CHAPTER 19. Using Securities Markets for Financing and Investing Opportunities – Flashcards

A corporate certificate indicating that a person has lent money to a firm.

Purchasing stocks by borrowing some of the purchase cost from the brokerage firm.

The positive difference between the purchase price of a stock and its sale price.

The most basic form of ownership in a firm; it confers voting rights and the right to share in the firm's profits through dividends, if offered by the firm's board of directors.

Bonds that are unsecured (i.e., not backed by any collateral such as equipment).

Buying several different investment alternatives to spread the risk of investing.

Part of a firm's profits that the firm may distribute to stockholders as either cash payments or additional shares of stock.

The average cost of 30 selected industrial stocks, used to give an indication of the direction (up or down) of the stock market over time.

Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds.

The first public offering of a corporation's stock.

Large organizations—such as pension funds, mutual funds, and insurance companies—that invest their own funds or the funds of others.

The payment the issuer of the bond makes to the bondholders for use of the borrowed money.

Specialists who assist in the issue and sale of new securities.

High-risk, high-interest bonds.

The exact date the issuer of a bond must pay the principal to the bondholder.

An organization that buys stocks and bonds and then sells shares in those securities to the public.

A nationwide electronic system that communicates over-the-counter trades to brokers.

Exchange that provides a means to trade stocks not listed on the national exchanges.

Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold.

Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses.

A condensed version of economic and financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors.

Federal agency that has responsibility for regulating the various exchanges.

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

A registered representative who works as a market intermediary to buy and sell securities for clients.

Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.

An organization whose members can buy and sell (exchange) securities for companies and investors.

Shares of ownership in a company.

An action by a company that gives stockholders two or more shares of stock for each one they own.

By issuing securities businesses are able to raise much-needed funding to help finance their major expenses. Individual investors can share in the success and growth of emerging or established firms by investing in them.

Investment bankers are specialists who assist in the issue and sale of new securities.

Stock exchanges are securities markets whose members are engaged in buying and selling securities such as stocks and bonds.

The NYSE Euronext lists the stock of over 8,000 companies. The NASDAQ is a telecommunications network that links dealers across the nation so that they can buy and sell securities electronically rather than in person. It is the largest U.S. electronic stock trading market. There are stock exchanges all over the world.

The OTC market is a system for exchanging stocks not listed on the national exchanges.

The Securities and Exchange Commission (SEC) regulates securities exchanges and requires companies that intend to sell bonds or stocks to provide a prospectus to potential investors.

Insider trading is the use of information or knowledge that individuals gain that allows them to benefit unfairly from fluctuations in security prices.

The advantages of selling stock include the following: (1) the stock price never has to be repaid to stockholders, since they become owners in the company; (2) there is no legal obligation to pay stock dividends; and (3) the company incurs no debt, so it may appear financially stronger. Disadvantages of selling stock include the following: (1) stockholders become owners of the firm and can affect its management by voting for the board of directors; (2) it is more costly to pay dividends since they are paid in after-tax profits; and (3) managers may be tempted to make stockholders happy in the short term rather than plan for long-term needs.

Holders of common stock have voting rights in the company. In exchange for having no voting rights, preferred stockholders receive a fixed dividend that must be paid in full before common stockholders receive a dividend. Preferred stockholders are also paid back their investment before common stockholders if the company is forced out of business.

The advantages of issuing bonds include the following: (1) management retains control since bondholders cannot vote; (2) interest paid on bonds is tax-deductible; (3) bonds are only a temporary source of financing, and after they are paid off the debt is eliminated; (4) bonds can be paid back early if they are callable; and (5) sometimes bonds can be converted to common stock. The disadvantages of bonds include the following: (1) because bonds are an increase in debt, they may adversely affect the market's perception of the company; (2) the firm must pay interest on its bonds; and (3) the firm must repay the bond's face value on the maturity date.

Unsecured (debenture) bonds are not supported by collateral, whereas secured bonds are backed by tangible assets such as mortgages, buildings, and equipment.

Investors can purchase investments through market intermediaries called stockbrokers, who provide many different services. Online investing, however, has become extremely popular.

Investors should determine their overall financial objectives and evaluate investments according to (1) risk, (2) yield, (3) duration, (4) liquidity, and (5) tax consequences.

Diversification means buying several different types of investments (government bonds, corporate bonds, preferred stock, common stock, global stock) with different degrees of risk. The purpose is to reduce the overall risk an investor would assume by investing in just one type of security.

A market order tells a broker to buy or sell a security immediately at the best price available.

A limit order tells the broker to buy or sell if the stock reaches a specific price.

When a stock splits, stockholders receive two (or more) shares of stock for each share they own. Each is worth half (or less) of the original share, so while the number of the shares increases, the total value of stockholders' holdings stays the same. Stockholders hope the lower per-share price that results may increase demand for the stock.

An investor buying on margin borrows part (the percentage allowed to be borrowed is set by the Federal Reserve) of the cost of a stock from the broker to get shares of stock without immediately paying the full price.

Stock quotations provide the highest and lowest price in the last 52 weeks; the dividend yield; the price/earnings ratio; the total shares traded that day; and the closing price and net change in price from the previous day.

In the secondary market a bond selling at a premium is priced above its face value. A bond selling at a discount sells below its face value.

Junk bonds are high-risk (rated BB or below), high-interest debenture bonds that speculative investors often find attractive.

A bond quotation gives the bond's interest rate (coupon rate), maturity date, rating, current price, and whether it's callable.

A mutual fund is an organization that buys stocks and bonds and then sells shares in those securities to the public, enabling individuals to invest in many more companies than they could otherwise afford.

Like mutual funds, ETFs are collections of stocks that are traded on securities exchanges, but they are traded more like individual stocks.

The Dow Jones Industrial Average is the average price of 30 specific stocks that analysts use to track the direction (up or down) of the stock market.