Understanding Business Chapter 19

Question 1

Initial Public Offering (IPO)

Answer 1

The first public offering of a corporation’s stock.

Question 2

Investment Bankers

Answer 2

Specialists who assist in the issue and sale of new securities.

Question 3

Institutional Investors

Answer 3

Large organizations-such as pension funds. mutual funds. and insurance companies-that invest their own funds or the funds of others.

Question 4

Stock Exchange

Answer 4

An organization whose members can buy and sell (exchange) securities for companies and individual investors.

Question 5

Over-the-Counter (OTC) Market

Answer 5

Exchange that provides a means to trade stocks not listed on the national exchanges.

Question 6

NASDAQ

Answer 6

A nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically.

Question 7

Securities and Exchange Commission (SEC)

Answer 7

The federal agency that has responsibility for refulating the various stock exchanges.

Question 8

Prospectus

Answer 8

A condensed version of economic and financial information that a company must file with the SEC before issuing stock. the prospectus must be sent to prospective investors.

Question 9

Stocks

Answer 9

Shares of ownership in a company.

Question 10

Stock Certificate

Answer 10

Evidence of stock ownership that specifies the name of the company. the number of shares it represents. and the type of stock being issued.

Question 11

Dividends

Answer 11

Part of a firm’s profits that the firm may distribute to stockholders as either cash payments or additional shares of stock.

Question 12

Common Stock

Answer 12

The most basic form of ownership in a firm. it confers voting rights and the right to share in the firm’s profits through dividends. if approved by the firm’s board of directors.

Question 13

Preferred Stock

Answer 13

Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold.

Question 14

Bond

Answer 14

A corporate certificate indicating that a person has lent money to a firm (or a government).

Question 15

Maturity Date

Answer 15

The exact date the issuer of a bond must pay the principal to the bondholder.

Question 16

Interest

Answer 16

The payment the Issuer of the bond makes to the bondholders for the use of the borrowed money.

Question 17

Debenture Bonds

Answer 17

Bonds that are unsecured (i.e.. not backed by any collateral such as equipment).

Question 18

Sinking Fund

Answer 18

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Question 19

Stockbroker

Answer 19

A registered representative who works as a market intermediary to buy and sell securities for clients.

Question 20

Diversification

Answer 20

Buying several different investment alternatives to spread the risk of investing.

Question 21

Capital Gains

Answer 21

The positive difference between the purchase price of a stock and its sale price.

Question 22

Stock Splits

Answer 22

An action by a company that gives stockholders two or more shares of stock for each one they own.

Question 23

Buying Stock on Margin

Answer 23

Purchasing stocks by borrowing some of the purchase cost from the brokerage firm.

Question 24

Junk Bonds

Answer 24

High-risk. high-interest bonds.

Question 25

Mutual Fund

Answer 25

An organization that buys stocks and bonds and then sells shares in those securities to the public.

Question 26

Exchange-Traded Funds (ETFs)

Answer 26

Collections of stocks. bonds. and other investments that are traded on exchanges but are traded more like individual stocks than like mutual funds.

Question 27

Dow Jones Industrial Average (the Dow)

Answer 27

The average cost of 30 selected industrial stocks. used to give an indication of the direction (up or down) or the stock market over time.

Question 28

Program Trading

Answer 28

Giving instrucitons to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses.