Introduction to Capital Markets

Glossary I
Extracted from Chapters 1, 2, 3, 8, 14 & 15 of the prescribed text (abo!!i"
12b-1 fee: ee that #ses the 1$8% &EC '#le 12b(1 to assess i)*estors for selli)+ a)d
mar,eti)+ costs
Active management strategy: - strate+y of re+#lar b#yi)+ a)d selli)+ assets that
is based o) the belief that they are mispriced by a)d i) the mar,et .here
they are traded/
Advisory fee: /
Agency problems: 0iffic#lties that ca) arise .he) a firm1s ma)a+ers, .ho are acti)+
as a+e)ts of the firm1s o.)ers .ho are pri)cipals, follo. their o.)
i)terests at the o.)ers1 expe)se a)d to their disad*a)ta+e/
Arbitrage: 2he act of ta,i)+ ad*a)ta+e of a differe)ce i) price a)d3or ret#r) of a)
asset that is traded i) more tha) o)e mar,et/
Asset: 4roadly spea,i)+, a)y possessio) that has *al#e i) a) excha)+e/
Asset/liability management: 2erm for a fi)a)cial i)stit#tio)1s efforts to ma)a+e
its assets relati*e to the )at#re of its liabilities/
Asset securitization:
Asymmetric information: 5cc#rs .he) i)*estors i) a firm do )ot ha*e the same
access as ma)a+ers to i)formatio) rele*a)t to a fi)a)cial e*al#atio) of the
firm/
Auctioneer: - mar,et participa)t .ho facilitates trades by see,i)+ bids from b#yers
a)d sellers that establish the mar,et(cleari)+ amo#)t to be traded a)d the
price that ma,es amo#)t dema)ded e6#al amo#)t offered/
ack-end load fund: - f#)d that char+es i)*estors a fee to sell (redeem" shares/
2he formal )ame for the bac,(e)d load is Co)ti)+e)t 0eferred &ales
Char+e or C0&C/
ank for International !ettlements "I!#: -) i)ter)atio)al or+a)i!atio) of
ce)tral ba),s from i)d#striali!ed co#)tries that has played a lar+e role i)
the i)ter)atio)ali!atio) of ba),i)+ a)d the re+#latio) of i)ter)atio)al
ba),i)+/
ank of $ngland: 2he ce)tral ba), i) the 7)ited 8i)+dom, .hich plays ma)y ,ey
roles i) the re+#latio) of ba),s/
ank of %apan "&%#: 9apa)1s ce)tral ba), a)d a ma:or re+#lator of commercial
ba),i)+/
asis point: - term i) the fi)a)cial mar,et for o)e(o)e h#)dredth (or 1;" of o)e
perce)ta+e poi)t/
est efforts under'riting: -) #)der.riti)+ arra)+eme)t i) .hich a) i)*estme)t
ba),i)+ firm a+rees o)ly to #se its expertise to sell the sec#rities a)d does
)ot b#y the e)tire iss#e from the iss#er
ig ang: I) the co)text of e6#ity mar,ets, it refers to the fi)a)cial reforms that
.ere i)trod#ced i) E)+la)d i) 1$8< a)d i) 9apa) i) 1$$< to liberali!e
stoc, tradi)+ practices/
oard of directors: -lso ,)o.) as 1f#)d tr#stees1 i) the co)text of i)*estme)t
compa)ies/ 2hey i)cl#de 1i)side1 or 1i)terested1 directors (i/e/ directors
affiliated .ith the i)*estme)t compa)y" a)d 1o#tside1 or 1i)depe)de)t1
directors (i/e/ directors .ho ha*e )o affiliatio) .ith the i)*estme)t
compa)y/
oug(t deal: -) #)der.riti)+ arra)+eme)t .hereby a) i)*estme)t ba),i)+ firm
or +ro#p of firms offers to b#y a) e)tire iss#e from the iss#er/
roker: -) a+e)t for a) i)*estor .ho exec#tes, for a commissio) or fee, the
i)*estor1s order to b#y or sell/
undes bond "or und#: - debt sec#rity iss#ed by the ce)tral Germa) +o*er)me)t/
undesbank or )euts(e undesbank: 2he ce)tral ba), of Germa)y a)d a
re+#latory a#thority i) the ba),i)+ i)d#stry/
Call market: - seco)dary mar,et .here orders to b#y a)d sell sec#rities are
batched or +ro#ped to+ether for sim#lta)eo#s exec#tio) at the same price
a)d at certai) times i) the day/
Call option: -) optio) that +ra)ts the o.)er of the optio), the ri+ht to b#y the fi)a)cial
asset from the other party (1the .riter1" at a specified price (1stri,e price1"/
Capital market: 2he fi)a)cial mar,et for e6#ity i)str#me)ts, a)d for debt
i)str#me)ts .ith a mat#rity +reater tha) o)e year/
Certificate of deposit "C)#: - fi)a)cial asset iss#ed by a ba), or similar
i)stit#tio) that i)dicates that a specified s#m of mo)ey has bee) deposited
at the i)stit#tio) for a specified period of time/
Closed-end fund: #)d that ma)a+es a pool of i)*estme)ts a)d that sells shares li,e
a)y other corporatio) a)d #s#ally does )ot redeem its shares, .hich trade
o) either a) or+a)i!ed excha)+e or o*er(the(co#)ter/
Commercial bank: - fi)a)cial i)stit#tio) that accepts deposits a)d may #se the
proceeds of those deposits to ma,e loa)s/
Commodity *utures +rading Commission "C*+C#: 2he 7/&/ +o*er)me)t a+e)cy
that lice)ses f#t#res excha)+es a)d mo)itors tradi)+ i) them/
Competitive bidding under'riting: -) #)der.riti)+ arra)+eme)t i) .hich the
iss#er a))o#)ces the terms of the iss#e, a)d i)terested parties s#bmit bids
for the e)tire iss#e/
Competitive market: - mar,et that bri)+s abo#t the efficie)t prod#ctio) of a
+ood or ser*ice at the lo.est possible cost/
Continuous market: - seco)dary mar,et .here the prices are determi)ed
co)ti)#o#sly thro#+ho#t the tradi)+ day as b#yers a)d sellers s#bmit
orders/
Contracting cost: 2he costs of a)aly!i)+ a)d arra)+i)+ a co)tract for the
performa)ce of certai) tas,s/
)ealer: =articipa)t i) a mar,et .ho ass#mes a positio) i) a) asset, ,eeps a)
i)*e)tory of it, a)d is ready to b#y a)d sell to other participa)ts/
)ealer,s position: 2he amo#)t of a) asset a dealer is holdi)+ i) i)*e)tory
)ebit card: - payme)t mecha)ism that allo.s for payme)t of a p#rchase by a)
immediate char+e a+ai)st the p#rchaser1s acco#)t at the fi)a)cial
i)stit#tio) that spo)sors the card/
)ebt instrument: 2he claim that the holder of a fi)a)cial asset has that is a fixed
mo)etary amo#)t/ >oa)s a)d bo)ds are examples/
)efault risk "also called credit risk#: 2he ris, that a) iss#er or borro.er .ill
defa#lt o) its obli+atio)/
)enomination: 2he si!e, i) #)its of mo)ey, of a loa) or debt sec#rity/
)epartment of +rade and Industry ")+I#: 2he 781s +o*er)me)t a+e)cy
respo)sible for re+#latio)s of ma)y mar,ets i)cl#di)+ fi)a)cial mar,ets/
)epositary institutions: i)a)cial i)stit#tio)s that ac6#ire the b#l, of their f#)ds by
offeri)+ their liabilities to the p#blic i) the form of deposits/
)erivative instrument: - co)tract that +i*es the co)tract holder either the
obli+atio) or the choice to b#y or sell a fi)a)cial asset at some f#t#re time/
5ptio)s a)d f#t#res are examples/
)eutsc(e +erminborse: #t#res mar,et i) Germa)y/
)irect investments: 2he fi)a)cial i)*estme)ts made by fi)a)cial i)termediaries?
these assets ca) be loa)s or sec#rities/
)isclosure -egulation: 2he re+#latio) that re6#ires iss#ers of sec#rities to ma,e
p#blic a lar+e amo#)t of fi)a)cial i)formatio) to act#al a)d pote)tial
i)*estors/
)isintermediation: 2he flo. of f#)ds, ca#sed by the the discrepa)cy bet.ee)
re+#lated a)d mar,et i)terest rates, o#t of the re+#lated commercial ba),s
a)d similar i)stit#tio)s i)to other, #)re+#lated fi)a)cial i)stit#tio)s, s#ch
as mo)ey mar,et m#t#al f#)ds/
)iversification: -llocati)+ .ealth across a si+)ifica)t )#mber of differe)t assets/
)omestic market: - classificatio) of the +lobal fi)a)cial mar,et/ It is the fi)a)cial
mar,et of a co#)try .here iss#ers domiciled i) the co#)try iss#e sec#rities
a)d .here those sec#rities are s#bse6#e)tly traded/ It is part of the i)ter)al
or )atio)al mar,et/
)ue diligence: 0#ty of a) #)der.riter to ass#re that there are )o misstateme)ts or
omissio)s of fact i) the re+istratio) stateme)t or prospect#s/
)utc( auction: -) a#ctio) process for a )e. iss#e of sec#rities i) .hich bidders
i)dicate the amo#)t of sec#rities they are .illi)+ to b#y a)d .i))i)+
bidders a+ree to pay the lo.est accepted bid price (or e6#i*ale)tly, the
hi+hest accepted bid yield"/
$fficient market (ypot(esis: 2he theory that the p#blic a*ailability of rele*a)t
i)formatio) abo#t the iss#ers of sec#rities .ill lead to a correct prici)+ of
those sec#rities if they are freely traded i) properly f#)ctio)i)+ mar,ets/
$.uity instrument "also called residual claim#: - fi)a)cial asset i) .hich the iss#er
a+rees to pay the holder a) amo#)t based o) ear)i)+s, if a)y, after holders
of debt i)str#me)ts ha*e bee) paid/ Commo) stoc, is a) example of a)
e6#ity claim/
$/c(ange-traded funds: Esse)tially hybrid closed(e)d *ehicles that trade o)
excha)+es, .hich typically trade *ery close to @-A/
$/ternal market "also called international market0 t(e offs(ore market or t(e
$uromarket#: Classificatio) of the +lobal fi)a)cial mar,et/ 2his fi)a)cial mar,et
i)cl#des sec#rities .ith the follo.i)+ disti)+#ishi)+ feat#resB (1" at
iss#a)ce, they are offered sim#lta)eo#sly to i)*estors i) a )#mber
of co#)tries, a)d (2" they are iss#ed o#tside the :#risdictio) of a)y
si)+le co#)try/
*ederal -eserve !ystem "*ed#: -) i)depe)de)t 7/&/ +o*er)me)t a+e)cy
respo)sible for 7/&/ mo)ey a)d ba),i)+ system/
*inancial asset : -) asset that represe)ts a le+al claim to some f#t#re mo)etary
be)efit/ 2he term may be #sed i)tercha)+eably .ith the terms financial
instrument a)d security/
*inancial institution: - fi)a)cial e)terprise that may perform o)e of se*eral
fi)a)cial ser*ices s#ch as accepti)+ deposits, bro,eri)+ sec#rities,
ma)a+i)+ f#)ds, or #)der.riti)+ sec#rities/
*inancial intermediary: - fi)a)cial e)terprise that tra)sforms fi)a)cial assets,
ac6#ired thro#+h the mar,et, i)to a differe)t a)d more .idely preferable
type of asset, .hich become the liability of the i)termediary/
*inancial market: - mar,et .here fi)a)cial assets are excha)+ed (traded"/
*irm commitment under'riting: -) #)der.riti)+ arra)+eme)t .hereby a)
i)*estme)t ba),i)+ firm a+rees to b#y the sec#rities from the iss#er at a
set price/
*i/: - collo6#ial term, #sed i) certai) 78 mar,ets, for the determi)atio) of a
mar,et(cleari)+ price i) a call mar,et system
*i/ed-income instrument: 0ebt i)str#me)ts a)d preferred stoc, that pay a fixed
mo)etary amo#)t/
*oreign-e/c(ange risk: 2he ris, of a) ad*erse forei+) excha)+e rate mo*eme)t/
*oreign market: - classificatio) of the +lobal fi)a)cial mar,et/ It is the fi)a)cial
mar,et of a co#)try .here the sec#rities of iss#ers )ot domiciled i) the
co#)try are sold a)d traded/ It is part of the i)ter)al or )atio)al mar,et/
*rictions: Eco)omic term for feat#res of a mar,et, or its e)*iro)me)t, that ,eeps the
price it sets from bei)+ the fair mar,et price/
1ross spread "or under'riter discount#: 2he differe)ce bet.ee) the price at .hich a
sec#rity is reoffered to the p#blic a)d the price paid by the #)der.riter to
the iss#er/
Immediacy: 2erm for a mar,et1s ability to pro*ide a) i)*estor .ith a 6#ic, exec#tio)
of a trade order, .hether it is to b#y or to sell, at a fair mar,et price/
Inde/ing: - passi*e i)*estme)t strate+y that i)*ol*es b#yi)+ stoc,s accordi)+ to the
compositio) of a) i)dex i) order to +e)erate the le*el of ret#r)s that the
i)dex achie*es/
Indirect investment: -) i)*estme)t a) i)*estor has by holdi)+ a claim o) a
fi)a)cial i)termediary that has made direct i)*estme)ts/
Information costs: Costs associated .ith assessi)+ the *al#e of a fi)a)cial asset/
Initial public offering "I2&#: 2he commo) stoc, offeri)+s iss#ed by firms that
ha*e )ot pre*io#sly sold commo) shares to the p#blic/
Insider trading: 2he p#rchase or sale of a firm1s sec#rities by its officers (amo)+
others" .ho are see,i)+ to be)efit from their ,)o.led+e of )o)p#blic
i)formatio) abo#t the firms fi)a)cial prospects/
Interbank market: - mar,et for f#)ds i) .hich o)ly ba),s participate/
Internal market "also called national market#: - classificatio) of a +lobal fi)a)cial
mar,et composed of t.o partsB the domestic mar,et a)d the forei+)
mar,et/
International ank Act of 1345 "IA#: 7/&/ le+islatio) that imposed some
re+#latio)s, lo)+ familiar to domestic ba),s, o) forei+)(o.)ed ba),s
operati)+ offices a)d bra)ches i) the 7/&/
Investment advisor: 2he ma)a+er of a f#)d1s portfolio/
Investment bankers: Car,et participa)ts .ho .or, .ith iss#ers to distrib#te
)e.ly iss#ed sec#rities/
Investment company: - fi)a)cial i)stit#tio) that pools f#)ds a)d p#rchases assets
o) behalf of the i)*estors/
Investment Company Act of 1367: - ma:or piece of le+islatio) re+ardi)+ the
operatio)s a)d re+#latio)s of m#t#al f#)ds a)d closed(e)d f#)ds/
Investment Company Institute: 2he 7/&/ associatio) for ope)(e)d or m#t#al f#)ds
Investment ob8ective: - f#)d1s stated +oal, .hich determi)es the ,i)ds of assets
i) .hich it may i)*est/
%apan !ecurities and $/c(ange !urveillance Commission: Created i) 1$$2 as
part of the C5, the commissio) so#+ht to pre*e)t i)sider tradi)+ a)d
fa*ored treatme)t for bi+ i)*estors that came to li+ht i) the 1$$1 stoc,
mar,et sca)dal i) 9apa)
9oad: &ales commissio) that a m#t#al f#)d may char+e/
9oad funds: C#t#al f#)ds that char+e sales commissio)s/
9iability: -) obli+atory payme)t to a s#pplier of a +ood, a ser*ice, or f#)ds/
9imit order: -) order to b#y or sell a sec#rity that may be exec#ted o)ly .he) the
mar,et price of a sec#rity cha)+es i) a specific .ay/
Market failure: 2he term #sed by some eco)omists for the i)ability of a
competiti*e mar,et to remai) so .itho#t the help of +o*er)me)t, or the
i)ability of a) #)competiti*e mar,et, if )ot aided by +o*er)me)t, to
become competiti*e/
Maturity intermediation: 2he f#)ctio) of a fi)a)cial i)termediary by .hich it
tra)sforms a lo)+er(term asset i)to a shorter(term o)e .he) it +i*es the
borro.er a loa) for a partic#lar le)+th of time a)d the i)*estor3depositor a
fi)a)cial asset for a possibly differe)t desired i)*estme)t hori!o)/
Ministry of *inance "M&*#: 9apa)1s po.erf#l re+#lator of ma)y aspects of the
fi)a)cial system/
Money market: 2he fi)a)cial mar,et for short(term debt i)str#me)ts of mat#rity
o)e year or less/
:ational Association of !ecurities )ealers ":A!)#: - self(re+#latory
or+a)i!atio) (&'5", .hich mo)itors the relatio)ships bet.ee) bro,ers,
firms iss#i)+ sec#rities a)d the i)*esti)+ p#blic/
:ational *utures Association ":*A#: 2he &'5 i) the 7/&/ that has, si)ce the
1$8%s, carried o#t ,ey respo)sibilities i) the f#t#res mar,ets/
:et asset value per s(are ":A;#: 2he total mar,et *al#e of a) i)*estme)t compa)y1s
portfolio of fi)a)cial a)d other assets, less the compa)y1s total liabilities,
di*ided by the total )#mber o#tsta)di)+ of the compa)y1s shares or #)its/
:o-load fund: - f#)d that char+es )o sales commissio)/
&ff-balance s(eet financing: 4orro.i)+s obtai)ed i) .hich debt does )ot appear
o) the bala)ce sheet/
&ffice of +(rift !upervision "&+!#: 7/& +o*er)me)t a+e)cy that re+#lates
sa*i)+s a)d loa) associatio)s/
&pen-end "or mutual# funds: #)ds that sta)d ready to sell )e. shares to the
p#blic a)d to redeem o#tsta)di)+ shares o) dema)d at a price e6#al to a)
appropriate share of their portfolio1s *al#e/
&perational or internal efficiency: 2he characteristic of a mar,et that allo.s
i)*estors to obtai) b#yi)+ a)d selli)+ ser*ices at the lo.est possible
prices/
&rganized e/c(anges: &tr#ct#red mar,ets that pro*ide for the tradi)+ of selected
corporate a)d +o*er)me)t sec#rities/
&ver-t(e-counter "&+C# market: - lar+ely #)re+#lated mar,et .hereby
+eo+raphically dispersed traders, .ho are li),ed to o)e a)other *ia
telecomm#)icatio)s systems/
2ayment mec(anism: 2he fi)a)cial arra)+eme)t by .hich the b#yer of a
commodity pays the seller .ith some form of mo)ey/
2erfect market: 2erm from eco)omic theory for the ,i)d of mar,et that has specific
characteristic of tradi)+ a)d price setti)+ that is free of the frictio)s that
,eep a fair mar,et price from bei)+ set i) tradi)+/
2(iladelp(ia !tock $/c(ange "2<9=#: -) or+a)i!ed 7/&/ sec#rities mar,et .here
optio)s a)d other sec#rities are traded/
2ortfolio: - +ro#p of fi)a)cial assets a)d sec#rities/
2reemptive rig(ts offering: 2he offeri)+ of commo) stoc, by a corporatio) to
existi)+ shareholders at a price belo. mar,et *al#e/
2rice discovery process: -) eco)omic f#)ctio) of fi)a)cial mar,ets that si+)als ho.
the f#)ds i) the eco)omy sho#ld be allocated amo)+ fi)a)cial assets/
2ricing or e/ternal efficience: 2he characteristic of a mar,et i) .hich the tradi)+
price reflects all rele*a)t i)formatio) abo#t the *al#e of the asset bei)+
traded/
2rimary market: 2he fi)a)cial mar,et .here fi)a)cial claims that are )e.ly iss#ed
are sold/
2rivate placement: 2he sale of )e. sec#rities directly to o)e or a fe. i)*estors rather
tha) thro#+h p#blic offeri)+
2rospectus: - part of the re+istratio) stateme)t that is filed .ith the &EC by a)
iss#er of a sec#rity a)d distrib#ted to the p#blic/
2urc(asing po'er risk "also called inflation risk#: 2he ris, attached to pote)tial
p#rchasi)+ po.er of the expected cash flo./
-ed (erring: 2he prelimi)ay prospect#s filed .ith the &EC by the iss#er of a
sec#rity/
-egistration statement: &tateme)t filed .ith the &EC for the p#rpose of disclosi)+
perti)e)t i)formatio) abo#t a sec#rity a)d the iss#er/
-ule 166A: -) &EC r#le that permits corporatio)s ( i)cl#di)+ )o)(7/&/ firms ( to
iss#e sec#rities .itho#t the complete a)d exte)si*e re+istratio) process
that &EC )ormally re6#ires/ 2hat is, '#le 144- pro*ides a 1safe harbor1
from the &ec#rities -ct of 1$$3/ 2his r#le is applicable o)ly for the iss#e
a)d sale of sec#rities to D#alified I)stit#tio)al 4#yers (DI4s" a)d for the
excha)+e of s#ch sec#rities amo)+ DI4s/ - DI4 is a fi)a)cial i)stit#tio)
that has at least E 1%% millio) i)*ested i) sec#rities of iss#ers that are )ot
affiliated .ith the DI4/
!elling group: &y)dicate formed to distrib#te (sell" a )e. iss#e/
!earc( cost: Costs i) locati)+ a co#)terparty to a tra)sactio)/
!econdary market: - mar,et i) .hich o#tsta)di)+ or existi)+ sec#rities are traded
amo)+ i)*estors/
!ecurities Act of 13>>: 7/&/ federal le+islatio) that deals primarily .ith disclos#re
re6#ireme)ts for the distrib#tio) of )e. sec#rities/
!ecurities and $/c(ange Commission: - 7/&/ federal re+#latory body respo)sible
for admi)isteri)+ sec#rity la.s i) the 7/&/
!ecurities and Investment oard "!I#: Great 4ritai)1s mai) +o*er)me)tal mo)itor
of the sec#rities i)d#stry/
!ecurities $/c(ange Act of 13>6: 7/&/ federal le+islatio) that created the &ec#rities
a)d Excha)+e Commissio) (&EC" a)d deals .ith the re6#ireme)ts for the
periodic disclos#re of p#blicly traded, seaso)ed sec#rities, a)d the
re+#latio) of acti*ities i) sec#rities mar,ets/
!elf-regulatory organization "!-&#: - +ro#p that, .ith the spo)sorship or
a#thority of a +o*er)me)t, mo)itors the beha*ior of its members to e)s#re
that they meet certai) .ell established sta)dards i) the co)d#ct of
b#si)ess/
!(elf registration "or !$C -ule 61?#: 2he r#le allo.i)+ firms to sell sec#rities o)
a co)ti)#o#s basis by fili)+ a si)+le re+istratio) doc#me)t/
!(ort sale: 2he sale of a) asset that the seller has borro.ed a)d m#st repay to the
le)der/
!pot market "also called cas( market#: 2he mar,et i) .hich a fi)a)cial asset trades
for immediate deli*ery/
!tandby fee: ee paid to #)der.riter i) a sta)dby #)der.riti)+ arra)+eme)t/
!tandby under'riting arrangement: -) #)der.riti)+ arra)+eme)t calli)+ for the
#)der.riter to b#y a firm1s #)s#bscribed shares, .hich are those that ca)
)ot be distrib#ted by the iss#er/
!tock e/c(ange: -) or+a)i!ed a)d some.hat re+#lated seco)dary mar,et, .here
tradi)+ i) stoc, occ#rs i) a specific +eo+raphic locatio)/
+angible asset: -) asset .hose *al#e depe)ds o) partic#lar physical properties (
examples are b#ildi)+s, la)d a)d machi)ery/
@nder'riting: -) i)*estme)t ba),i)+ f#)ctio) i) .hich sec#rities are p#rchased
from the iss#er for sale to the p#blic
@nder'riting syndicate: - +ro#p of i)*estme)t ba),i)+ firms formed to #)der.rite
a) iss#e/
@nit trust: I) the 7/&/, a pool of mo)ey i)*ested i) a specific a)d #)cha)+i)+ +ro#p
of assets o*er the pla))ed life of the tr#st
Aaiting period: 2he time i)ter*al bet.ee) the i)itial fili)+ of the re+istratio)
stateme)t a)d the time the re+istratio) stateme)t becomes effecti*e/