend those funds (at a profit!) to businesses that need capital.

Investment Bank

a financial intermediary who performs a variety of services including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individuals and institutional clients, and trading for their own account.

Intermediary

an institution that acts as a middleman, providing services to those with funds to invest and those who need funds, with the most common intermediary being commercial banks

Commercial Banks

a safe place for savers to invest their money. They take funds and package them into loans made to individuals and to businesses through business loans.

broker

someone who facilitates trades by bringing buyers and sellers together but never buys the assets

dealer

someone who owns the assets during the buying and selling process.

Bootstrapping

A way of funding by using personal savings, selling personal assets, borrowing against assets, using credit cards, and taking on personal loans to raise capital.

Venture Capital

a way of funding by trusting individuals to develop businesses into viable, profitable companies through their investment of capital that more traditional investors may not make.

Efficient Market Hypothesis (EMH)

The view that the market price reflects information about the asset

Historic Information

market information such as price movements over time, the volume of trading, and even who is buying and selling may give some hints as to what will happen to market prices in the future.

Technical Analysis

seeking to identify these repeatable patterns and use them to predict future price movements.

Weak-form efficient

A market where prices reflect historic market information. You thus can’t then use technical information to consistently beat the market, because in most cases someone else has already discovered and used it! This version of the EMH recognizes that market historic information may be useful, but no single investor is consistently able to get such information and trade on it before other market participants.

Public information

any information available to the investing public. Everything—political cultural, economic, social, meteorological—that can affect the stock price is considered by investors

fundamental analysis

The analysis of public information

semi-strong efficient

when market prices reflect all publicly available information, including historic information.

Private information

a monopoly of information where a few investors possess information not available to most investors in the market. Eventually, this information will be used to purchase or sell stocks and thus will become public, so the big drive for investors is to get information before other investors!

insider trading

When someone uses private information about their company to trade against their own shareholders

strong-form efficient

When a market’s price reflects all information, technical, public and private.

Efficient market

A market in which the price of the asset reflects its economic value.

Financial markets

Markets in which financial securities are issued and traded.

Exchanges

Organized public markets where companies list their securities for trading by investors. These listed securities must adhere to securities laws and regulations to be traded on these public markets. They provide a legal platform to ensure that the commitments made by participants are realized. generally organized as profit-seeking companies.

Over-the-Counter (OTC) markets

not centralized trading places but rather systems by which dealers can offer to buy and sell securities among themselves and to their customers.