Chap2:

Financial asset market

Financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. Financial markets also deal with derivative securities whose values are derived from changes in the prices of other assets. A share of Ford stock is a "pure financial asset," while an option to buy Ford shares is a derivative security whose value depends on the price of Ford stock.

Money Market Funds

Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.

Mutual Funds

Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.

Pension funds

Pension funds are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily in bonds, stocks, mortgages, and real estate.

Physical asset market

Physical asset markets (also called "tangible" or "real" asset markets) are for products such as wheat, autos, real estate, computers, and machinery.

Equilibrium price

The price that balances buy and sell orders at any given time. When a stock is in equilibrium, the price remains relatively stable until new information becomes available and causes the price to change.

Commercial Bank

The traditional department store of finance serving a variety of savers and borrowers. Such as Bank of America, Citibank, Wells Fargo, and JP Morgan Chase

Intrinsic value

The price at which the stock would sell if all investors had all knowable information about a stock.

Name three ways capital is transferred between savers and borrowers?

- Direct transfer - Through investment banks - Through financial intermediaries

3 TYPES OF STOCK MARKET TRANSACTIONS

- Outstanding shares of established publicly owned companies that are traded: the secondary market - Additional shares sold by established publicly owned companies: the primary market. - Initial public offerings made by privately held firms: the IPO market

Types of financial markets

- Physical asset markets vs. Financial asset market - Spot markets vs. Future markets - Money Markets vs. Capital Markets - Primary Markets vs. Secondary Markets - Private Markets vs. Public Markets

Closely Held Corporation

A corporation that is owned by a few individuals who are typically associated with the firm's management.

Publicly Owned Corporation

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.

Financial Services Corporation

A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. For example, Citigroup owns Citibank (a commercial bank), an investment bank, a securities brokerage organization, insurance companies, and leasing companies.

Over-the-Counter (OTC) Market

A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities. When a stock is traded infrequently, perhaps because the firm is new or small, few buy and sell orders come in, and matching them within a reasonable amount of time is difficult. To avoid this problem, some brokerage firms maintain an inventory of such stocks and stand prepared to make a market for them. These "dealers" buy when individual investors want to sell, and they sell part of their inventory when investors want to buy. At one time, the inventory of securities was kept in a safe; and the stocks, when bought and sold, were literally passed over the counter.

Efficient market

A market in which prices are close to intrinsic values and stocks seem to be in equilibrium.

Investment Bank

An organization that underwrites and distributes new investment securities and helps businesses obtain financing. Investment banks traditionally help companies raise capital. They (1) help corporations design securities with features that are currently attractive to investors, (2) buy these securities from the corporation, and (3) resell them to savers. Because the investment bank generally guarantees that the firm will raise the needed capital, the investment bankers are also called underwriters.

Derivatives

Any financial asset whose value is derived from the value of some other "underlying" asset. The value of the IBM option depends on the price of IBM's stock and the value of the Japanese yen "future" depends on the exchange rate between yen and dollars. The market for derivatives has grown faster than any other market in recent years, providing investors with new opportunities but also exposing them to new risks.

Credit unions

Credit unions are cooperative associations whose members are supposed to have a common bond, such as being employees of the same firm. Members' savings are loaned only to other members, generally for auto purchases, home improvement loans, and home mortgages. Credit unions are often the cheapest source of funds available to individual borrowers.

Physical Location Exchanges

Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities. Physical location exchanges are tangible entities. Each of the larger exchanges occupies its own building, allows a limited number of people to trade on its floor, and has an elected governing body—its board of governors.

Dealer Markets

Include all facilities that are needed to conduct security transactions not conducted on the physical location exchanges. Today these markets are often referred to as dealer markets. A dealer market includes all facilities that are needed to conduct security transactions, but the transactions are not made on the physical location exchanges. The dealer market system consists of (1) the relatively few dealers who hold inventories of these securities and who are said to "make a market" in these securities; (2) the thousands of brokers who act as agents in bringing the dealers together with investors; and (3) the computers, terminals, and electronic networks that provide a communication link between dealers and brokers. The dealers who make a market in a particular stock quote the price at which they will pay for the stock (the bid price) and the price at which they will sell shares (the ask price).

Life insurance companies

Life insurance companies take savings in the form of annual premiums; invest these funds in stocks, bonds, real estate, and mortgages; and make payments to the beneficiaries of the insured parties.

Primary Markets

Markets in which corporations raise capital by issuing new securities.

Secondary Markets

Markets in which securities and other financial assets are traded among investors after they have been issued by corporations. Secondary markets are markets in which existing, already outstanding securities are traded among investors.

Public Markets

Markets in which standardized contracts are traded on organized exchanges. Securities that are traded in public markets (for example, common stock and corporate bonds) are held by a large number of individuals. These securities must have fairly standardized contractual features because public investors do not generally have the time and expertise to negotiate unique, non-standardized contracts. Broad ownership and standardization result in publicly traded securities being more liquid than tailor-made, uniquely negotiated securities.

Private Markets

Markets in which transactions are worked out directly between two parties. Bank loans and private debt placements with insurance companies are examples of private market transactions. Because these transactions are private, they may be structured in any manner to which the two parties agree.

Going Public

The act of selling stock to the public at large by a closely held corporation or its principal stockholders.

Market price

The current price of a stock.

Capital Markets

The financial markets for stocks and for intermediate- or longterm debt (one year or longer). The New York Stock Exchange, where the stocks of the largest U.S. corporations are traded, is a prime example of a capital market.

Money Markets

The financial markets in which funds are borrowed or loaned for short periods (less than one year). The New York, London, and Tokyo money markets are among the world's largest.

Initial Public Offering (IPO) Market

The market for stocks of companies that are in the process of going public.

Spot markets

The markets in which assets are bought or sold for "on-the-spot" delivery.

Futures Markets

The markets in which participants agree today to buy or sell an asset at some future date.