Investments Chapters 1

Security

A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.

Financial Intermediaries

A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans An entity that acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer including safety, liquidity and economies of scale.

Derivatives

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

Active Management

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is called passive management, better known as "indexing"

Financial Assets

An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets.

Net Savers

An entity that saves more than it borrows or lends out. Usually a household. Typically, not national governments.

Alternative name for Net Worth

Equity Value

Net Borrower

Firms are net borrowers. Governments can be net savers or net lenders. An entity that borrows more than it saves or lends out. A net borrower could be a company, country, government, group or individual.

Passive Management or "Indexing"

Passive management is a financial strategy in which an investor invests in accordance with a pre-determined strategy that doesn't entail any forecasting. The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future

Real Assets

Real assets include precious metals, commodities, real estate, agricultural land and oil. Relatively low correlation with financial assets, such as stocks and bonds. They are particularly well-suited for inflationary times

Asset Allocation

Strategy. Why and when and how much you buy of things. Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame

The Risk-Return Trade-off

The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.

Investment Bankers

a banker who deals chiefly in underwriting new securities An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities usually only work for larger institutions of some kind

Fixed Income or Debt Securities

a negotiable or tradable liability or loan. Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate and maturity/renewal date. Debt securities include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities. The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower; higher risks of payment default almost always lead to higher interest rates to borrow capital.

Financial Theory

a set of concepts about how to allocate resources over time and a set of models describing how to evaluate alternative, make decisions and implement them.

Investment

the current commitment of money or other resources in the expectation of reaping future benefits

Capital Market

the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals.

Financial Sustem

the set of markets and institutions used for financial contracting and the exchange of assets and risk. IT includes the markets for stocks, bonds and other financial instruments; financial intermediaries such as banks and mutual finds; financial services firms and the regulatory bodies that govern all these institutions

Finance

the study how economic agents allocate scarce resources over time.

Money Market (Under Debt Securities)

the trade in short-term loans between banks and other financial institutions. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Equity

the value of the shares issued by a company. In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. 1. A stock or any other security representing an ownership interest. 2. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity". 3. In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage. 5. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.