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Business in Action Ch 19 BUSN100 Financial Markets and Investment Strategies

After studying this chapter, you will be able to 1. Distinguish between common and preferred stock and explain the difference between market value and intrinsic value 2. Explain the three key variables that distinguish bonds, compare the advantages and disadvantages of owning bonds, and list the major types of bonds 3. Define mutual fund and explain the advantages and disadvantages of this popular investment vehicle 4. Define derivative and identify the major types of derivatives 5. Describe the…
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Ownership of or equity in a company; a share of stock represents a specific portion of ownership
stock
Investments such as stocks, bonds, options, futures, and commodities
securities
Shares of ownership that include voting rights
common stock
Increases in the value of a stock or other asset
capital gains
Shares of ownership without voting rights but with defined dividends
preferred stock
The price at which the stock is actually selling in the stock market
market value
An estimate of what a company is actually worth, independent of book and market values
intrinsic value
ratio Market value per share divided by the earnings per share
price-earnings
Act of dividing a share into two or more new shares and reducing the market value by the same ratio
stock split
Amount of money, or principle, a bond buyer lends to a bond issuer; also known as par value or denomination
face value
Date on which the principle of a bond will be repaid in full
maturity date
Short- term debt securities issued by the federal government; also referred to as T- bills
Treasury bills
Debt securities issues by the federal government that are repaid within 1 to 10 years after issuance
Treasury notes
( TIPS) Treasury issues in which the principle amount is tied to the Consumer Price Index to protect the buyer against the effects of inflation
Treasury inflation- protected securities
Bonds issued by states, cities, and various government agencies to fund public projects
municipal bonds
Spreading investments across enough different vehicles to protect against significant declines in any one vehicle
portfolio diversification
Financial instruments that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities
mutual funds
Annual cost of owning a mutual fund, expressed as a percentage
expense ratio
Sales commission charged when buying or selling a mutual fund
load
Mutual funds that do not charge loads
no-load funds
Mutual funds that mirror the composition of a particular market or index
index funds
Statistical indicator of the rise and fall of a representative group of securities
index
( ETFs) Mutual funds whose shares are traded on public exchanges in the same way as stocks
exchange traded funds
( NAV) A mutual fund's assets minus its liabilities; usually expressed as NAV per share
net asset value
Contracts whose value is derived from some other entity ( usually an asset of some kind, but not necessarily); used to hedge against or speculate on risk
derivatives
The purchased right— but not the obligation— to buy or sell a specified number of shares of a stock at a predetermined price during a specified period
option
Contracts to buy or sell a financial instrument ( such as stocks, Treasury bonds, and foreign currencies) for a set price at a future date
financial futures
futures Contracts to buy or sell specific amounts of commodities for a set price at a future date
commodities
Contracts to buy or sell amounts of specified currency at some future date
currency futures
Derivatives used to reduce a lender's exposure to credit risk
credit derivatives
Organizations that facilitate the buying and selling of stock
stock exchanges
The New York Stock Exchange, one of the oldest and most widely recognized exchanges in the world
NYSE
An electronic stock exchange that competes with the NYSE
NASDAQ
The collective buying and selling of bonds; most bond trading is done over the counter, rather than in organized exchanges
bond market
Over-the-counter marketplace for short- term debt instruments such as Treasury bills and commercial paper
money market
Includes exchange trading ( for futures and some options) and OTC trading ( for all other derivatives, at least currently)
derivatives market
Gain ( or loss) of an investment over time, expressed as a percentage
rate of return
Market situation in which most stocks are increasing in value
bull market
Market situation in which most stocks are decreasing in value
bear market
Collections of various types of investments
investment portfolios
Managing a portfolio to balance potential returns with an acceptable level of risk
asset allocation
Certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors
broker
Type of securities order that instructs the broker to buy or sell at the best price that can be negotiated at the moment
market order
Order that stipulates the highest or lowest price at which the customer is willing to trade securities
limit order
Order to sell a stock when its price falls to a particular point to limit an investor's losses
stop order
Borrowing money from brokers to buy stock, paying interest on the borrowed money, and leaving the stock with the broker as collateral
margin trading
Selling stock borrowed from a broker with the intention of buying it back later at a lower price, repaying the broker, and keeping the profit
short selling