Financial Markets and Institutions Vocabulary

Vocabulary practice flashcards generated from FIN3244 Lecture 1 and Lecture 2 covering financial markets, capital raising, market structure, stock indices, and banking regulations.

Primary Market

The financial market where a corporation issues a new set of shares or securities to the public for the first time, such as through an initial public offering (IPO) or seasoned issue.

Secondary Market

The financial market where existing securities are traded among investors after their initial issuance on the primary market, without direct corporate involvement or funding.

Money Markets

Markets that trade debt securities with maturities of $1$ year or less, such as Treasury bills, federal funds, commercial paper, and negotiable CDs.

Capital Markets

Markets that trade equity instruments (stocks) and debt instruments (bonds) with maturities of more than $1$ year.

Foreign Exchange Markets

Markets where foreign currencies are traded and converted, enabling firms to hedge against currency depreciation and appreciation risks.

Derivatives Security Markets

Markets where financial securities are traded whose payoff is directly linked to the value of an underlying asset, such as a stock, currency, or housing mortgage.

Syndicate

A group of investment banks assembled during an issuance process to share underwriting risk and access a larger pool of potential investors.

Originating Houses

The lead investment banks (or lead managers) in an underwriting syndicate responsible for directing the primary issue process.

Firm-Commitment Underwriting

An underwriting arrangement in which an investment bank purchases an entire security issue at a fixed price (net proceeds) and resells it to the public (gross proceeds), assuming the inventory risk.

Best-Efforts Underwriting

An underwriting arrangement in which an investment bank sells shares to the public for a fee without guaranteeing a fixed price or buying unsold shares.

Seasoned Equity Offering (SEO)

An issue of new stock offered by a company that is already publicly traded on a secondary exchange.

Preemptive Right

A right given to existing shareholders allowing them the option to buy new shares before they are offered to the public, protecting their percentage ownership from dilution.

Rights Offering

A seasoned issue method where existing shareholders are offered new shares at a discounted price based on preemptive rights, avoiding underwriter fees.

Red Herring Prospectus

A preliminary prospectus distributed to potential investors during the SEC waiting period that provides company and security details but omits the final issue price.

Shelf Registration

An SEC process allowing mature firms planning multiple security issues over a $2$-year period to file one master registration statement and issue securities quickly when market pricing is favorable.

Dealer

A financial entity that maintains an inventory of securities, stands ready to buy and sell at any time, and profits from the bid-ask spread.

Broker

An intermediary who brings buyers and sellers of securities together to execute trades without maintaining an inventory of securities.

Bid-Ask Spread

The price difference between the bid price (what a dealer is willing to pay for a stock) and the ask price (what a dealer is willing to sell a stock for).

Designated Market Maker (DMM)

An NYSE floor participant assigned to a specific stock who maintains inventory and updates bid and ask prices to preserve market liquidity.

Supplemental Liquidity Provider (SLP)

High-volume electronic trading firms operating off the NYSE floor whose primary duty is to add liquidity to assigned stocks in exchange for rebates.

Electronic Communications Networks (ECNs)

Automated websites that match buy and sell orders directly between investors without intermediaries, facilitating liquid and extended-hours trading.

Over-the-Counter (OTC) Market

A decentralized market without a physical location or formal exchange listing requirements, used to trade high-risk, small-cap stocks priced under $5$ dollars.

Venture Capital

A professionally managed pool of funds invested in small, high-risk startup firms offering exponential growth potential.

Private Equity

Investment funds targeted primarily at mature, established companies requiring operational restructuring or a strategic change in direction.

Dow Jones Industrial Average (DJIA)

A price-weighted U.S. stock index tracking $30$ prominent, large, and stable blue-chip companies.

Standard & Poor's 500 (S&P 500)

A value-weighted stock index tracking the performance of $500$ of the largest publicly traded corporations in the United States.

Commercial Bank

A financial intermediary that accepts customer deposits into checking, savings, or CD accounts and lends those pooled funds out to borrowers at higher interest rates.

Investment Bank

A financial institution that assists companies in raising capital through stock and bond underwriting and provides advisory services for corporate mergers and acquisitions.

Glass-Steagall Act

A landmark $1933$ financial reform law enacted following the $1929$ stock market crash that mandated the legal separation of commercial banking and investment banking.

FDIC Insurance

Government deposit protection managed by the Federal Deposit Insurance Corporation that guarantees up to $250,000$ per depositor per bank to prevent bank runs.

Shadow Banking

Nonbank financial entities (such as money market mutual funds) that perform traditional banking activities without being subject to standard commercial banking regulation.

Section 20 Affiliates

Securities subsidiaries created by bank holding companies under Glass-Steagall exemptions starting in $1987$ to engage in limited investment banking activities.

Financial Services Modernization Act (FSMA)

A $1999$ federal law that repealed Glass-Steagall restrictions, permitting commercial banks, investment banks, and insurance companies to enter each other's lines of business.

Dodd-Frank Act

A $2010$ financial reform law enacted after the $2008$ financial crisis to reduce systemic risk and eliminate the too-big-to-fail problem.

Volcker Rule

A provision of the Dodd-Frank Act that prevents FDIC-insured deposit institutions from engaging in proprietary trading or investing in hedge funds and private equity.

Net Regulatory Burden

The net financial difference between the private benefits a bank derives from regulation and the private compliance costs it incurs.

Securities and Exchange Commission (SEC)

The primary U.S. federal agency established in $1934$ tasked with regulating securities markets, enforcing standards, and approving public offerings.

Financial Industry Regulatory Authority (FINRA)

An independent non-profit self-regulatory body that oversees day-to-day securities trading and administers broker licensing exams.

Securities Investor Protection Corporation (SIPC)

A non-profit membership corporation created under SIPA $1970$ that protects customer accounts against broker-dealer failure up to $500,000$.