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