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FIN 3303: CHAPTER 2
Three ways to transfer capital flows with surplus capital |
Direct transfer, through an investment bank, and through a financial intermediary
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Direct Transfers |
When business sells its stocks or bonds directly to savers, without going through any type of financial institution.
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Primary Market Transaction
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When new securities are involved and the corporation receives the sale proceeds.
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Financial Intermediary |
It uses the funds received from exchanging its securities to buy and hold businesses' securities, while the saver hold the intermediary's securities.
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Physical Asset Markets |
They are for products such as wheat, autos, real estate, computers and machinery.
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Financial Asset Markets |
Stocks, bonds, notes, and mortgages are comprised within this.
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Spot Market |
Markets in which assets are bought or sold for "on-the-spot" delivery
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Future Markets |
Markets in which participants agree today to buy or sell an asset at some future date.
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Money Markets |
Markets for short-term highly liquid debt securities.
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Capital Markets |
Markets for intermediate- or long-term debt and corporate stocks.
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Primary Markets |
The markets in which corporations raise new capital.
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Secondary Markets |
Markets in which existing, already outstanding securities are traded among investors.
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Private Markets |
Where transactions are negotiated directly between two parties.
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Public Markets |
Where standardized contracts are traded on organized exchanges.
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Derivatives |
Any security whose value is derived from the price of some other "underlying" asset.
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Different Types of Financial Institutions |
Investment banks, Commercial banks, Financial services corporations, Credit unions, Pension funds, Life insurance companies, Mutual funds, Exchange traded funds, Hedge funds, and Private equity companies.
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Investment Banks |
The help corporations design securities with features that are currently attractive to investors, buy these securities from the corporation, an resell them to savers.
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Commercial Banks |
Traditional "department stores of finance" because they serve a variety of savers and borrowers.
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Financial Services Corporations |
Large conglomerates that combine many different financial institutions within a single corporation.
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Credit Unions |
Cooperative associations whose members are supposed to have a common bond, such as being employees of the same firm.
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Pension Funds |
Retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies.
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Life Insurance Companies |
... |
Mutual Funds |
Corporations that accept money from savers and then use these fund to buy stocks, long-term bonds, or short-term debt instruments issued by businesses or government units.
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Money Market Funds |
An open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper.
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Exchange Traded Funds |
Similar to regular mutual funds and are often operated by mutual fund companies. They buy portfolio stocks of a certain type and then sell their own shares to the public.
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Hedge Funds |
A collective investment scheme, often structured as a limited partnership, that invests private capital speculatively to maximize capital appreciation. They are largely unregulated and target large minimum investments investors.
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Private Equity Companies |
Organizations that operate much like hedge funds; but they buy and then manage entire firms.
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Physical Location Exchanges |
They are tangible entities. Each of the larger ones occupies its own building, allows a limited number of people to trade on its floor, and has an elected governing body-its board of governors.
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Over-the-Counter-Market |
The trading is done directly between two parties, without any supervision of an exchange.
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Dealer Markets |
Markets that includes all facilities that are needed to conduct security transactions, but the transactions are not made on the physical location exchanges.
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Closely Held Corporations |
Companies that are so small that their common stocks are not actively traded.
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Publicly Owned Corporations |
Corporations where the stocks of most large companies are owned by thousands of investors, most of whom are not active in management.
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Types of Stock Market Transactions |
Outstanding shares of established publicly owned companies that are traded: the secondary market, additional shares sold by established publicly owned companies: the primary market, and initial public offerings made by privately held firms: the IPO market.
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