Finance 101 Chapter 2
Money Market Funds
Mutual funds that invest in short-term, low-risk, securities and allow investors to write checks against their accounts
Private Equity Companies
Organizations that operate much like hedge funds, but rather than purchasing some of the stock of a firm, they buy and then manage the entire firm
Mutual Funds
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification
Intrinsic Value
The price at which the stock would sell if all investors had knowable information about a stock
Equilibrium Price
The price that balances buy and sell orders at any given time
Commercial Bank
The traditional department store of finance serving a variety of savers and borrowers
Types of Transfers (capital)
- Direct Transfers - Indirect Transfers Through Investment Bankers - Indirect Transfers Through a Financial Intermediary
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 Corporations
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking
Over-The-Counter Markets
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities
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
Derivative
Any financial asset whose value is derived from the value of some other "underlying" asset
Capital Allocation Process
Businesses, individuals, and governments often need to raise capital. These things need to figure out where to use their capital.
Credit Unions
Cooperative associations whose members are supposed to have a common bond, such as being employees of the same firm
Physical Location Exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities
Efficient Markets Hypothesis (EMH)
Implies that, on average, asset prices are about equal to their intrinsic values
Dealer Markets
Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges
Hedge Funds
Largely unregulated, target large, wealthy, investors who often invest more than $1mil as the minimum
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
Public Markets
Markets in which standardized contracts are traded on organized exchanges
Private Markets
Markets in which transactions are worked out directly between two parties
Pension Funds
Retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments or commercial banks or by life insurance companies
Exchange Traded Funds (ETF's)
Similar to regular mutual funds, and are often operated by mutual fund companies
Life Insurance Companies
Takes savings in the form of annual premiums, and invests them in stocks, bonds, real estate, and mortgages
Going Public
The act of selling stock to the public at large by a closely held corporation or its principal stockholders
Capital Markets
The financial markets for socks and for intermediate, or long-term debt (one year or longer)
Money Markets
The financial markets in which funds are borrowed or loaned for short periods (less than one year)
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