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Fundamentals of Investing
Test #1
86
Finance
Undergraduate 3
09/16/2008

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Term
Investment
Definition
Any vehicle into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value
Term
returns
Definition
the rewards from investing, recieved as current income and/or increased value
Term
securities
Definition
investments that represent debt or ownership or the legal right to acquire or sell an ownership interest
Term
property
Definition
investments in real property or tangible personal property
Term
direct investment
Definition
investment in which an investor directly acquires a claim on a security or property
Term
indirect investment
Definition
investment made in a collection of securities or properties
Term
debt
Definition
funds lent in exchange for interest income and the promised repayment of the loan at a given future date
Term
equity
Definition
ongoing ownership in a business or property
Term
derivative securities
Definition
securities that are structured to exhibit characteristics similar to those of an underlying security or asset and derive their value from the underlying security or asset
Term
risk
Definition
the chance that actual investment returns will differ from those expected
Term
speculation
Definition
the purchase of high - risk investment vehicles that offer highly uncertain returns and future value
Term
short - term investments
Definition
investments that typically mature within one year
Term
long - term investments
Definition
investments with maturities of longer than a year or with no maturity at all
Term
domestic investments
Definition
debt, equity, and derivative securities of U.S. based companies
Term
foreign investments
Definition
debt, equity, and derivative, securities of foreign-based companies
Term
financial institution
Definition
organization that channel the savings of governments, businesses, and individuals into loans or investments
Term
financial markets
Definition
forums in which suppliers and demanders of funds make financial transactions, often through intermediaries
Term
short-term vehicle
Definition
savings instruments that usually have lives of 1 year or less
Term
liquidity
Definition
the ability of an investment to be converted into cash quickly and with little or no loss in value
Term
common stock
Definition
equity investment that represents ownership in a corporation; each share represents a fractional ownership interest in the firm
Term
dividends
Definition
periodic payments made by firms to their shareholders
Term
capital gains
Definition
the amount by which the sale price of an asset exceeds its original purchase price
Term
fixed - income securities
Definition
investment vehicles that offer a fixed periodic
Term
bonds
Definition
long term debt instruments (IOUs), issued by corporations and governments, that offer a known interest return plus return of the bond's face value at maturity
Term
convertible security
Definition
a fixed - income obligation with a feature permitting the investor to convert into a specified number of shares of common stock
Term
preferred stock
Definition
ownership interest in a corporation; has a stated dividend rate, payment of which is given preference over common stock dividends of the same firm.
Term
mutual fund
Definition
a company that raises money from sale of its shares and invests in and professionally manages a diversified portfolio of securities
Term
money market mutual funds
Definition
mutual funds that invest solely in short-term investment vehicle
Term
options
Definition
securities that give the investor an oppurtunity to sell or buy another security at a specified price over a given period of time
Term
futures
Definition
legally binding obligations stipulating that the seller of the contract will make delivery and the buyer of the contract will take delivery of an asset at some specific date, at a price agreed on at the time the contract is sold.
Term
real estate
Definition
entities such as residential homes, raw land, and income property
Term
tangibles
Definition
investments assets, other than real estate, that can be seen or touched
Term
investment goal
Definition
the financial objectives that one wishes to achieve by investing
Term
investment plan
Definition
a written document describing how funds will be invested and specifying the target date for achieving each investment goal and the amount of tolerable risk
Term
portfolio
Definition
collection of securties or other investments, typically constructed to meet one or more investment goals
Term
diversification
Definition
the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risk
Term
capital loss
Definition
the amount by which the proceeds from the sale of a capital asset are less than its original purchase price
Term
net losses
Definition
the amount by which capital losses exceed capital gains; up to $3000 of net losses can be applied against ordinary income in any year
Term
tax planning
Definition
the development of strategies that will defer and minimize an individual's level of taxes over the long run
Term
market timing
Definition
the process of identifying the current state of the economy/market and assessing the likelihood of its continuing on its present course
Term
discount basis
Definition
a method of earning interest on a security by purchasing it at a price below its redemption value; the difference is the interest earned.
Term
securities markets
Definition
forums that allow suppliers and demanders of securities to make financial transactions; they include both the money market and the capital market
Term
money market
Definition
market where short - term securities (with maturities less than one year) are bought and sold
Term
capital market
Definition
market in which long - term securitie (with maturities greater than one year) such as stocks and bonds are bought and sold.
Term
primary market
Definition
the market in which new issues of securities are sold to the public
Term
initial public offering (IPO)
Definition
the first public sale of a company's stock
Term
Securities and Exchange Commission (SEC)
Definition
federal agency that regulates securities offerings and markets
Term
public offering
Definition
the sale of firm's securities to the general public
Term
rights offering
Definition
an offer of new shares of stock to existing stockholders on a pro rata basis
Term
private placement
Definition
the sale of new securities directly, with SEC registration, to selected groups of investors
Term
prospectus
Definition
a portion of a security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position
Term
red herring
Definition
a preliminary prospectus made available to prospective investors during the waiting period between the registration statement's filing with the SEC and its approval
Term
investment banker
Definition
financial intermediary that specializes in selling new security in selling new security issues and advising firms with regard to major financial transactions
Term
underwriting
Definition
the role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price
Term
underwriting syndicate
Definition
a group formed by an investment banker to share the financial risk associated with underwriting new securities
Term
selling group
Definition
a large number of brokerage firms that join the originating investments banker(s); each accepts responsibility for selling a certain portion of a new security issue
Term
over-the-counter (OTC) market
Definition
a segment of the secondary market that involves trading in smaller, unlisted securities
Term
broker market
Definition
the securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities
Term
dealer market
Definition
the market in which the buyer and seller are not brought together directly but instead have theirs orders executed by dealers that make markets in the given security.
Term
market makers
Definition
securities dealers that "make markets" by offering to buy or sell certain securities at stated prices
Term
specialist
Definition
stock exchange member who specializes in making transactions in one or more stocks and manages the auction process
Term
dual listing
Definition
listing of a firm's shares on more than one exchange
Term
bid price
Definition
the highest price offered to purchase
Term
ask price
Definition
the lowest price at which a security is offered for sale
Term
secondary distributions
Definition
the public sales of large blocks of previously issued securities held by large investors
Term
third market
Definition
over-the-counter transactions typically handled by market makers and made in securities listed on the NYSE, the AMEX, or one of the other exchanges
Term
fourth market
Definition
transactions made directly between large institutional buyers and sellers of securities
Term
diversification
Definition
the inclusion of a number of different investment vehicle in a portfolio to increase returns or reduce risk
Term
yankee bonds
Definition
dollar - denominated debt securities issued by foreign government or corporations and traded in U.S. securities markets
Term
crossing markets
Definition
after-hours trading in stocks that involves filing buy and sell orders by matching identical sell and buy orders at the desired price
Term
long purchase
Definition
a transaction in which investors buy securities in the hope that they will increase in value and can be sold at a later date for profit
Term
margin trading
Definition
the use of borrowed fund to purchase securities; magnifies returns by reducing the amount of equity that the investor must put up
Term
margin requirement
Definition
th minimum amount of equity that must be a margin investor's own funds; set by the Federal Reserve Board
Term
financial leverage
Definition
the use of debt financing to magnify investment returns
Term
margin loan
Definition
vehicle through which borrowed funds are made available, at a stated interest rate, in a margin transaction
Term
prime rate
Definition
the lowest interest rate charged the best business borrowers
Term
margin account
Definition
a brokerage account for which margin trading is authorized
Term
initial margin
Definition
the minimum amount of equity that must be provided by a margin investor at the time of purchase
Term
restricted account
Definition
a margin account whose equity is less than the initial margin requirement; that investor may no make further margin purchases and must bring the margin back to the initial level when securities are sold
Term
maintenance margin
Definition
the absolutely minimum amount of margin (equity) that an investor must maintain in the margin account at all times
Term
margin call
Definition
notification of the need to bring the equity is below the maintenance level up above the maintenance margin level or to have enough margined holdings sold to reach this standard
Term
debit balance
Definition
the amount of money being borrowed in a margin loan
Term
pyramiding
Definition
the technique of using paper profits in margin accounts to partly or fully finance the acquisitions of additional securities
Term
excess margin
Definition
more equity than is required in a margin account
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