Defining Financial Terms

Running head: DEFINING FINANCIAL TERMS

Defining Financial Terms

University of Phoenix

Defining Financial Terms

Defining Financial Terms

a. Finance: Financial management is concerned with the maintenance and creation of
economic value or wealth (Keown, Martin, Petty, & Scott, 2005, p. 4).
Role in finance: Finance within a company is vital since it leads toward creating
wealth. It helps make decisions such as when to introduce new products, when to
invest in new assets, and when to borrow money. (Keown et al., 2005, p. 4).
b. Efficient Market: A market in which the values of all assets and securities at any
instant in time fully reflect all available public information (Keown et al., 2005, p. 16).
Role in finance: To provide quick information with accurate and right prices.
c. Primary Market: Transactions in securities offered for the first time to potential
investors (Keown et al., 2005, p. 484).
Role in finance: Provide a channel for sale of new securities. In addition, it also
provides a variety of opportunities to those who issue securities such as
corporations, or government, to raise resources to meet their requirements within
their obligations.
d. Secondary Market: The market in which stock previously issued by the firm trades
(Keown et al., 2005, p. 11).
Role in finance: To provide a place for investors/public an efficient place to trade
his/her securities. For management of firms, secondary markets serve as control
and monitoring conduit enabling implementation of incentive-based
management contracts and helps management made decisions.
e. Risk: we referred to risk as the likely variability associated with expected revenue or
income streams (Keown et al., 2005, p. 507).
Role in finance: There exist multiple roles for risk in finance. Risk is the way to
evaluate all investments.
f. Security: An investment instrument, other than an insurance policy or fixed annuity,
issued by a corporation, government, or other organization which offers evidence of debt
or equity (InvestorGuide.com, Inc., 2009).

Defining Financial Terms

Role in finance: Security is the source of finance who issued it and source of
investment who buys it. Some of the securities are common stock, preferred
stock, bonds, notes, debenture, option, future, swap, right, warrant or any other

financial assets.
g. Stock: An instrument that signifies an ownership position (called equity) in a
corporation, and represents a claim on its proportional share in the corporation's assets
and profits (InvestorGuide.com, Inc., 2009).
Role in finance: A way of being able to have financial assets, which represent
claims for future payments. Without this exchange, the company can only survive
on real assets.
h. Bond: A type of debt or a long-term promissory note, issued by the borrower, promising
to pay its holder a predetermined and fixed amount of interest each year (Keown et al.,
2005, p. 224).
Role in finance: Without this exchange, the company can only survive on real
assets. Investors are able to keep the company running by providing capital
(through the sale of bonds) for longer periods of time
i. Capital: The money, property, and other valuables which collectively represent the
wealth of an individual or business (InvestorGuide.com, Inc., 2009).
Role in finance: Capital serves one of the most vital roles in finance. Without
cash/goods being used for investing in businesses, our markets our stall. It is a
must for our market system to function and survive
j. Debt: is money that has been borrowed and must be repaid at some predetermined
date (Keown et al., 2005, p. 37).
Role in finance: Debt is caused when companies borrow money from external
sources such as investors, banks and others.
k. Yield: The annual rate of return on an investment, expressed as a percentage
(InvestorGuide.com, Inc., 2009).

Defining Financial Terms

Role in finance: Rate of returned based on market price is yield. Investors,

companies, etc. need to be aware of yield in order to determine return.

l. Rate of Return: The rate of return on an investment, expressed as a percentage of the
total amount invested. Rate of return is usually, but not always, calculated annually
(InvestorGuide.com, Inc., 2009).
Role in finance: Investors, companies, etc. need to be aware of rate of return in
order to determine return.
m. Return on Investment: ROI. A measure of a corporation's profitability, equal to a fiscal
year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the
ROI, the better (InvestorGuide.com, Inc., 2009).
Role in finance: The amount of return on investment will be received. Investors
invest money in hopes of high returns, thus management need to make sure they
make wise decisions
n. Cash Flow: A measure of a company's financial health. Equals cash receipts minus cash
payments over a given period of time; or equivalently, net profit plus amounts charged off
for depreciation, depletion, and amortization (InvestorGuide.com, Inc., 2009).
Role in finance: The more cash flow means more funds available to pay
dividends, reduce debt, possibly invest in new assets and much more.

Defining Financial Terms

References
InvestorGuide.com, Inc.. (2009). Investorwords.com. Retrieved October 13, 2009, from
http://www.investorwords.com/
Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005). Financial Management:
Principles and Applications (10th ed.). Upper Saddle River, NJ: Pearson Education, Inc..