DEFINITION OF 'STOCK MARKET'

The market in which shares of publicly held companies are issued and traded either through exchanges
or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital
components of a free-market economy, as it provides companies with access to capital in exchange for
giving investors a slice of ownership in the company. The stock market makes it possible to grow small
initial sums of money into large ones, and to become wealthy without taking the risk of starting a business
or making the sacrifices that often accompany a high-paying career.
DEFINITION OF 'BOND MARKET'
The environment in which the issuance and trading of debt securities occurs. The bond market primarily
includes government-issued securities and corporate debt securities, and facilitates the transfer of capital
from savers to the issuers or organizations requiring capital for government projects, business expansions
and ongoing operations.
DEFINITION OF 'MONEY MARKET'
A segment of the financial market in which financial instruments with high liquidity and very short
maturities are traded. The money market is used by participants as a means for borrowing and lending in
the short term, from several days to just under a year. Money market securities consist of negotiable
certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal
notes, federal funds and repurchase agreements (repos)
DEFINITION OF 'CAPITAL MARKETS'
Markets for buying and selling equity and debt instruments. Capital markets channel savings and
investment between suppliers of capital such as retail investors and institutional investors, and users of
capital like businesses, government and individuals. Capital markets are vital to the functioning of an
economy, since capital is a critical component for generating economic output. Capital markets include
primary markets, where new stock and bond issues are sold to investors, and secondary markets, which
trade existing securities.

DEFINITION OF 'PRIMARY MARKET'

A market that issues new securities on an exchange. Companies, governments and other groups obtain
financing through debt or equity based securities. Primary markets are facilitated by underwriting groups,
which consist of investment banks that will set a beginning price range for a given security and then
oversee its sale directly to investors.

Also known as "new issue market" (NIM).

DEFINITION OF 'SECONDARY MARKET'

A market where investors purchase securities or assets from other investors, rather than from issuing
companies themselves. The national exchanges - such as the New York Stock Exchange and the
NASDAQ are secondary markets.

Secondary markets exist for other securities as well, such as when funds, investment banks, or entities
such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market trade, the cash
proceeds go to an investor rather than to the underlying company/entity directly.
DEFINITION OF 'SPOT MARKET'
1. A commodities or securities market in which goods are sold for cash and delivered immediately.
Contracts bought and sold on these markets are immediately effective.

2. A futures transaction for which commodities can be reasonably expected to be delivered in one month
or less. Though these goods may be bought and sold at spot prices, the goods in question are traded on
a forward physical market.
DEFINITION OF 'FUTURES MARKET'
An auction market in which participants buy and sell commodity/future contracts for delivery on a
specified future date. Trading is carried on through open yelling and hand signals in a trading pit.
The financial system offers two different ways to lend: (1) direct lending through financial markets, and
(2) indirect lending through financial intermediaries, such as banks, finance companies, and mutual funds.
Direct Lending
Direct lending involves the transfer of funds from the ultimate lender to the ultimate borrower, most often
through a third party. An example is a private party purchasing the securities issued by a firm. The
securities are usually sold to the public through an underwriter, someone who purchases them from the
issuer with the intention of reselling them at a profit. The underwriter negotiates the terms of the contract
with the borrower and appoints a trustee, typically a commercial bank, to monitor compliance. Because of
the costs involved, the issue of securities makes sense for the borrower only when the amount to be
raised is substantial.

If the security is a bond issue, the borrower is obligated to return the principal at maturity and to pay
interest during the period of the loan. If the securities are equities, the borrower has no obligation to
return the principal, but is expected to pay dividends. What if the lender needs his money back
immediately? The only solution is to sell the security in the secondary market. However a secondary
market will exist only if someone has created it.
Secondary Markets
There are two types of secondary markets, dealers and brokers. Dealers stand ready to buy or sell from
their own inventory at quoted prices, profiting by the markup in those prices. Brokers simply bring buyers
and sellers together but do not buy or sell securities. Their profit is normally a commission on the
resulting sale. The existence of a good secondary market is of benefit to borrowers as well as lenders. It
makes the loans more liquid and therefore more attractive to lenders. A more attractive loan lowers the
cost to the borrower.
Indirect Lending
Indirect lending is lending by the ultimate lender to a financial intermediary who pools the funds of many
lenders in order to re-lend at a markup over the cost of the funds. The ultimate borrowers are normally
unknown to the ultimate lenders. A lender faces less risk in indirect lending because, as a specialist in the
field, the intermediary normally has a well-established credit standing. Of course, lower risk usually
means less gain for the lender.
Indirect lending generally offers lower cost to the ultimate borrower for small or short-term loans. Most
borrowers lack sufficient credit standing to borrow directly. Borrowers who do have that option may find it
cheaper, especially for large sums. In fact it may not even be possible to borrow large sums indirectly
through intermediaries. The capacity of the direct financial markets is much larger than that of even the
largest intermediaries.
Comparison of Risks
The two types of lenders face different problems with borrowers in financial difficulty. With direct lending,
rescheduling a loan is problematic because the relationship is generally at arms length and legalistic. The
risks are often unknown to the lender. With indirect lending, the intermediary is usually in a much better
position to know whether the problem is permanent or temporary. As the sole lender, the intermediary
can alter the terms without having to obtain the agreement of others.