Chapter 2 Blueprint

The most active secondary market, and the most important one to financial managers, is the stock market where the prices of firms' stocks are established. There are a number of different stock markets; however, the two leaders are the New York Stock Exchange, which is a(n) _________________ exchange, and the NASDAQ, which is a(n) _______________ market. The New York Stock Exchange is a tangible entity that conducts auction markets in listed securities.

Physical location electronic dealer-based

Stock market transactions can be classified into three distinct categories: (1) outstanding shares of established publicly owned companies that are traded in the _______________ market, (2) additional shares sold by established publicly owned companies in the _____________ market, and (3) initial public offerings made by privately held firms in the _____________ market.

Secondary Primary IPO

There are some important distinctions among mutual funds. _____________funds use a manager's expertise to outperform the overall markets. ______________ funds are designed to simply replicate the performance of a specific basket of stocks like the S&P 500. Both types of funds provide investors with valuable ______________.

Actively-managed Indexed diversification

Cooperative associations whose members are supposed to have a common bond are known as

Credit unions

An important trend in securities is the increased use of ______________ , which are securities whose values stem from the price of some other underlying asset. These securities can be used to reduce risks or to speculate. The purpose of a ______________ operation is to reduce risk exposure.

Derivatives hedging

Retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks are known as

Pension Funds

_____________ asset markets exist for wheat, autos, and real estate, while ___________ asset markets deal with stocks, bonds, and mortgages. ____________ markets are markets where assets are sold for almost immediate delivery, while ____________ markets are markets in which participants agree today to buy or sell an asset months from now. _____________ markets are the markets for intermediate- or long-term debt and corporate stocks, while _______________ markets are the markets for short-term, highly liquid debt securities. _____________ markets are markets in which existing, already outstanding securities are traded among investors, while _________________ markets are the markets in which corporations raise new capital. In ____________ markets transactions are negotiated directly between two parties, while _____________ markets are markets where standardized contracts are traded on organized exchanges.

Physical Financial Spot Futures Capital Money Secondary Primary Private Public

The traditional department stores of finance serving a variety of savers and borrowers are known as

Commercial Banks

Businesses, individuals, and governments often need to raise capital, while others have surplus funds. In a well-functioning economy, capital flows efficiently from those with surplus capital to those who need it. Transfers can take place in 3 ways: _________ transfers without going through any type of financial institution, __________ transfers through investment banks that underwrite the securities, and indirect transfers through financial ______________ that create new forms of capital.

Direct indirect intermediaries

Many believe that insufficient supervision of the financial sector was partly responsible for the recent financial crisis. Consequently, Congress passed the _____________ Act. The legislation's main goals are to create a new agency for consumer protection, increase the transparency of derivative transactions, and force financial institutions to take steps to limit excessive risk-taking and to hold more capital.

Dodd Frank Act

If the stock market is _____________ , it's a waste of time for most people to seek bargains by analyzing published data on stocks. Stock prices will already reflect all publicly available information and these stocks will be __________________ priced. However, an investor should still be careful when selecting stocks for his or her portfolio. Most importantly, the portfolio should be _____________________.

Efficient fairly diversified

The _________________________ remains one of the cornerstones of modern finance theory. It implies that, on average, asset prices are approximately _____________ their intrinsic values. Many events in the real world seem inconsistent with the hypothesis, which has spurred a growing field called _________________ finance, that borrows insights from psychology to better understand how irrational actions can be sustained over time. This theory considers two key points. First, it is often difficult or risky for traders to take advantage of mispriced assets. Second, it considers why mispricing occurs. Investors and managers behave differently in down markets than they do in up markets and individuals tend to _____________ their true abilities.

Efficient markets hypothesis equal to behavioral overestimate

Large conglomerates that combine many different financial institutions within a single corporation are known as

Financial services corporations

Stock prices are determined in the financial markets. Management's primary goal is to maximize the firm's stock price, so financial managers need to understand how these markets operate in order to make good decisions. In addition, individuals make personal investment decisions so they too must understand how the financial markets operate and have some knowledge of the institutions that operate in these markets. In a global context, economic development is ___________ correlated with the level and efficiency of financial markets and institutions.

Highly

Financial markets have experienced many changes in recent years. Technological advances in computers and telecommunications, along with the globalization of banking and commerce, have led to deregulation, which has _____________ competition throughout the world.

Increased

Organizations that underwrite and distribute new investment securities and help businesses obtain financing are known as

Investment banks