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Defining Financial Terms 1

Defining Financial Terms Suzie Taing University of Phoenix

Defining Financial Terms 2

a.

Finance

Definition The process of managing money and other assets to create economic value or wealth. Role in Finance The ability to have growth and expansion for a company through financing. Finance is also a goal of maximization of shareholder wealth. (Keown, Martin, Petty, & Scott, 2005, p. 4) b. Efficient Market

Definition Up to date information which reflected in the values of the assets and securities. Role in Finance This concept is use to maximize shareholders wealth by the financial manager to fully understand what causes the fluctuation in the stock and bond prices and its market value. (Keown, Martin, Petty, & Scott, 2005, p. 16) c.Primary Market Definition Primary markets are the initial offering of the stocks through new stock or bonds that
are sold to investors through underwriting. Primary market trading includes Initial Public Offering (IPO) and primary offering

Role in Finance Funds can be raised for a company to increase shares by offering initial public offering and employee stock purchase plan. (Keown, Martin, Petty, & Scott, 2005, p.11, 484) d. Secondary Market

Definition Secondary markets are securities that being traded by the public after an IPO or in the
primary market. Secondary market securities are usually sold and bought among investors or traders

Role in Finance This gives the freedom for the investors and the public to trade stocks efficiently. Stocks can be affected through the heavy trading through the secondary market. Investors can maximize their wealth by effectively trading stocks through the secondary market. (Keown, Martin, Petty, & Scott, 2005, p.11, 484)

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e.Risk Definition Principle one of the financial management which states that there are a certain amount of risk for a certain amount of return. Risk is taking chances and not knowing the outcome. Principle 9 shows us how to measure risk through diversification. Role in Finance Assessing risk through diversification and measuring risk with the expected return. (Keown, Martin, Petty, & Scott, 2005, p.13,18) f. Security Definition In order for corporation to raise funds in the financial market, it sells securities. It is a type of investment instrument that represents ownership in a company which includes stocks and bonds. Role in Finance Funds are being raised through corporations selling securities in the financial market. (Keown, Martin, Petty, & Scott, 2005, p.10) g. Stock

Definition A type of security which can be traded through a primary or secondary market. ` Role in Finance Stocks can be traded in the financial markets or ownership of a company. Maximization of shareholder wealth is the maximization of the market value of the existing shareholders stock. The firms stock price can reflect the value of a firm. (Keown, Martin, Petty, & Scott, 2005, p. 5, 6, 10) h. Bond

Definition A debt security that shows the principal, interest, and maturity date which the issuer to pay the holder the agreed term and interest. Role in Finance Maximization of shareholders wealth by the interest earned on the bond. (Keown, Martin, Petty, & Scott, 2005, p. 5, 6, 10) i. Capital

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Definition Money or assets that is use to start up a company, income, or for investment. A firm need access to the capital market to raise funds to grow and to stay competitive in the market. Role in Finance Capital use to help sustain a business, debt repayment, & expansion of a business. Profit maximization looks at the efficient use of capital resources. In order for a firm to grow, it needs access to the capital markets to raise funds. (Keown, Martin, Petty, & Scott, 2005, p. 4, 8, 13) j. Debt Definition Anything that is owed. Funds that companies borrow to fund their business. Role in Finance Helps to identify the strength and weakness of a company by how much debt the company owes by calculating debt ratios. Companies use debt to finance their startup business or growth of a company. (Keown, Martin, Petty, & Scott, 2005, p.80) k. Yield

Definition Is the interest or return earned on an investment or the return earned on a bond at maturity. Role in Finance Interest earned from investment instrument such as stocks, bonds, and securities. The yield calculates the return of profitability on an investment. (Keown, Martin, Petty, & Scott, 2005, p. 77,80,81) l. Rate of Return Definition A percentage or ratio calculation of the profitability of an investment over a period of time. The rate of return is calculated by return minus capital divided by the total capital x 100% equals rate of return. Role in Finance The ability to compare the profitability of an investment, this is very important for an investor. (Keown, Martin, Petty, & Scott, 2005, p.81) m. Return on Investment

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Definition A measurement that depicts the return of profitability on an investment. Return on investment can be calculated by average annual rate of return or compound rate of return. Role in Finance The ability to compare the profitability of an investment by calculating the ratios on return of investment. (Keown, Martin, Petty, & Scott, 2005, p.81-83) n. Cash Flow

Definition A measurement of wealth and value of a company. This is based on Principle 3 of financial management. Cash flow is how money flow from incoming cash to a company, how it is invested, how interests is earned, and given back as dividends to the shareholders. Role in Finance The ability to measure wealth or value of a company. A financial management tool to see if a company can expand or need to borrow for shortfall of cash. Cash flows reflects the time of the benefits and costs. (Keown, Martin, Petty, & Scott, 2005, p. 14, 15)

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References

University of Phoenix. (2011). Introduction to Finance and Analysis, Chapter 1, 3, & 14 Retrieved April 15, 2011, from University of Phoenix, Week One reading, aXcess, FIN 370 Finance for Business Web site.