2 Financial Markets and Instruments Free Online FlashCards

What is the central role of a financial market?

Financial markets connect people and organizations that supply funds with firms and governments that need them, helping raise capital and establish prices.

What happens in a primary market?

In a primary market, an issuer sells a newly issued security and receives the proceeds, less associated costs.

What happens in a secondary market?

In a secondary market, investors trade securities that have already been issued. The issuer generally does not receive proceeds from these resales.

How do financial intermediaries support markets?

Financial intermediaries help move funds or arrange transactions. Banks take deposits and make loans; investment banks may arrange new securities; broker-dealers execute trades.

What do exchanges and other trading venues provide?

Exchanges and other trading venues provide systems and rules for matching or arranging trades. Not all securities trade on an exchange.

What is the role of clearing and settlement institutions?

Clearing and settlement institutions help confirm trade details and transfer securities and money, completing a transaction.

How do the SEC and FINRA relate to U.S. securities markets?

Regulators set and enforce rules intended to support fair, orderly markets and protect investors. In the United States, the SEC regulates securities markets; FINRA oversees member broker-dealers under SEC supervision.

What does a stock represent?

A stock represents an ownership interest in a company; a stockholder is a part-owner rather than a lender.

What potential rights and payments can common stock provide?

Common stock may provide voting rights and dividends if declared, but neither dividends nor share-price gains are guaranteed.

How does preferred stock commonly differ from common stock?

Preferred stock commonly has priority over common stock for dividends and claims on assets, but usually has limited or no voting rights.

What does a bond represent, and what does its issuer promise?

A bond is a debt security: the issuer borrows from investors and promises interest and repayment of principal at maturity, subject to its terms and ability to pay.

How much annual interest does a $1,000 bond with a 5% coupon pay?

A $1,000 bond with a 5% annual coupon pays $50 in annual interest, according to its payment schedule.