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Lesson Flashcards: Stock Market Economics

An institutional investor

A person who makes investment decisions with other people’s money

Bond

A security through which an entity can borrow from investors in the stock market

Stock

A type of financial security that entitles its holders to a fractional “ownership” of the firm

Types of secondary financial market

Trading floors and over the counter (OTC)

Trading floors

Restricted areas in which specialized individuals such as financial brokers trade securities

Primary market

The marketplace where securities are first issued and sold, also known as the issuance market

Types of securities

Stocks and bonds

Cash flow rights

The type of rights that allow the shareholders to earn portions of the firm’s profits

Reinvestment

An indirect method of returning profits to shareholders by increasing the value of each stock share (rather than paying profits out directly to shareholders as dividends, corporations invest them to expand their operations, hoping to generate future stock price increases)

Over the counter (OTC)

A decentralized marketplace (OTC market) in which securities that do not meet regulations are informally traded between parties directly without going through brokers

Types of financial markets

Primary and secondary markets

Underwriting

The process through which someone takes on the risk involved in financial agreements, such as loans, in exchange for a fee, often used by investment banks to assist firms

Secondary market

A marketplace where investors can buy and sell securities that have previously been issued (also known as the exchange market)

Bankruptcy

A legal statement indicating that the firm cannot fulfill its obligations to repay its outstanding debts

Stock market

A marketplace acting as a mediator between firms and investors where firms can raise capital by selling their financial contracts, called securities (the term refers to the entire framework, including all its participants, regulations, and buildings, but excluding secondary markets)

Face value

The specified value that a firm owes the owner of a corporate bond on its maturity date (also known as par value)

Liquidity

The ability to easily convert any asset into money

Coupons

Periodic cash payments resembling stock dividends that are made to bondholders

Initial public offering

A major component of the primary market, where firms offer their stock for sale for the first time

Dividends

Profits directly distributed to shareholders in the form of cash payments

Voting rights

An entitlement of shareholders to participate indirectly in the management of firms by voting on a number of important decisions (also known as control rights)

Brokers

Financial intermediaries, generally working for investment banks, who carry out transactions of securities on behalf of their clients in exchange for a fee

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