Financial Markets, Securities, Trading, and Investment Companies

Vocabulary flashcards covering topics from Lectures 2 through 5, including fixed income, equity, derivatives, market structures, underwriting, orders, short sales, and investment companies.

Fixed Income / Debt

A senior claim on an income stream that promises a fixed stream of income, features a variety of maturities and payment provisions, and is paid back first.

Money Market

A market for short-term debt instruments with maturities $< 1\text{ year}$ that are highly liquid and low risk, such as treasury bills, CDs, and commercial paper.

Bond Market

A market for fixed income securities with maturities $> 1\text{ year}$, such as treasury notes (up to $10\text{ years}$), bonds ($10\text{--}30\text{ years}$), municipal bonds, and corporate bonds.

Investment Grade Bonds

Bonds issued by corporations with low credit risk.

Speculative Grade Bonds

Bonds issued by corporations with high credit risk.

Equity Securities

An ownership claim on a firm with cash flow and voting rights, residual claim, and limited liability, representing $\$68\text{ trillion}$ in US market cap.

Preferred Shares

Equity securities that pay fixed income with higher priority than common stock but lower priority than bonds, having no voting rights and preferred dividends that are not a contractual obligation.

American Depository Receipts (ADRs)

Securities traded in the US that represent ownership in a foreign security.

Derivative Securities

Financial instruments whose payoff depends on the value of other underlying assets, representing $\$21.8\text{ trillion}$ in US market value (e.g., options, futures, forwards, swaps).

Option

A derivative contract giving the right to buy or sell an asset at a specified price on or before a specific date.

Indexes

Portfolios of financial securities whose value reflects underlying securities (e.g., Dow Jones, S&P 500, NASDAQ), used to track average returns and compare performance benchmarks.

Primary Market

The market where newly issued securities are sold to investors and the issuer receives the proceeds.

Public Offering

A sale of securities registered with the SEC and sold to the investing public, including IPOs (first sale) and SEOs (sale of additional shares).

Private Offering

A sale of securities not registered with the SEC, sold to limited qualified investors such as venture capitalists and angel investors with few financial disclosures.

Secondary Market

The market where securities are traded among investors, where issuers do NOT receive proceeds.

Prospectus

A disclosure document containing a description of the firm and security provided to potential investors.

Roadshow

A series of presentations where investment bankers travel to publicize an IPO, generate interest, and provide information.

Bookbuilding

The process where underwriters poll large investors to communicate interest in order to determine the IPO price range.

Direct Search Market

The least organized market structure where buyers and sellers seek each other out directly.

Brokered Market

A market where a third party provides assistance in locating a buyer or seller, such as the real-estate market.

Dealer Market

A market where a third party acts as an intermediate buyer and seller, such as NASDAQ.

Auction Market

A market where all traders converge in one centralized location to trade, such as the NYSE.

NASDAQ

A major electronic US stock exchange operating as a dealer market where market makers post bid and ask prices.

NYSE

The largest stock exchange by market value of listed firms, functioning as an auction market with a physical trading floor that is largely electronic today.

Market Order

An order to execute immediately at the best available price, subject to the bid-ask spread.

Limit Order

A price-contingent order specifying a selling price, executed at that specified price or better.

Stop Order

A price-contingent order that is not executed until a specified stop price is hit, triggering the order; execution price is not guaranteed.

Buying on Margin

An investment practice where an investor borrows part of the purchase price from a broker, up to a minimum initial margin percentage of the stock value.

Maintenance Margin

The minimum percentage margin required in an account before additional funds must be deposited.

Margin Call

A notification that account margin has fallen below the maintenance percentage, giving the broker the right to liquidate assets if additional funds are not provided.

Short Sale

The sale of shares not owned by the investor but borrowed through a broker, executed to profit if the security price falls before covering or closing out the position.

Investment Companies

Financial intermediaries that pool funds from individual investors to invest in a wide range of securities and assets, offering services such as record keeping, administration, diversification, professional management, and lower transaction costs.

Big 3

The three largest investment companies: BlackRock, Vanguard, and State Street.

Proxy Voting

The practice in which asset managers use large equity ownership voting power to vote on corporate decisions on behalf of fund investors.

Proxy Voting Choice

A recent mechanism allowing individual fund investors to directly choose how their underlying shares are voted.

Common Ownership

A scenario where large asset managers hold significant shares in multiple competing firms within the same industry.

Dual Ownership

A scenario where mutual fund families hold both stock and bond securities of the same firm, creating differing incentives regarding risk-taking and downside default risk.