Financial Terms
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Defining Financial Terms
This is a list of definitions with an explanation of how they relate to finance.
Finance-“Finance is the study of how individuals and businesses allocate money over time” (2011, p. 14). Decisions made in finance might include “long-term investments, financing, and management of short term cash needs” (2011, p. 15) or the design of incentive plans. A finance manager works for shareholders and oversees investment decisions, capital structure decisions, and managing funds for daily operations, working capital, and short term financing (2011, p. 9).
Efficient market-“A market whose prices quickly respond to the announcement of new information” (Titman, Keown, Martin, 2011, p.G-3). “The speed with which investors act and the way that prices respond to the information determine the efficiency of the market” (2011, p. 13).
Primary market-New securities are bought and sold in the primary market. Securities are sold for the first time in the primary market.
Secondary market- previously issued stocks and bonds are sold in the secondary market.
Risk-Investor may lose money because it is an uncertain future return. The risk return relationship shows that investors expect a bigger return if they take on higher risk.
Security- “A negotiable instrument that represents a financial claim” (2011, p.26). Securities may be in the form of “ownership (stocks) or a debt agreement” (2011, p. 26) and are “classified as debt securities (bonds) and equity securities (shares of common stock). The securities market is where corporations can raise capital by selling debt or equity” (2011, p. 34).
Stock- Two types of equity securities are common stock and preferred stock. “Common stock is a security that represents equity ownership in a corporation, provides voting rights, and entitles the holder to a share of the companys success in the form of dividends
and any capital appreciation in the value of the security” (Titman, Keown, Martin, 2011, p. 27). Investors who purchase common stock are the residual owners of the firm” (2011, p.27). Owners of preferred stock have preference over common stockholders and receive their share first. “preferred stockholders have a preferred claim on the distribution of assets of the firm in the event that the firm goes bankrupt and sells or liquidates its assets”(2011, p. 28).
Bond- “A long-term (10-year or more) promissory note issued by a borrower, promising to pay the owner of the security a predetermined amount of interest each year” (2011, p.34). Long term debt securities.
Capital-The amount a businesss