Securities Markets, Stocks, Bonds & Investing

What are securities markets?

Financial marketplaces for stocks and bonds.

What are the two main functions of securities markets?

Help businesses obtain long-term funding and give investors a place to buy and sell securities.

What is a primary market?

A market where new securities are sold for the first time.

What is a secondary market?

A market where investors trade securities with other investors. The proceeds go to the selling investor.

What is an IPO?

An initial public offering; the first public offering of a corporation's stock.

What is a stock exchange?

An organization where members buy and sell securities for companies and investors

What is the over-the-counter (OTC) market?

A market that allows investors to trade stocks not listed on national exchanges.

What is NASDAQ?

A nationwide electronic system that communicates over-the-counter trades to brokers.

What is an investment banker?

A specialist who assists in issuing and selling new securities.

What is the Securities and Exchange Commission (SEC)?

A federal agency responsible for regulating securities exchanges and markets

What law created the SEC?

The Securities Exchange Act of 1934

What is insider trading?

Buying or selling securities using material, nonpublic information

Why is insider trading unethical and illegal?

It gives people with confidential information an unfair advantage over other investors and undermines fair markets

What is a prospectus?

A document containing important financial and economic information about a company that is provided to prospective investors when securities are offered

What is a stock?

A share of ownership in a company

What is a stock certificate?

Evidence of stock ownership that identifies the company, number of shares, and type of stock.

What are dividends?

A portion of a firm's profits that may be distributed to stockholders as cash or additional shares.

What are the advantages of issuing stock?

The company does not have to repay stockholders' investments. / Dividends are not legally required / Issuing stock does not create debt and can improve the firm's balance sheet

What are the disadvantages of issuing stock?

Stockholders may vote on company decisions and board members / Dividends are paid from after-tax profits and are not tax-deductible. / Pressure to keep stockholders happy can affect management decisions

What is common stock?

The most basic form of company ownership, usually providing voting rights and the opportunity to receive dividends.

What rights do common stockholders have?

Vote for the board of directors and on important issues / Receive dividends if declared / Have the right to purchase new shares before they are offered to others, as described in your notes

What is preferred stock?

Stock that gives owners priority for dividend payments and an earlier claim on assets than common stockholders

What is one major difference between common and preferred stock?

Common stock generally has voting rights; preferred stock generally does not. Preferred stock receives priority for dividends and claims on assets

What are the three special features of preferred stock listed in your notes

Callable, convertible, and cumulative

What is a bond?

A certificate representing money lent to a company, which promises to repay the borrowed amount under specified terms

What is the principal of a bond?

The face value of the bond that must be repaid

What is a bond's maturity date?

The date the issuer must repay the principal to the bondholder

What is bond interest?

Payment made by the issuer to bondholders for the use of their borrowed money

What is a coupon rate?

The stated interest rate associated with a bond

What are the advantages of issuing bonds?

Bondholders are creditors, not owners / bondholders generally do not vote on corporate matters / bond interest is tax-deductible / bonds provide temporary financing / callable bonds can be repaid before maturity

What are the disadvantages of issuing bonds?

they increase company debt / interest payments are a legal obligation / the principal must be repaid at maturity

What is a secured bond?

A bond backed by collateral, such as land or buildings

What is an unsecured bond, also called a debenture?

A bond that is not backed by specific collateral

What is a sinking fund?

A reserve account in which the issuer periodically sets aside money to retire part of the bond principal before maturity

What is a callable bond?

A bond that allows the issuer to repay the principal before its maturity date

What is a convertible bond?

A bond that allows the bondholder to convert it into shares of common stock

What is the relationship between risk and return?

Generally, investments with greater risk require the possibility of greater returns to attract investors. However, higher returns are not guaranteed

What is diversification?

Spreading investments across different investment alternatives to reduce risk

Why is diversification important?

It reduces the risk of losing a large portion of your investment because your money is not concentrated in a single investment

What is a junk bond?

A high-risk bond that generally offers higher interest rates because it has a greater risk of default

What is a capital gain?

The positive difference between the purchase price and the sale price of an investment

What is leverage when buying stocks on margin?

Using borrowed money to purchase stocks, increasing both potential gains and potential losses

What is a mutual fund?

An organization that pools investors' money to purchase stocks, bonds, or other investments and sells shares in the fund to the public

What is an index fund?

A fund designed to match or track the components of a market index

What is an exchange-traded fund (ETF)?

A collection of investments traded on an exchange, generally bought and sold throughout the trading day like individual stocks

What is the difference between a mutual fund and an ETF?

Both can pool money into a collection of investments. ETFs trade on exchanges throughout the trading day like stocks, while traditional mutual funds generally process purchases and redemptions at the fund's end-of-day net asset value

What are blue-chip stocks?

Stocks of well-established companies with reputations for financial stability

What are growth stocks?

Stocks of companies expected to grow their earnings or value faster than average

What are income stocks?

Stocks that investors often buy for their potential to provide regular dividend income

What are penny stocks?

Stocks that trade at very low prices and often carry high risk

What is a stock split?

An action in which a company gives stockholders multiple shares for each share they already own

Does a stock split immediately change an investor's total investment value?

Generally, no. The number of shares increases while the price per share adjusts proportionally

What is a market order?

An instruction to buy or sell a security immediately at the best available price

What is a limit order?

An instruction to buy or sell a security only at a specified price or better

What is buying stock on margin?

Buying stock using some borrowed money from a brokerage firm

What is a margin call?

A broker's demand that an investor deposit additional funds or securities because the account no longer meets its margin requirements

What is program trading?

Using computer instructions to automatically execute trades according to specified rules. Your notes specifically mention automatic selling when a stock price reaches a certain point

What is a stockbroker or registered representative?

A market intermediary who helps clients buy and sell securities

What is a robo-advisor?

An automated online service that uses algorithms to provide investment recommendations or manage investments

What is an institutional investor?

A large organization, such as a pension fund or mutual fund, that invests its own money or money belonging to others

What is a bull?

An investor who expects stock prices to rise

What is a bear?

An investor who expects stock prices to decline

What is a load fund?

A mutual fund that charges a commission when investors buy or sell shares

What is a no-load fund?

A mutual fund that does not charge a sales commission

What is an open-end fund?

A mutual fund that can issue additional shares as investors put money into the fund and generally redeems shares when investors sell them back

What is a closed-end fund?

A fund that issues a fixed number of shares, which investors generally trade with one another on an exchange or in another secondary market

What is an institutional investor example?

A pension fund or mutual fund

What is the purpose of a stock certificate?

To provide evidence of stock ownership

What factors can affect bond interest rates?

Government interest rates, economic conditions, the issuer's reputation, and rates offered by other companies

What do bond rating organizations assess?

The creditworthiness of corporate bond issues

What is a fiduciary?

A person or organization entrusted to act in another party's best interests, including when managing that party's money

What is a foreign stock exchange?

A securities market located outside the investor's home country where investors can buy and sell securities