Financial Vocabulary

Financial Vocabulary

Two accountants are sitting in the break room at work when one asks the other "How do you explain the different financial terms to a your High School Student" he continues saying he has to go to career day at his son's high school and wants to tell a story of financial terms but is not sure how to do it. The other accountant uses some creativity and replies..

INTRODUCTION

The term finance is the study of how our house or business evaluates monthly cash flow and raises capital (Titman, Keown, & Martin, 2011). Each month we (my wife and I) sit down and discuss our budget or cash flow, or simply determine where to spend the capital or money we earn from our respective jobs. This gives each of us an idea if we have enough funds to pay the bills and pay for Tae Kwon Do lessons. We also look at the long-term needs of saving for retirement and other expenses such as making repairs or renovations on the house or saving for a child's college education. During the discussion I explain to them your retirement accounts and how you plan to reinvest your capital gains.

TWO WAYS TO INVEST

There are two ways we invest our capital gains: primary market and secondary market. When we invest in a primary market, we are buying stocks and bonds, also known as securities, Hubbard & O'Brien, (2010), directly through an Initial Public Offering (IPO). An IPO is the first time stocks or bonds are offered to the public and are purchased directly from the company or bond issuer. Tell them to look at it like when Microsoft comes out with a brand new Xbox model that has never been sold before. Titman, Keown, & Martin (2011) the company uses the capital or money to finance their business for research and development for newer and better graphics or to make the next generation smaller and faster. Or they can re-invest the money to hire new employees or buy new equipment; in other words, to expand the company. I further explain when we buy stock in a company, Hubbard & O'Brien (2010) we own part of the company, and if we own enough, we can vote when the company has corporate decisions to make. Ask them if they would want to help Microsoft decide on what the next Xbox will be like. A bond, on the other hand, is different. A person who owns bonds has made a loan to the company, or issuer, and cannot vote when the company makes decisions. Companies or issuers use bonds to obtain large amounts of long-term capital Hubbard & O'Brien (2010). A corporation uses the capital it raises by issuing bonds (debt) to investors much in the same way they do from the sale of stock. The difference between the sale of bonds and stocks are that a company promises to pay the money back (par value) within a specified amount of time (maturity) and with a specified amount of interest to the bond holder (yield). Tell them other way you invest our money or capital is through a secondary market. The stocks and bonds we have purchased through an IPO are transferred to another investor through a secondary market such as the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), or one of the many international exchanges. This would be similar to buying an Xbox from one of their friends who received two of them for their birthday. Like buying an Xbox from a friend, when stocks or bonds are sold in a secondary market, the company does not receive new financing. Secondary markets are simply a place for investors to sell their stocks or bonds from one investor to another and collect any capital gains earned through stock price appreciation (Titman, Keown, & Martin, 2011).

RISK

Each of these types of investments do have some risk. Stock prices can rise and fall, and depending on whether a person