HEDGING - take a financial
position in order to reduce risk. Start with a risky position of some
type and take an equal, opposite position in a market in order to offset
(reduce) your existing risk Example: you have an unrealized capital
gain in the stock market and to hedge against an unexpected downturn in
the market you establish an offsetting short hedge in the options
market.
SPECULATION -
take a risky position in order to profit from short-term price
movements. Start with no position and no exposure to risk then take on
an additional risky position in an attempt to earn speculative profits
over the short term. Example: you have no existing business activities
in the frozen orange juice industry but you believe the recent cold
weather in Florida will hurt the citrus crop and frozen orange juice
concentrate prices will rise so you buy orange juice futures i order to
profit on the expected price rise.
INVESTMENT
- take a position that will provide an appropriate return for a given
level of risk exposure. Invest your money in an investment vehicle that
will provide an appropriate risk adjusted return over the medium or
long term. Example: open an account in a diversified stock mutual fund
and make periodic contributions to the fund while planning on using the
fund proceeds when you retire.
REAL ASSETS
- tangible, physical assets. Real assets either have an intrinsic
value or are physical assets that can be used to create wealth.
Examples: factories, tractors, gold, research laboratory.
FINANCIAL ASSETS
- intangible, paper or electronic claims to wealth or other assets.
Financial assets are either paper assets such as stock certificates or
bond certificates or electronic claims on future cash flows or real
assets.
BROKERS - act as intermediary, bring buyers and sellers together, earn commissions.
DEALERS - maintain an inventory of assets and fill buy/sell orders.
BROKER/DEALERS - function in both capacities maintaining an inventory in some assets and brokering others.
MONEY MARKETS
- markets for short term debt instruments where original maturity is
equal to or less than 1 year. Examples: commercial paper, negotiable
CDs, Fed Funds, T-Bills.
CAPITAL MARKETS - markets for medium and long-term debt equities. Examples: notes, bonds, common stock and preferred stock.
FORMAL MARKETS
- markets with a centralized physical location. Examples include stock
markets like the New York Stock Exchange (NYSE) and American Exchange
(AMEX) and the Futures/Options markets like the Chicago Board of Trade
(CBOT) and Kansas City Board of Trade (KCBT).
INFORMAL MARKETS
- computer and telecommunications based markets with no centralized
physical location. Examples include National Association of Securities
Dealers Automated Quotation (NASDAQ) System, the Institutional Network
(InstiNet), and the foreign exchange market (FOREX).
FOREX MARKETS - informal market for buying and selling foreign exchange for spot and forward delivery.
SPOT MARKET
- generic term for any market for immediate delivery of the asset being
bought and sold. Delivery and settlement in 1-2 business days.
Example: spot FOREX market, spot commodities market, spot heating oil
market.
DERIVATIVES MARKETS
- markets where derivatives such as options and futures contracts or
Swaps are traded. The largest formal derivatives markets often trade
both futures and options contracts. The Swaps market is an informal
market where swap counter parties arrange swap contracts through
telecommunications linkages.
FUTURES MARKET
- a market where standardized futures contracts are traded. Examples
of formal markets are the Chicago Board of Trade (CBOT) and Chicago
Mercantile Exchange (CME or the Merc). The CME is establishing an
informal, global market called GLOBEX.
FORWARD MARKET
- generic term for any market involving delivery of an asset at some
time in the future. Typical forward delivery takes place in 30, 60, or
90 days but other arrangements are available.
OPTIONS MARKET
- a market where standardized options contracts are traded. Examples
of formal markets are the Chicago Board of Trade (CBOT) and Chicago
Mercantile Exchange (CME or the Merc).
PRIMARY MARKET
- market where securities (and other assets) are sold for the first
time. Examples: initial public offering (IPO) market, follow-on issue
markets, new issue bonds. New issues transfer funds from investors to
the issuers of the securities.
SECONDARY MARKET
- market where securities can be bought/sold after original issue.
Examples: New York Stock Exchange (NYSE) trades listed stocks and bonds
in a formal market and the Institutional Network (InstiNet) trades large
blocks of shares in the informal market. Security sales in the
secondary market transfer securities and funds between investors; no
additional funds are transferred to the original issuer of the
securities.