23 terms

Ch 2 Finance 301

STUDY
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Savers (Suppliers)
Individuals or institutions with "excess funds" looking for a return on their investment
Borrowers (Users)
Those who need funds to finance investment opportunities
Direct Transfer of Capital
Directly from borrower to saver with no financial intermediary involved

Ex. Selling stock to friend in exchange for cash
Indirect Transfer: Investment Banker
Provide services to investors and companies to help raise capital.

Investment Bank may "underwrite" the issue by buying stock and selling it; assuming the risk.

Ex. Morgan Stanley
Indirect Transfer: Financial Intermediary
Accepts money from savers, issues its own securities in exchange and then uses funds to purchase other securities
Creates new forms of capital
Crucial for the efficiency of markets
Ex. Insurance Company
Mutual Funds
Organizations that pool investor funds to purchase finaccial instruments

The more types of securities, the less one's risk through diversification
Derivatives
A financial instrument that has a value based on the expected future price movements of the asset to which it is linked

Ex. The option to buy IBM stock is a derivative. The value of the IBM option depends on the price of IBM stock
Hedging
Technique that attempts to reduce risk.
Hedging occurs when an individual or institution buys an asset and sells it using a futures contract.

Ex. Purchase wheat futures at a certain price reduces risk if the price of wheat is expected to increase
Hedge Funds
Similar to mutual funds
Except:
Not regulated by SEC
Typically have large minimum investment of $1 million
Charge large fees
Money Market Funds
Mutual funds that invest in short-term, low risk securities
Investors can also write checks against their accounts
This is a good investment tool for someone who wants liquidity and minimal risk
Exchange Traded Funds (ETF's)
Similar to mutual funds
ETF buys a portfolio of stocks of one type and then sells their own shares to the public
Tranded in the public markets
What is a market?
A venue where goods and services are exchanged
A place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds
Money Markets
Liquid and short term
Ex. US Treasury Bills, Money Market Mutual fund certificate of deposit
Capital Markets
Long-term (over a year)
Ex. US Treasury bonds, mortgages, leases, preferred and common stock
Physical asset markets
Still needs to be looked up
Financial asset markets
Still needs to be looked up
Primary Market
First time a company goes public; buy directly from company
Secondary Market
Trading previously purchased stock
Ex. NYSE, Nasdaq
Private Market
Ex. Pilot buying Flying J
Public Market
Anyone can buy parts of the company
Regulated by the SEC
Initial Public Offering (IPO)
A company issues stock in the public market for the first time. "Going public"
Enables a company's owners to raise capital from outside investors.
Spot Markets
Sold on the spot
Futures Markets
Agreement to buy or sell stock at a certain price in the future