Finance Vocabulary

Stockholders Earn returns from receiving dividends and from stock price appreciation.
Common Stockholders Claim any cash flows to the firm that remain, after the firm pays all other claims.
When residual cash flows are high Stock values will be high
Brokers’ Trading Posts where trading at physical exchanges take place.
Specialists and/or market makers oversea brokers and trades to ensure smooth trading in the stocks for which they are responsible.
Dow Jones Industrial Average Includes: 30 of the largest and most active companies in the U.S. economy.
Standard and Poor’s 500 includes: 500 firms that are the largest in their respective economic sector.
NASDAQ Composite Includes all of the stocks listed on the NASDAQ stock exchange.
A limit order will only be executed if the order’s price conditions are met.
Investors buy stock at the quoted ask price.
Investors sell stock at the bid price.
Preferred Stock: valued as a special zero-growth case of the constant growth rate model.
Stock valuation model dynamics make clear that lower discount rates lead to higher valuations.
Stock valuation model dynamics make clear that higher growth rates lead to higher valuations.
We can estimate stocks value by discounting the future dividends and future stock price appreciation.
Variable Growth Rate firms grow very fast at first, but slower future growth is expected.
We often use the P/E ratio model with the firm’s growth rate to estimate a stock’s future price.
Value stocks usually have low P/E ratios and high growth rates
Dividend yield is defined as the last four quarters of dividend income expressed as a percentage of the current stock price.
Market Capitalization size of the firm measured as the current stock price multiplied by the number of shares outstanding.
Dividend discount model provides a useful theoretical basis because it illustrates the importance of dividends as a fundamental stock prick determinant.
Primary Markets provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds.
Investment Banks Arrange most primary market transactions for businesses.
Initial Public Offering (IPO) stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time
Once firms issue financial instruments in primary markets, these same stocks and bonds are traded in secondary markets
Money markets feature debt securities or instruments with maturities of one year or less.
Corporate Bonds are NOT a money market instrument.
Federal Funds are short-term funds transferred between financial institutions, usually for no more than one day.
U.S. Treasury Bills are not a capital market instrument.
Mortgages long term loans to individuals or businesses to purchase homes, pieces of land, or other real property.
Foreign Exchange markets Trade Currencies for immediate or for some future stated delivery.
Derivative Security Formalizes an agreement between an asset at a predetermined price on a specified future date.
Secondary Markets do not perform vital function to securities markets of all sorts by channeling funds from those with surplus funds to those with shortages of funds.
Liquidity the ease with which an asset can be converted into cash.
Price Risk the risk that an asset’s sale price will be lower than it’s purchase price.
Nominal Interest Rate The interest rate that is actually observed in financial markets.
Real Interest Rate The interest rate that would exist on a default free security if no inflation were expected.
Default Risk The risk that a security issuer will miss an interest or principal payment or to continue to miss such payments.
Inflation Continual increase in the price level of a basket of goods & services.
The higher the default risk, the higher the interest rate that security buyers will demand.
Liquidity Risk the risk that a security can be sold at a predictable price with low transaction costs.
Team structure of Interest Rates comparison of market yields on securities, assuming all characteristics except maturity are the same.
Unbiased Expectations Theory At any given point in time, the yield curve reflects the market’s current expectations of future short-term rates.
Market Segmentation Theory Individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate.
Forward Rate the expected or implied rate on a short-term security that will originate at some point in the future.
Short-Term Structure of interest rates theory is NOT a theory that explains the shape of the term structure of interest rates.

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