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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…

Ownership of or equity in a company; a share of stock represents a specific portion of ownership


Investments such as stocks, bonds, options, futures, and commodities


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


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


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


( 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


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


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


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


An electronic stock exchange that competes with the NYSE


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


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

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