Defining Financial Terms
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Finance
Definition – Finance is the science of money and other asset management. While finance explores future possibilities, not all possibilities can be planned for. Finance looks at the allocation of resources in these possibilities and attempts to anticipate future events. (Mayo, 2012, p. 1)
Role in Finance – Finance provides planning and management for businesses with respect to money, credit, and assets. Financing also is about the management and understanding of information. (Titman, Keown & Martin, 2011, p.5)
Efficient Market
Definition – An efficient market is a hypothesis that basically states that all trading is fairly priced because all available information is reflected in the price of the respective security. (Titman, Keown & Martin, 2011, p. 213).
Role in Finance – Real world markets are neither fully efficient nor inefficient. The flow of trades within a market will reduce the inefficiencies of available information. If investors view a firms securities as undervalued, they would buy it. The same is said in reverse – if the security was viewed as being overvalued, they would sell it. (Mayo, 2012, p. 58).
Primary Market
Definition – The primary market is where a security begins and is sold for the first time. (Mayo, 2012, p. 36). Within this market, the firm that is selling the security would receive the money from the sale.
Role in Finance – The primary market is used by firms to issue new securities in order to raise money for their operations. (Titman, Keown & Martin, 2011, p. 26)
Secondary Market
Definition – Once a security has already be issued and once it is again sold, the secondary market would facilitate the trade. (Titman, Keown & Martin, 2011. p. 26) Investors selling the security would be the ones receiving the money from this sale.
Role in Finance – The secondary market provides a forum for securities to be sold by investors.
Definition – Risk is the chance of failure. In finance this would be the same with different degrees. In finance, risk is the chance that an investors decision to make an investment would be less than predicted. This might be the loss of some, or all of their investment. (Mayo, 2012, p. 139)
Role in Finance – When an investment is made, it is made with the expectation of a return. The level of expected return is where risk comes in. Risk would be the potential to realize a negative return on an investment.
Security
Definition – A security represents a monetary claim. Securities can be stocks, or partial ownership, or can also include debt, or bonds. (Titman, Keown & Martin, 2011. p. 26)
Role in Finance – Securities allows businesses to raise capital for their operations by allowing individuals to invest in either ownership or debt. (Titman, Keown & Martin, 2011. p. 26). Additionally, securities can later be traded by individuals on the secondary markets.
Stock
Definition – Stock is a type of security that represents ownership in a firm and serves as a claim to a portion of those corporations earnings.
Role in Finance – Stocks can be initially offers on the primary market as a means to raise money by firms, or traded on the secondary market between individuals. (Titman, Keown & Martin, 2011. p. 26)
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