Financial Markets and Institutions: Capital Allocation and Market Structures

Vocabulary flashcards covering key terms from the lecture notes on capital allocation, financial markets, intermediaries, and the stock market.

Capital allocation

Process by which businesses, individuals, and governments raise and deploy funds to finance production, investment, and growth.

Surplus funds

Funds available from savers that exceed current expenditures and can be invested.

Direct transfers

Savers directly purchase a business’s stocks or bonds without a financial intermediary.

Indirect transfers through investment banks

An investment bank underwrites and sells new securities to savers; the bank may hold the securities temporarily, creating a primary market transaction.

Investment bank (underwriter)

A firm that helps issue securities, buys them from the issuer, and resells them to savers, guaranteeing capital formation.

Primary market transaction

A sale of new securities where proceeds go to the issuing company.

Financial intermediary

An institution that pools savers’ funds and uses them to purchase businesses’ securities, increasing market efficiency.

Certificates of deposit (CDs)

Bank-issued time deposits that are safe and liquid, illustrating how intermediaries create new forms of capital.

Efficiency of money and capital markets

The extent to which capital flows efficiently from savers to borrowers, with prices reflecting information.

Financial Markets

Marketplaces for buying and selling assets such as stocks, bonds, currencies, and derivatives.

Physical asset markets

Markets for tangible goods like wheat, autos, real estate, and machinery.

Financial asset markets

Markets for financial securities such as stocks, bonds, notes, mortgages, and derivatives.

Spot markets

Markets for immediate delivery of assets (on-the-spot transactions).

Futures markets

Markets where contracts to buy or sell assets at a future date are traded.

Money markets

Markets for short-term, highly liquid debt securities (generally less than one year).

Capital markets

Markets for intermediate- or long-term debt and corporate stocks.

IPO (Initial Public Offering)

The first sale of a company’s stock to the public; raises capital and transforms a private company into a public one.

Secondary markets

Markets where existing, outstanding securities are traded among investors.

Private markets

Markets where transactions are negotiated directly between two parties and are not publicly traded.

Public markets

Markets with standardized contracts traded on organized exchanges, offering liquidity and broad ownership.

Commercial banks

Banks that provide checking, deposits, loans, and other services to a wide range of savers and borrowers.

Financial services corporations

Large conglomerates that own multiple financial institutions across the financial spectrum.

Credit unions

Cooperative financial institutions owned by members, typically offering cheaper funds for loans.

Pension funds

Retirement funds funded by employers or government agencies, investing in bonds, stocks, mortgages, and real estate.

Life insurance companies

Companies that collect premiums, invest in assets, and pay beneficiaries; offer tax-deferred savings plans.

Mutual funds

Pooled funds from savers invested in a diversified portfolio of stocks, bonds, or debt instruments.

Exchange-traded funds (ETFs)

Funds similar to mutual funds but traded on exchanges, providing liquidity and diversification.

Hedge funds

Unregistered, often unregulated funds that pool capital from institutions and high net-worth individuals to invest in a variety of assets.

Stock market

A market where stocks are bought and sold; facilitates trading after the IPO.

Philippine Stock Exchange (PSE)

The sole stock exchange in the Philippines that governs the local stock market.

PSEi

The main index of the PSE, comprising 30 large, active companies.

OTC market

Over-the-counter market for trading securities not listed on an exchange, via direct negotiations.

Closely held stock

Stock of privately owned firms that is not actively traded on public markets.

Publicly held stock

Stock of publicly traded companies with broad ownership and active trading.

Secondary market offering

A sale of a large block of securities already issued, with proceeds going to current holders, not the issuer.

Private placement

Non-public offering of securities to a select group of investors.

Stock repurchases

When a company buys back its own shares, reducing or retiring outstanding stock.

Market price

The current price at which a stock trades.

Intrinsic value

Theoretical value of a stock based on all knowable information.

Equilibrium price

Price where current supply and demand balance; remains stable until new information appears.

Efficient market

A market where prices closely reflect intrinsic values and information is quickly incorporated.

Behavioral Finance Theory

Study of how psychology and biases influence financial decision-making and market outcomes.