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110 Cards in this Set
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The mathematics of finance whereby interest is earned over time by saving or investing money.
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time value of money
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Value of an investment or savings amount today or at the present time.
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present value
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Value of a savings amount or investment at a specified time in the future.
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future value
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Interest earned only on the principal of the initial investment.
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simple interest
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An arithmetic process whereby an inital value increases at a compound interest rate over time to reach a future value.
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compounding
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Interest earned on interest in addition to interest earned on the principal or investment.
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compound interest
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An arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value.
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discounting
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Used to approximate the time required for an investment to double in value.
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Rule of 72
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Divide the interest rate into the number 72 to determine the number of years it will take for an investment to double in value. (8% - 72/8 = 9 years to double)
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A series of equal payments that occur over a number of time periods.
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annuity
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Exists when equal payments occur at the end of each time period (also referred to as a deferred annuity)
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ordinary annuity
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Exists when equal periodic payments occur at the beginning of each time period.
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annuity due
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A loan repaid in equal payments over a specified time period.
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amortized loan
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A schedule of the breakdown of each payment between interest and principal, as well as the remaining balance after each payment.
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loan amortization schedule
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Determined by multiplying the interest rate charged per period by the number of periods in a year.
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annual percentage rate (APR)
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Measures the true interest rate when compounding occurs more frequently than once a year.
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effective annual rate (EAR)
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Claims against the income or assets of individuals, businesses, and governments.
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financial assets
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The issuer knows the names of the bondholders and the interest payments are sent directly to the bondholder.
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registered bonds
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Have coupons that are literally "clipped" and presented, like a check, to the bank for payment. The bond issuer does not know who is receiving the interest payments.
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bearer bonds
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Principal amount that the issuer is obligated to repay at maturity.
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par value (face value)
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Interest payments paid to the bondholders.
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coupon payments
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Contract that lists the various provisions and convenants of the loan arrangement.
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trust indenture
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Individual or organization that represents the bondholders to ensure the indenture's provisions are respected by the bond issuer.
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trustee
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Impose additional restrictions or duties on the firm.
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covenants
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Assess both the collateral underlying the bonds as well as the ability of the issuer to make timely payments of interest and principal.
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bond ratings
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Backed or secured by specifically pledged property of a firm (real estate, buildings, and other assets classified as real property)
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mortgage bonds
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Gives the bondholder a claim to specific "rolling stock" (movable assets) such as railroad cars or airplanes.
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equipment trust certificate
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Does not permit future bond issues to be secured by any of the assets pledged as security to it.
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closed-end mortgage bond
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Allows the same assets to be used as security in future issues.
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open-end mortgage bond
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Unsecured obligations that depend on the general credit strength of the corporation for their security.
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debenture bonds
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Claims of these bonds are subordinate or junior to the claims of the debenture holders.
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subordinated debenture
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Can be changed or converted, at the investor's option, into a specified issuer's common stock.
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convertible bond
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Number of shares into which a convertible bond can be converted.
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conversion ratio
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Stock price times the conversion ratio.
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conversion value
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Can be redeemed prior to maturity by the issuing firm.
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callable bonds
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Price paid to the investor for redemption prior to maturity, typically par value plus a call premium of one year's interest.
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call price
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Risk of having a bond called away and reinvesting the proceeds at a lower interest rate.
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call risk
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Specified period of time after the issue during which the bonds cannot be called.
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call deferment period
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Allow the investor to force the issuer to redeem the bonds prior to maturity.
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putable bonds (retractable bonds)
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Have their coupons reset every two or three years to reflect the current interest rate environment and any changes in the firm's creditworthiness. The investor can accept the new coupon rate or put the bonds back to the firm.
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extenable notes
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Requirement that the firm retire specific portions of the bond issue over time.
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sinking fund
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Dollar denominated bonds sold outside the US
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Eurodollar bonds
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Dollar denominated bonds issued in the US by a foreign issuer.
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Yankee bonds
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Generally denominate in US dollars and marketed globally.
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global bonds
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Financial capital supplied by the owners of a corporation.
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corporate equity capital
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Certificate showing an ownership claim of a specific company.
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stock certificate
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Allows stock to be held in the name of the brokerage house.
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street name
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Represents ownership shares in a corporation.
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common stock
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Stated value of a stock; accounting and legal concept bearing no relationship to a firm's stock price or book value.
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par value
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Equity security that has preference, or a senior claim, to the firm's earnings and assets over common stock.
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preferred stock
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Requires that before dividends on common stock are paid, preferred dividends must be paid not only for the current period but also for all previous periods in which preferred dividends were missed.
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cumulative preferred stock
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Makes no provision for the accumulation of past missed dividends.
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noncumulative preferred stock
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Give the corporation the right to return the prefered stock at its option.
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callable preferred stock
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Has special provision that makes it possible to convert it to common stock of the corporation, generally at the stockholder's option.
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covertible preferred stock
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Bond that is selling below par value.
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discount bond
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Bond that is selling in excess of its par value.
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premium bond
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Return on a bond if it is held to maturity.
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yield to maturity (YTM)
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The chance of nonpayment or delayed payment of interest or principal.
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credit risk (default risk)
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Fluctuating interest rates lead to varying asset prices. In the context of bonds, rising (falling) interest rates result in falling (rising) bond prices.
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interest rate risk
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Fluctuating interest rates cause coupon or interest payments to be reinvested at different interest rates over time.
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reinvestment rate risk (rollover risk)
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Actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.
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political risk
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Fluctuating exchange rates lead to varying levels of US dollar-denominated cash flows.
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exchange rate risk
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A means of estimating common stock prices by assuming constant dividend growth over time.
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Gordon model (constant divident growth model)
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Original issue market in which securities are intially sold.
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primary market
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Market in which securities are traded among investors.
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secondary market
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Initial sale of newly issued debt or equity to the public.
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flotation
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Initial sale of equity to the public.
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initial public offering (IPO)
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Assist corporations by raising money through the marketing of corporate securities to the securities markets.
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investment bankers (underwriters)
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Sale of securities to the investing public.
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public offering
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Sale of securities to a small group of private investors.
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private placement
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Detailed study of a corporation.
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due diligence
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Highly regulated document which details the issuer's operations and finances and must be provided to each buyer of a newly issued security.
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prospectus
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Contract in which the investment banker agrees to buy securities at a predetermined price and then resell them to the investors.
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underwriting agreement
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Price at which the security is sold to the investors.
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offer price
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Difference between the offer price and the price paid by the investment bank.
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spread
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Agreement by the investment banker to sell securities of the issuing corporation; assumes no risk for the possible failure of the flotation.
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best-effort agreement
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Allows firms to register security issues (both debt and equity) with the SEC, and have them available to sell for two year.
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shelf registration
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Announcements of securities offerings.
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tombstones
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Group of several investment banking firms that participate in underwriting and distributing a security issue.
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syndicate
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Period of time during which members of the syndicate may not sell the securities for less than the initial offering price.
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aftermarket
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Intervention of the syndicate to repurchase securities in order to maintain their price at the offer price.
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market stabilization
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Represents the difference between the aftermarket stock price and the offering price.
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underpricing
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Comprised of direct costs, the spread, and underpricing.
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flotation costs
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One who assists in the trading process by buying or selling securities in the market for an investor.
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broker
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Satisfies the investor's trades by buying and selling securities from its own inventory.
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dealer
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Protect the investor from fraudulent security offerings.
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blue-sky laws
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Act as agents to execute customer's orders for securities purchases and sales.
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commission (house) brokers
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Independent brokers who handle the commission brokers' overflow.
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independent (floor) brokers
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Buy and sell stocks for their own account.
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registered traders
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Assigned dealers who have the responsibility of making a market in an assigned security.
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specialists
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One who facilitates market transactions by selling (buying) when other investors wish to buy (sell).
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market maker
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Price that the buyer is willing to pay for the security.
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bid price
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Price for which the owner is willing to sell the security.
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ask price
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Open order of an immediate purchase or sale at the best possible price.
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market order
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Maximum buying price (limit buy) or the minimum selling price (limit sell) specified by the investor.
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limit order
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Limit "book" in which the specialist keeps unexecuted limit orders.
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central limit order book
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Order to sell stock at the market price when the price of the stock falls to a specified level.
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stop-loss order
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Sale of securities that the seller does not own.
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short sale
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An investor's securities are kept in the name of the brokerage house to facilitate record keeping, settlement, safety against loss or theft, and so on.
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street name
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Investor borrows money and invests it along with his own funds in securities.
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buying on margin
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Minimum percentage of the purchase price that must represent the investor's equity or unborrowed funds.
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margin
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Investor faces the option of either closing the position or investing additional cash to increase the position's equity or margin.
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margin call
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Initial equity percentage.
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initial margin
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Minimum margin to which an investment may fall before a margin call will be placed.
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maintenance margin
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Sale or purchase of 100 shares.
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round lot
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Sale or purchase of less than 100 shares.
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odd lot
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Technique for trading stocks as a group rather than individually, defined as a minimum of at least 15 different stocks with a minimum value of $1 million.
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program trading
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Market for large blocks of listed stocks that operates outside the confines of the organized exchanges.
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third market
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Large institutional investors arrange the purchase and sale of securities among themselves without the benefit of broker or dealer.
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fourth market
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Receipt that represents foreign shares to US investors.
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American depository receipt (ADR)
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Listed on the London Stock Exchange; facilitates trading in foreign shares.
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global depository receipt (GDR)
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