Chapter 14 Terms - FIN 301: Principles of Finance

financial intermediary

A financial institution, such as a bank or a life insurance company, that directs other people's money into such investments as government and corporate securities.

Securities Act of 1933

An act that is sometimes referred to as the truth in securities act, because it requires detailed financial disclosures before securities may be sold to the public.

Sarbanes-Oxley Act of 2002

An act that was intended to restore confidence in the financial markets by demanding accuracy in financial reporting.

Intermarket Trading System (ITS)

An electronic communications system that links nine markets -- NYSE, AMEX, Boston, Chicago, Cincinnati, Pacific, and Philadelphia stock exchanges, the Chicago Board Options Exchange, and the Nasdaq.

National Association of Security Dealers (NASD)

An industry association that supervises the over-the-counter market.

capital markets

Competitive markets for equity securities or debt securities with maturities of more than one year. The best examples of capital market securities are common stock, bonds, and preferred stock.

money markets

Competitive markets for securities with maturities of one year or less. The best examples of money market instruments would be Treasury bills, commercial paper, and negotiable certificates of deposit.

electronic communications networks (ECNU)

Electronic trading systems that automatically match buy and sell orders at specific prices.

dual trading

Exists when one security, such as General Motors common stock, is traded on more than one stock exchange. This practice is quite common between NYSE-listed companies and regional exchanges.

federally sponsored credit agencies

Federal agencies, such as the Federal Home Loan Banks and the Federal Land Bank, that issue securities.

listing requirements

Financial standards that corporations must meet before their common stock can be traded on a stock exchange. Listing requirements are not standard but are set by each exchange. The requirements for the NYSE are the most stringent.

internally generated funds

Funds generated through the operations of the firm. The principal sources are retained earnings and cash flow added back from depreciation and other noncash deductions.

Securities Exchange Act of 1934

Legislation that established the Securities and Exchange Commission (SEC) to supervise and regulate the securities markets.

market efficiency

Markets are considered to be efficient when (1) prices adjust rapidly to new information; (2) there is a continuous market, in which each successive trade is made at a price close to the previous price (the faster the price responds to new information and the smaller the differences in price changes, the more efficient the market); and (3) the market can absorb large dollar amounts of securities without destabilizing the prices.

over-the-counter markets (OTC)

Markets for securities (both bonds and stock) in which market makers, or dealers, transact purchases and sales of securities by trading from their own inventory of securities.

brokers

Members of organized stock exchanges who have the ability to buy and sell securities on the floor o their respective exchanges. Brokers act as agents between buyers and sellers.

regional stock exchanges

Organized exchanges outside of New York that list securities.

dealers

Participants in the market who transact security trades over the counter from their own inventory of stocks and bonds. They are often referred to as market makers, since they stand ready to buy and sell their securities at quoted prices.

municipal securities

Securities issued by state and local government units. The income from these securities is exempt from federal income taxes.

secondary trading

The buying and selling of publicly owned securities in secondary markets, such as the New York Stock Exchange and the over-the-counter markets.

three-sector economy

The economy consists of three sectors -- business, government, and households. Typically, households have been major suppliers of funds, while business and government have been users of funds.

New York Stock Exchange (NYSE)

The largest organized security exchange in the United States. It also has the most stringent listing requirements.

Nasdaq Small-Cap Market

The list includes companies centered in one city or state with little national ownership, or small development companies with stock priced as low as 25 cents per share, or companies that are closely held by the founders with very few shares available for trading.

Securities Acts Amendments of 1975

The major feature of this act was to mandate a national securities market.

Securities and Exchange Commission (SEC)

The primary regulatory body for security offerings in the United States.

American Stock Exchange (AMEX)

The second largest national physically located security exchange in the United States.

Nasdaq National Market

The segment of the over-the-counter market with the largest companies.

decimalization

The statement of quotes in decimals rather than fractions.

screen-based market

There is no physical location, but trading is based on computers and other communication mediums.