Chapter 01 - Definitions

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<ul><li><p>7/28/2019 Chapter 01 - Definitions</p><p> 1/3</p><p>Investment: Commitment of current resources in the expectation of deriving greaterresources in the future.</p><p>Real assets: Real assets are land, building, and equipment that are used to produce goods</p><p>and services.</p><p>Financial assets: Financial assets are claims such as securities to the income generated byreal assets.</p><p>Fixed-income (debt) securities: A security such as a bond that pays a specified cash flow</p><p>over a specific period.</p><p>Equity: Ownership in a firm. Also, the net worth of a margin account.</p><p>Primitive securities: A primitive security is an instrument such as a stock or bond forwhich payments depend only on the financial status of its issuer.</p><p>Derivative securities: A derivative security is created from the set of primitive securities</p><p>to yield returns that depend on factors beyond the characteristics of the issuer and thatmay be related to prices of other assets.</p><p>Agency problem: Conflicts of interest among stockholders, bondholders, and managers.</p><p>Asset allocation: Choosing among broad asset classes such as stocks versus bonds</p><p>Security selection: Choosing the particular securities to include in a portfolio.</p><p>Security analysis: Determining correct value of a security in the marketplace.</p><p>Risk-return trade-off: If an investor is willing to take on risk, there is the reward of higher</p><p>expected returns.</p><p>Passive management: Buying a well-diversified portfolio to represent a broad-basedmarket index without attempting to search out mispriced securities.</p><p>Active management: Attempts to achieve portfolio returns more than commensurate with</p><p>risk, either by forecasting broad market trends or by identifying particular mispricedsectors of a market or securities in a market.</p><p>Financial intermediaries: An institution such as a bank, mutual fund, investment company</p><p>or insurance company that serves to connect the household and business sectors sohouseholds can invest and businesses can finance production.</p><p>Investment companies: Firm managing funds for investors. An investment company may</p><p>manage several mutual funds.</p></li><li><p>7/28/2019 Chapter 01 - Definitions</p><p> 2/3</p><p>Investment bankers: Firms specializing in the sale of new securities to the public,typically by underwriting the issue.</p><p>Primary market: New issues of securities are offered to the public here.</p><p>Secondary market: Already existing securities are bought and sold on the exchanges or inthe OTC market.</p><p>Globalization: Tendency toward a worldwide investment environment, and theintegration of national capital markets.</p><p>Pass-through securities: Pools of loans (such as home mortgage loans) sold in one</p><p>package. Owners of pass-throughs receive all principal and interest payments made bythe borrowers.</p><p>Securitization: Pooling loans for various purposes into standardized securities backed by</p><p>those loans, which can then be traded like any other security.</p><p>Financial engineering: Creating and designing securities with custom-tailoredcharacteristics.</p><p>Bundling: A trend allowing creation of securities by combining primitive and derivative</p><p>securities into one composite hybrid.</p><p>Unbundling: A trend allowing creation of securities by separating returns on an asset intoclasses.</p><p>Lyhenteet:</p><p>CD: A bank certificate of deposit.</p><p>VC: A venture capitalist. A private investor who provides venture capital to promising</p><p>business ventures.</p><p>IPO: Initial public offering. The first sale of stock by a private company to the public.</p><p>CFO: Chief financial officer.</p><p>ADR: American Depository Receipt. Domestically traded secuirites representing claimsto shares of foreign stocks.</p><p>ETF: Exchange-traded funds. Offshoots of mutual funds that allow investors to trade</p><p>portfolios of securities just as they do shares of stock.</p><p>WEBS: World Equity Benchmark share.</p></li><li><p>7/28/2019 Chapter 01 - Definitions</p><p> 3/3</p><p>MSCI: Morgan Stanley Capital International</p><p>GNMA: Government National Mortgage Association (Ginnie Mae).</p><p>FNMA: Federal National Mortgage Association (Fannie Mae).</p><p>FHLMC: Federal Home Loan Mortgage Corporation (Freddie Mac).</p><p>OTC: Over-The-Counter market. A decentralized market of securities not listed on anexchange where market participants trade over the telephone, facsimile or electronic</p><p>network instead of a physical trading floor. There is no central exchange or meeting placefor this market.</p></li></ul>