Ch 11 Financial Markets

Capital gains

Gains made from the sale of securities.

Financial asset

A claim on the property of the borrower.

Future

A contract to buy or sell a commodity at a specified future data and price.

Investment objective

A financial goal that an investor uses to determine if an investment is appropriate.

Financial intermediary

A financial institution that collects funds from savers and then invests these funds in loans and other financial assets.

Stock index

A measure of the change in prices for a specific set of stocks.

Mutual fund

A pool of money managed by an investment company that gathers money from individual investors and purchases a range of financial assets.

Stock exchange

A secondary market where securities (stocks and bonds) are bought and sold.

Option

A similar contract that gives the right, but not the obligation, to buy or sell.

Financial market

A situation in which buyers and sellers exchange particular types of financial assets.

Stockbroker

An agent who is paid a commission for buying and selling securities on behalf of customers.

Junk bond

Considered high risk but has the potential for high yields.

Financial system

Consists of institutions such as banks, insurance markets, bond markets, and stock markets, allows for this transfer of funds between savers and investors.

Savings

Income not used for consumption, in other words not spent on immediate wants.

Preferred stock

Share of ownership in a corporation giving holders a share of profits (paid before common stockholders) but no voting rights.

Common stock

Share of ownership in a corporation, giving holders voting rights and a share of profits.

Par value

The amount that bond issuer promises to pay the buyer at maturity.

Yield

The annual rate of return for a bond when deciding to buy and sell bonds.

Maturity

The date when the bond is due to be repaid.

Capital market

The market for buying and selling long-term financial assets.

Money market

The market for buying and selling short-term financial assets.

Primary market

The market for buying newly created financial assets directly from the issuing entity.

Secondary market

The market where financial assets are resold.

Risk

The possibility for loss on an investment.

Diversification

The practice of distributing investments among different financial assets to maximize return and limit risk.

Return

The profit or loss made on investments.

Investment

The use of income today in a way that allows for a future benefit.

Bull market

When stock prices rise steadily.

Bear market

When the trend in stock prices is a steady decline.