2-Financial Markets Page 45 Wednesday, February 4, 2004 1:15 PM
Overview of Financial Markets, Financial Assets, and Market Participants 45Endowments and Foundations
Endowments and foundations include colleges, private schools, muse-
ums, and hospitals. The investment income generated from the funds
invested by endowments and foundations is used for the operation of
the entity. In the case of a college, the investment income is used to meet
current operating expenses and capital expenditures (i.e., the construc-
tion of new buildings or sports facilities).
As with pension funds, qualified endowments and foundations are
exempt from taxation. The board of trustees, just like the plan sponsor
for a pension fund, specifies the investment objectives and the accept-
able investment alternatives. Typically, the managers of endowments
and foundations invest in long-term assets and have the primary goal of
safeguarding the principal of the entity. The second goal, and an impor-
tant one, is to generate a stream of earnings that allow the endowment
or foundation to perform its functions of supporting certain operations.
There is a constraint imposed on an endowment or foundation in that it
must maintain its tax-exempt status.COMMON STOCK
Common stocks are also called equity securities. Equity securities repre-
sent an ownership interest in a corporation. Holders of equity securities
are entitled to the earnings of the corporation when those earnings are
distributed in the form of dividends; they are also entitled to a pro rata
share of the remaining equity in case of liquidation.Trading Locations
In the United States, the secondary market that trades in common stocks
has occurred in two ways. The first is on organized exchanges, which
are specific geographical locations called trading floors, where represen-
tatives of buyers and sellers physically meet. The trading mechanism on
exchanges is the auction system, which results from the presence of
many competing buyers and sellers assembled in one place. The second
type is via over-the-counter (OTC) trading, which results from geo-
graphically dispersed traders or market-makers linked to one another
via telecommunication systems. That is, there is no trading floor. This
trading mechanism is a negotiated system whereby individual buyers
negotiate with individual sellers.
Exchange markets are called central auction specialist systems and
OTC markets are called multiple market maker systems. In recent years
a new method of trading common stocks via independently owned and