Defining Financial Terms

Defining Financial Terms

Finance - Built upon a combination of both economic and accounting principles. Finance creates a value of wealth and aims to maintain that value of wealth in the market. Finance investigates everything that has to do with money or the value of wealth in the market. The role of finance is to help management deal with financial issues a corporation may encounter.

Efficient market - The stock prices reflect available and relevant information therefore the value of assets and securities at any instant is the same. Available information is public therefore profit-driven individuals cannot profit from public information because the price is right. The role of efficient market is to present quick information with precise prices.

Primary market - A market that offers new securities for the first time to potential new investors (Keown, Martin, Petty, & Scott, 2005). For example a new issue of common stock by a company is considering a primary market transaction. The role of the primary market in finance is creating new markets or channels for investors.

Secondary market - A market were previously issues stock is sold or traded among investors rather than from the companies that originally issue the stock. For example the New York Stock Exchange is a secondary market. The role of the secondary market is to allow investors to resale or exchange the stock.

Risk - The possibility that the return on an investment will be different from what an individual or company expected to receive. The outcome of the investment can be unforeseen or unfavorable. The role of risk is involved in making decisions in finance.

Security - Is an instrument of investment if the forms of a document for example, stock, certificate, or bond. The security will provide evidence for the owner to prove its ownership. The role of security is that it can be used to secure or receive a loan.

Stock - A certificate that proves ownership in a corporation and represents a corporation's assets and earnings. The role of stock is for corporation or investors to sell, trade, or invest.

Bond - A type of debt or promissory note in which the authorized issuer owes the holder money. The issuer may be obligated to pay interest. The role of bonds in finance is to allow the business owners to issue them and sale them for money the company can use for financial needs.

Capital - A company's financial assets also known as fixed assets. The capitals role in finance is that it can measure a company's value.

Debt - Made of the credit extended by suppliers or loans from a bank. The role of debt it to help companies borrow money they can pay back.

Yield - The income received from an investment. A yield to an investment is calculated in various methods depending on what the investment is. The role of a yield