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Financial markets
The arenas through which funds flow.

Secondary market
A market that trades financial instruments once they are issued.

Primary markets
Markets in which corporations raise funds through new issues of securities.

Initial public offerings (IPOs)

The first public issue of financial instruments by a firm.

Capital markets
Markets that trade debt (bonds) and equity (stocks) instruments with
maturities of more than one year.

Derivative security markets

The markets in which derivative securities trade.

Derivative security
An agreement between two parties to exchange a standard quantity of
an asset at a predetermined price on a specified date in the future.

Liquidity
The ease with which an asset can be converted into cash at its fair market value.

Money markets
Markets that trade debt securities or instruments with maturities of one
year or less.

Commercial paper
Short-term unsecured promissory notes issued by a company to raise
short-term cash.

Over-the-counter (OTC) markets

Markets that do not operate in a specific fixed location—rather, transactions occur via telephones, wire
transfers, and computer trading.

Mortgages
Loans to individuals or businesses to purchase a home, land, or other real property.

Financial institutions
Institutions that perform the essential function of channeling funds from those with surplus funds
to those with shortages of funds.

Direct transfer
A corporation sells its stock or debt directly to investors without going through a financial institution.

Thrifts
Depository institutions in the form of savings associations, savings banks, and credit unions. Thrifts
generally perform services similar to commercial banks, but they tend to
concentrate their loans in one segment, such as real estate loans or consumer loans.

Price risk
The risk that an asset’s sale price will be lower than its purchase price.

Delegated monitor
An economic agent appointed to act on behalf of smaller investors in collecting information and/or
investing funds on their behalf.

Forward

Intergenerational wealth transfers FIs, especially life insurance companies and pension funds, provide
savers with the ability to transfer wealth from one generation to the next.

Purpose of derivative
1. For hedging
2. For speculation

Diversify
The ability of an economic agent to reduce risk by holding a number of securities in a portfolio.

Economies of scale
The concept that cost reduction in trading and other transaction services results from increased efficiency
when FIs perform these
services.

Asset transformers
Financial claims issued by an FI that are more attractive to investors than are the claims directly issued by
corporations.

NASDAQ
National Association of Securities Dealers Automated Quotations.