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Investment
A financial claim on an asset that is usually documented by some form of legal representation
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Real asset
represents an actual tangible asset that may be seen, felt, held, or collected
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Direct equity claims
represents ownership interests and include common stock as well as other instruments that can be used to purchase common stock, such as warrants and options
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indirect equity
aquired through placing funds in investment companies (such as a mutual fund)
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creditor claims
represented by debt instruments offered by financial institutions, industrial corporations, or the government.
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liquidity
measured by the ability of the investor to convert an investment into cash within a realtively short time at its fair market value or with a minium capital loss on the transaction
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beta
Measures the risk of a security relative to the market. Stocks with beta greater than 1 have more risk than the market, stocks with beta less than 1 have less risk than markets.
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real rate of return
Return investors require for allowing others to use their money for a given period. Value determined before inflation is included in the calculation.
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risk free rate
(1+real rate)(1+expected rate of inflation)-1
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required rate of return
risk free rate + risk premium
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stock broker
Works with the public in advising and excuting orders for individual or instituional accounts.
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security analyst or portfolio manager
Studies various industires and companies and provide research reports to their clientele.
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Investment Banker
Primarily distributes securities from the issuing corporation to the public. Advise corporate clients on their financial strategy and may help to arrange mergers and acquisitions. Performs underwriting.
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Financial Planner
Solves the investment and tax problems of the individual investor.
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A market
Way of exchanging assets, usually cash, for something of value.
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Efficient market
Prices respond quickly to new information, when each successive trade is made at a price close to the preceding price, and when the market can absorb large amounts of securities or assets without changing the price significantly.
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Secondary markets
Markets for existing assets that are currently traded between investors. These markets create prices and allow for liquidity.
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Primary markets
Flow of funds between the market participants. Participants buy their assets directly from the source of the asset.
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Syndicate
Investment banking firms share the risk and the burden of distribution during underwriting.
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Initial Public Offering
Bringing private companies public for the first time.
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Electronic Communication Network (ECN)
Automatically match buy and sell orders at specified prices.
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Securities Act of 1933
- 1. All offerings except government bonds and bank stocks that are to be sold in more than one state must be registered with the SEC.
- 2. Registration statement must be filed 20 days in advance of the date of sale.
- 3. All new issues must be accompanies by a prospectus.
- 4. Officers of the company and other experts preparing the prospectus or registration statement can be sued for penalties and recovery or realized losses if any information presented was fradulent or factually wrong or if relevant information was omitted.
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Security Exchange Act of 1934
- 1. Guidelines for insider trading were established.
- 2. Fed became responsible for setting margin rate
- 3. Manipulation of securities by conspiracies between investors prohibited.
- 4. 10K must be filed.
- 5. All securities exchanges to register with SEC.
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Securities Act 1975
SEC to supervise securities market.
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Program trading
Computer based trigger points established in which large volume trades are initiated by instituional investors.
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Circuit breakers
Shut down the market for a period of time if there is a dramatic drop in stock prices.
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Margin account
Allows the investor to borrow a percentage of the purchase price from the brokerage firm. It is set by the Federal Reserve. Currently 50% since 1974.
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Long position
Purchase security for the account
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Short position
Profit from the expected decline in a security.
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Limit order
Limits the price at which you are willing to buy or sell
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Stop order
Placed at a specific price, but when the price is reached, turns into a market order.
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Market order
Next best price to buy or sell.
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Dow Jones Industrial Average
Price weighed average of 30 large industrial comapnies and is considered a blue chip index (stocks of high quality).
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S&P 500 index
Standard and Poor 500 index is value weighted index, which means each company is weighted in the index by its own total market value as a percentage of the total market value for all firms.
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Fiscal Policy
Goverments taxing and spending policies
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Monetary policy
Money supply and interest rates set by Federal Reserve to adjust economic goals.
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Reserve requirements
Percentage of total deposits that a bank must hold as cash in its vault or as deposits in Federal Reserve Banks
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Discount rate
Interest rate the Federal Reserve charges commercial banks on very short term loans.
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Open Market Operations
Fed buys and sells US government securities for its own portfolio.
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Gross Domestic Product
Measures output from US factories and consumption within the United States only.
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Leading economic indicators
Change direction in advance of general business conditions. Stock prices, initial claims for unemployment insurance, consumer sentiment.
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Top down approach
Macro economic view to the individual company.
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Bottom up approach
Starts from individual company then moves to economy.
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Industry life cycles
Created because of economic growth, competition, availability of resources, and the resultant market saturation by the particular goods and services offered.
Development stage, Growth stage, Expansion stage, Maturity stage, Decline stage.
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