Section 1: Describe Systems, Structures, Roles, and Impact in Business

Three main financial instruments

• stocks

• bonds

• financial derivatives

Stocks

certificates that represent ownership of an asset

Common stock

A type of security that represents ownership in a corporation, granting shareholders voting rights and a claim on a portion of the company’s profits through dividends

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, typically without voting rights but with fixed dividends. aka “Hybrid Security”

capital appreciation

When a stock is bought at a lower price than what it is sold. Subtracting the lower purchase price from the higher sales price is the appreciation.

Bonds

represent loans, like and “I owe You” (aka “IOU”). Are securities issued by corporations or governments to raise capital, where the issuer agrees to pay back the principal along with interest on a specific date

Least to most risky bonds

Least Risky: AAA, AA, A, BBB

Most Risky: BB, B, CCC, etc…

corporate bonds

Bonds issued by corporations to fund operations, expansions, or other activities

coupon

The periodic interest payment made to bondholders during the life of the bond. typically paid every 6 months

public bonds

Bonds issued by government entities to finance public projects and operations, often considered low-risk investments.

two types of public bonds

• municipal bonds

• treasury bonds

municipal bonds

aka “munis.” Bonds issued by state, municipal, or county governments to finance public projects, typically offering tax-exempt interest income to investors. fund public projects like parks, hospitals, infrastructure, public roads, fire departments, etc

Treasuries

aka “treasury bonds.” Debt securities issued by the U.S. Department of the Treasury, considered among the safest investments due to their backing by the full faith and credit of the U.S. government.

Financial Derivatives

Financial instruments whose value is derived from the performance of underlying assets, indexes, or interest rates. Two main types are Options and Futures.

Options

Financial contracts that give the holder the right, but not the obligation, to buy or sell an asset at a specified price before a certain date.

Futures

Financial contracts obligating the buyer to purchase, or the seller to sell, an asset at a predetermined future date and price.

Investment Banks

Financial institutions that assist companies in raising capital, advising on mergers and acquisitions, and providing various financial services, such as underwriting and trading.

Investment Institutions

Organizations that invest pooled funds from clients into securities and other assets, aiming to generate returns on the investments.

Mutual Funds

Investment vehicles that pool funds from multiple investors to buy a diversified portfolio of securities managed by professional fund managers.

Exchange-traded Funds (ETFs)

Investment funds that are traded on stock exchanges, holding assets such as stocks, commodities, or bonds, and generally tracking an index.

Hedge Funds

Private investment funds that employ various strategies to earn active returns for their investors, often with higher risk and less regulation compared to mutual funds.

Pension Funds

Investment pools established by employers to provide retirement income for their employees, typically managed by professional managers to ensure long-term growth and stability

Open-end Investment

A type of mutual fund that does not have restrictions on the amount of shares the fund can issue, allowing for continuous buying and selling of shares.

Net Asset Value (NAV)

The per-share value of a mutual fund or ETF, calculated by dividing the total value of the fund’s assets by the number of outstanding shares.

Financial Markets

A marketplace where buyers and sellers trade financial assets, such as stocks, bonds, currencies, and derivatives, facilitating the allocation of resources and risk.

Public Markets

A marketplace where securities are traded openly, allowing the general public to buy and sell stocks, bonds, and other financial instruments.

Private Markets

A marketplace where the buying and selling of securities that are not publicly traded, typically involving transactions between private investors, institutions, and companies.

Primary Market

The financial market where new securities are issued and sold directly to investors by the issuer.

securities

Financial instruments that represent an ownership position, a creditor relationship, or rights to ownership, such as stocks, bonds, and options.

Underwrite

The process in which an investment bank or financial institution analyzes and takes the risk of a new securities issuance, ensuring the issuer raises the required capital, usually by purchasing the securities and reselling them to investors

Initial Public Offering (IPO)

The process by which a private company offers its shares to the public for the first time, allowing it to raise capital from a broad base of investors.

Secondary Market

The financial market where previously issued securities are traded among investors, providing liquidity and price discovery.

Dealers

Market participants who buy and sell securities for their own accounts, providing liquidity to the market.

Auction Markets

Financial markets in which buyers and sellers submit competitive bids and offers, with transactions occurring at prices that match the highest bid with the lowest offer.

Open Outcry

A method of trading on exchange floors where traders shout bids and offers, facilitating immediate communication and price discovery.

Auction Markets

Financial markets in which buyers and sellers submit competitive bids and offers, with transactions occurring at prices that match the highest bid with the lowest offer.

Financial Institutions

Organizations that provide financial services, including banks, credit unions, insurance companies, and investment firms.

Depository Institutions (DIs)

Financial institutions that accept deposits from the public and provide loans, such as commercial banks, savings banks, and credit unions.

Investment Institutions

Organizations that invest pooled funds from clients into securities and other assets, aiming to generate returns on the investments.

Investment Banks

Financial institutions that assist companies in raising capital, advising on mergers and acquisitions, and providing various financial services, such as underwriting and trading.

Equity raising

a method companies implement to secure funding.

Two types:

• public equity raising

• private equity raising

public equity raising

The process of obtaining capital by issuing shares of stock to the public, typically through an IPO or additional stock offerings

Private Equity Raising

The process of obtaining capital by selling shares or ownership stakes in a company privately, often to institutional investors or accredited individuals.

Gross Domestic Product (GDP)

The total market value of all goods and services produced within a country in a specific period, serving as a broad measure of economic activity.

Consumer Price Index (CPI)

An index that measures the average change in prices paid by consumers for a basket of goods and services over time, used to gauge inflation.

Yield Curve

A graph showing the relationship between interest rates and the maturity of debt securities, often used to predict economic activity and interest rate changes.

Producer Price Index (PPI)

is a measure that examines the average change over time in the selling prices received by domestic producers for their goods and services.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Demand-pull Inflation

Inflation that occurs when aggregate demand in an economy outpaces aggregate supply, leading to higher prices.

Cost-push Inflation

Inflation resulting from increased production costs, such as wages and raw materials, leading to higher prices for final goods and services.

Market Baskets

A collection of goods and services used to track the performance of a specific market, typically to measure inflation or economic trends.

Consumer Spending

The total amount of money spent by households on goods and services, a key driver of economic growth.

Consumer Confidence

A measure of how optimistic or pessimistic consumers are about the economy’s future performance, influencing their spending and saving behaviors.

Unemployment rates

Unemployment rates

Full Employment

refers to the economic condition in which all available labor resources are being used efficiently, typically meaning that the unemployment rate is at its lowest possible level without causing inflation.

Yield Curve

A graph showing the relationship between interest rates and the maturity of debt securities, often used to predict economic activity and interest rate changes.

Recession

A significant decline in economic activity across the economy, lasting more than a few months, typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Interest Rates

set by central banks like the Fed in the United States, These rates influence the cost of borrowing and the return on savings

Agency Problem

A conflict of interest inherent in relationships where one party is expected to act in another’s best interests, such as between shareholders and company management.

Board of Directors (BOD)

A group of individuals elected by a company’s shareholders to oversee the management and make key decisions on corporate policies and strategy.

Corporate Social Responsibility (CSR)

A company’s commitment to manage the social, environmental, and economic effects of its operations responsibly and in line with public expectations.

Subprime Mortgage Crisis

The financial crisis that occurred between 2007 and 2010, triggered by a significant rise in mortgage delinquencies and foreclosures, leading to the collapse of mortgage-backed securities and widespread financial instability.

Offshoring

The practice of relocating business processes or production to a foreign country, often to reduce costs or access new markets.