Chapter 1: The Investment Environment
Definitions:
1. Investment:
o Any asset into which funds can be placed with the expectation that it will
generate positive income and/or increase its value.
2. Portfolio:
o A collection of different investments held by an individual or institution.
3. Return:
o The reward from investing, consisting of income from investment and/or an
increase in value.
4. Liquidity:
o The ability to buy and sell assets quickly with little to no loss in value.
5. Direct Investment:
o Investor directly acquires a claim/ownership in a security or property (e.g.,
buying shares of stock).
6. Indirect Investment:
o Investor acquires ownership indirectly through a professional investment
manager (e.g., mutual funds).
7. Debt Securities:
o Financial instruments where the investor lends funds in exchange for interest
income and repayment of principal (e.g., bonds).
8. Equity Securities:
o Represents ownership in a business or property (e.g., common stocks).
9. Derivative Securities:
o Financial instruments whose value is derived from an underlying asset (e.g.,
options and futures).
10. Diversification:
• A strategy of holding different types of assets to reduce risk.
11. Capital Market:
• The market where long-term securities (stocks and bonds) are bought and sold.
12. Money Market:
• The market where short-term debt securities (less than one year) are bought and
sold.
13. Initial Public Offering (IPO):
• The first public sale of a company’s stock.
14. Risk:
• The uncertainty surrounding the return that a particular investment will generate.
15. Investment Policy Statement:
• A written document that outlines an investor's financial goals, risk tolerance, and
guidelines for investment decision-making.
16. Capital Gains:
• The profit from the sale of a capital asset, like stocks or property, where the sale
price exceeds the purchase price.
Classifications:
1. Types of Investors:
o Individual Investors: Manage their own funds to achieve personal financial
goals.
o Institutional Investors: Professional investment managers who handle large
pools of money for businesses, governments, or other institutions (e.g.,
pension funds, mutual funds).
2. Types of Investments:
o Short-term Investments: Investments with a maturity of one year or less,
typically low risk (e.g., U.S. Treasury Bills).
o Long-term Investments: Investments with a maturity of more than one year,
potentially offering higher returns but with greater risk (e.g., stocks, bonds).
o Common Stock: Represents ownership in a corporation and claims to the
company’s residual earnings.
o Fixed-Income Securities: Debt instruments that provide a fixed return in the
form of interest (e.g., bonds).
o Mutual Funds: Actively or passively managed portfolios of securities that
pool funds from multiple investors.
o Exchange-Traded Funds (ETFs): Similar to mutual funds but traded on stock
exchanges like individual stocks.
o Hedge Funds: Pooled funds that engage in a variety of complex strategies
and are less regulated than mutual funds.
o Real Estate: Tangible asset investments in property.
o Derivatives: Include options, futures, and other securities that derive their
value from underlying assets.
3. Types of Income:
o Active Income: Income from working (e.g., wages, salaries).
o Portfolio Income: Income from investments (e.g., interest, dividends, capital
gains).
o Passive Income: Income from investments like rental properties.
Chapter 2: Securities Markets and Transactions
Definitions:
1. Securities Markets:
o Markets that allow buyers and sellers of securities to make financial
transactions.
2. Primary Market:
o The market where new issues of securities are sold to investors (e.g., during
an IPO).
3. Secondary Market:
o The market where securities are traded after they have been issued (e.g.,
stock exchanges like the NYSE).
4. Broker Market:
o A market where a broker facilitates a trade directly between a buyer and a
seller.
5. Dealer Market:
o A market where trades are executed with a dealer (market maker) who buys
and sells securities to the public.
6. Bull Market:
o A condition of the securities markets associated with rising prices, investor
optimism, and economic recovery.
7. Bear Market:
o A condition of the securities markets associated with falling prices, investor
pessimism, and economic slowdown.
8. Underwriting:
o The process by which investment bankers buy an entire new issue of
securities from a company and assume the risk of selling it to the public.
9. Prospectus:
o A legal document that provides details about an investment offering for sale
to the public.
10. Margin Trading:
• The practice of using borrowed funds from a brokerage firm to buy securities.
11. Short Selling:
• The practice of borrowing securities from a broker and selling them, with the
intention of repurchasing them later at a lower price.
12. Bid Price:
• The highest price offered to purchase a given security.
13. Ask Price:
• The lowest price at which a security is being offered for sale.
14. Market Maker:
• A dealer who buys and sells securities in a dealer market, providing liquidity and
setting bid and ask prices.
15. Electronic Communications Networks (ECNs):
• Automated systems that allow institutional investors to trade directly with each
other, bypassing exchanges.
16. American Depositary Receipts (ADRs):
• U.S. dollar-denominated receipts for stocks of foreign companies that trade on U.S.
exchanges.
17. Currency Exchange Risk:
• The risk caused by fluctuating exchange rates between the currencies of two
countries.
Classifications:
1. Types of Securities Markets:
o Money Market: For short-term debt securities (e.g., Treasury bills).
o Capital Market: For long-term securities like stocks and bonds.
o Primary Market: Where new securities are issued.
o Secondary Market: Where existing securities are traded after issuance.
2. Types of Market Conditions:
o Bull Market: Associated with rising prices, optimism, and economic
recovery.
o Bear Market: Associated with falling prices, pessimism, and economic
contraction.
3. Types of Trading Systems:
o Third Market: OTC transactions in securities listed on a major exchange like
the NYSE.
o Fourth Market: Direct transactions between institutional investors, often
through ECNs.
4. Basic Types of Securities Transactions:
o Long Purchase: Buying securities with the expectation they will increase in
value.
o Margin Trading: Using borrowed funds to increase leverage on investments.
o Short Selling: Selling borrowed securities in the hope of repurchasing them
at a lower price.
5. Types of Risks in International Markets:
o Government Policies Risk: Risk due to unstable foreign governments and
changing policies.
o Currency Exchange Risk: Risk caused by fluctuating exchange rates
affecting the value of foreign investments.
o Political Risk: Risk due to unstable or changing political conditions in a
foreign country.
