Financial Markets Vocabulary Flashcards

Vocabulary flashcards covering core concepts from the Financial Markets lecture notes including intermediaries, funds, fintech, money markets, interest rate formulas, stock exchanges, trading mechanisms, and margin accounts.

Financial Market

A market where funds are transferred from people/institutions with excess funds to people/institutions with a shortage of funds.

Functions of Financial Markets

1. Provide information about the economy. 2. Transfer consumption through time. 3. Transfer/allocate risk.

Lender-Savers and Borrower-Spenders

Entities that can act as lenders or borrowers, specifically households, companies, and government.

Direct Finance

Finance where borrowers obtain funds directly from lenders by selling securities/financial claims.

Indirect Finance

Finance where a financial intermediary stands between lenders and borrowers.

Transformations by Financial Intermediaries

The three main functions performed by intermediaries: risk transformation, maturity transformation, and volume transformation.

Maturity Transformation

Borrowing short-term funds and lending them over a longer maturity.

Volume Transformation

Re-packaging many small savings into larger amounts of finance.

Building Society

A financial institution that mainly provides banking and financial services, particularly residential mortgage lending.

Investment Banks

Financial institutions such as Morgan Stanley and JP Morgan that perform raising finance, dealing, fund management, corporate restructuring, and risk management.

Finance Houses

Institutions that provide financing for hire purchase, instalment credit, leasing, and factoring.

Pension Funds

Funds that provide retirement income, including annuities.

Insurance Companies

Financial institutions that obtain their funds from premiums paid by customers.

Unit Trust

An open-ended investment fund whose units are bought/sold directly from the fund manager and priced using NAV.

Open-Ended Fund

A fund that can issue units as investors invest, meaning the number of units is not fixed.

NAV (Net Asset Value)

The value of a fund's assets minus liabilities, divided by the number of units: $\text{NAV} = \frac{\text{Market value of assets} - \text{liabilities}}{\text{number of units}}$.

Investment Trust

A closed-ended investment fund whose shares trade between investors in secondary markets, often at a premium or discount to NAV.

ETF (Exchange-Traded Fund)

An exchange-traded fund that provides exposure to a collection of assets and trades like a stock on an exchange.

Hedge Fund

An investment fund attempting to generate positive returns based on manager skill rather than general market returns, using strategies such as leverage, short selling, and derivatives.

Short Selling

Selling securities that the investor does not own, with the intention of profiting if their price falls.

Fintech

The application of technology to financial markets, including peer-to-peer lending, cryptocurrency, mobile wallets, robo-advice, e-trading, and crowdfunding.

Financial Disintermediation

The reduction of the role of traditional financial intermediaries as technology allows financial participants to interact more directly.

Primary Market

A market where new securities are sold to initial buyers.

Secondary Market

A market where previously issued securities are resold.

Broker

An agent that matches buyers and sellers and does not hold a portfolio of securities.

Dealer

A market maker that buys and sells securities at stated prices and holds a portfolio of securities.

Exchange

An organised market providing facilities and regulation for trading financial assets.

OTC Market

An over-the-counter market with no central location.

Money Market

A market for short-term financial instruments characterized by large denominations, low default risk, and short maturities.

Capital Market

A market containing longer-term and riskier securities.

Certificate of Deposit

A time deposit where the bank pays interest and principal at maturity.

Treasury Bill

A short-term government discount security bought below face value and redeemed at face value.

Commercial Paper

Short-term unsecured debt, often issued by large, well-known companies.

Banker's Acceptance

A document accepted by a bank where the bank promises to make a specified future payment.

Repo

A sale and repurchase agreement in which securities are sold for cash and later repurchased at a higher price.

Proportional Annual Rate

The annual interest rate calculated as $r \times m$, where $r$ is the interest rate per sub-period and $m$ is the number of sub-periods in one year.

Effective Annual Rate

The annual interest rate calculated as $(1 + r)^m - 1$, which incorporates compounding.

Proportional Future-Value Formula

The formula used to calculate future value given by $\text{FV} = \text{PV} \times (1 + r \times t)$.

Equivalent Future-Value Formula

The formula used to calculate future value given by $\text{FV} = \text{PV} \times (1 + r)^t$.

London Stock Exchange (LSE)

An organised financial market operating electronically without a physical trading floor that functions as both a primary and secondary market.

AIM

Alternative Investment Market, described as a lightly regulated market.

Open Outcry

A traditional trading method where traders physically meet and communicate trades.

Bid Price

The price at which the dealer buys.

Ask Price

The price at which the dealer sells, which is the price a buyer pays when purchasing.

Bid-Ask Spread

The difference between the ask price and the bid price (Ask price minus bid price).

Tick Size

The minimum permitted price movement.

Limit Order

An order to buy or sell at a specified price.

Market Order

An order to buy or sell immediately at the current market price.

Clearing

The processing of a trade where the clearing house acts as a counterparty to reduce/eliminate counterparty default risk and facilitate settlement.

Cash Account

An account with a broker that must have a positive balance.

Margin Account

An account that allows the investor to borrow through the broker.

Leverage

Using borrowed funds to increase the size of an investment relative to the investor's own capital, which increases risk.

Maintenance Margin

The minimum equity that must be maintained in a margin account.

Margin Call

A requirement for the investor to provide additional funds when equity falls below the maintenance margin.