2 - Financial Markets & Institutions Flashcards
Occur when a business sells its stocks or bonds directly to savers; used by small firms
Direct transfers
Transfers may go through investment bank (IB; companies sells its stocks/bonds to the investment bank which then sells these same securities to savers.
Indirect transfers through IB
Facilitates the issuance of securities
Underwriter
May not be able to resell securities to savers for as much as it paid
Primary market transaction
Intermediary obtains funds from savers in exchange for its securities ; then they use this money to buy businesses’ securities
Indirect transfers through a financial intermediary
Markets which assets are bought or sold on the spot
Spot Markets
Markets where participants agree today to buy/sell an asset at some future date
Future Markets
Financial markets which funds are borrowed or loaned for short periods
Money Markets
Financial markets which funds are borrowed or loaned for long-term debt
Capital Markets
Markets in which corporations raise capital by issuing new securities
Primary Markets
Securities and other financial
assets are traded among
investors; markets in which existing, already outstanding securities are traded among investors
Secondary Markets
Transactions are worked out directly between 2 or more parties
Private Markets
Markets in which standardized contracts are
traded on organized
exchanges.
Public Markets
Financial asset whose
value is derived from
the value of some other
“underlying” asset
Derivatives
Formal organizations
having tangible physical
locations that conduct
auction markets in designated (“listed”) securities
Physical Location
Exchanges
Large collection of brokers & dealers that provides for trading in unlisted securities
Over-the-Counter
(OTC) Market
All facilities that
are needed to conduct
security transactions not
conducted on the physical location exchanges.
Dealer Markets
Corporation that is
owned by a few individuals who are typically
associated with the firm’s
management.
Closely Held
Corporation
Corporation that is
owned by a relatively
large number of individuals who are not actively
involved in the firm’s
management.
Publicly Owned Corporation
Act of selling stock to
the public at large by a
closely held corporation
Going Public
Market for stocks of companies that are in the process of going public
Initial Public Offering (IPO) Market
Price that balances buy and sell orders at any given time
Equilibrium price
Market in which prices are close to intrinsic values stocks seem to be in equilibrium
Efficient market
One of the cornerstones of modern finance theory; on average, asset prices are about equal to their intrinsic values.
Efficient Markets Hypothesis (EMH)
Also called “tangible” or “real” asset markets
Physical asset markets
Deals with stocks, bonds, notes, and mortgages
Financial asset markets
Values are derived from changes in the prices of other prices
Derivative securities
Contracts that offer protection against the default of a particular security
Credit default swaps (CDS)
Purpose is to reduce risk exposure
Hedging operation
Done in the hope of high returns but raises risk exposure
Speculation
Organization that underwrites and distributes new investment securities and helps businesses obtain financing
Investment bank
Also called ‘underwriters’
Investment bankers
Traditional “department stores of finance” because they serve a variety of savers and borrowers
Commercial Banks
Large conglomerates that combine many different financial institutions within a single corporation
Financial Services Corporation
Cooperative associations whose members are supposed to have a common bond, such as being employees of the same firm
Cheapest source of funds available to individual borrowers
Credit Unions
Retirement plans funded by corporations or government agencies for their workers and administered primarily by life insurance companies
Pension Funds
Take savings in the form of annual premiums; invest these funds in stocks and bonds and make payments to the beneficiaries of the insured parties
Life Insurance Companies
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification
Mutual Funds
Try to outperform the overall markets
Actively Managed Funds
Designed to simply replicate the performance of a specific market index
Indexed Funds
Mutual funds that invest in short-term, low risk securities and allow investors to write checks against their accounts
Money-Market Funds
Buy a portfolio of stocks of a certain type - then sell their own shares to the public
Exchange Traded Funds
Largely unregulated; have large minimum investments and are marketed primarily to institutions and individuals with high net worth
Hedge Funds
Organizations that operate much like hedge funds but rather than purchasing some of the stock of a firm, private equity players buy and then manage entire firms
Private Equity Companies
Most active secondary market and the most important one to financial managers - where the prices of the firms’ stocks are established
Stock Market
Different Stock Markets
- NYSE
- NASDAQ
They purchase seats on exchanges and designate one or more of their officers as members
Brokerage Departments
Exchange members with sell orders offer the shares for sale and they bid for by the members with buy orders
Auction Markets
Licenses borders and overseas trading practices
Financial Industry Regulatory Authority (FINRA)
Computerized network used by FINRA
National Association of Securities Dealers Automated Quotations (NASDAQ)
Current price of a stock
Market Price
Price at which the stock would sell if all investors had all knowledgeable information about a stock
Intrinsic Value
Possibility of purchasing the company’s stock at a low price and then be able to turn around and sell it at a higher price making a profit
Arbitrage
Rational traders will quickly take advantage of this opportunity and but the stock
Stock price is “too low”
Rational traders will sell the stock pushing the price down to it equilibrium level
Stock price is “too high”
Price at which they will pay for
Bid Price
Price at which they will sell shares
Ask Price
Difference between bid and ask prices represent the dealer’s mark-up or profit
Bid-Ask Spread
