Individual Assignment Resource: Financial management: Principles and applications Define the following terms and identify their roles in finance: * Finance – The “science of funds management. ” Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. Finance also deals with how money is spent and budgeted. * * Efficient market – A market in which the values of all assets and securities at any point in time reflect all available public information.
In order to understand what causes price changes in stock prices and how securities are valued or priced in the financial markets, it is necessary to have an understanding of efficient markets. * * * Primary market – A market in which new securities are traded. This is the only time that the issuing firm actually receives money for its stock. There are two different types of offerings in the primary markets: initial public offerings and seasoned new issues or primary offerings. * * Secondary market – Once newly issued stock is in the public’s hands, it then begins trading in the secondary market. Securities that have previously been issued and bought are traded in the secondary market * * * * Risk – The potential that a chosen action or activity will lead to a loss. Investors sometimes choose to put their money in risky investments because these investments offer higher expected returns. The more risk an investment has, the higher will be its expected return. * * Security – A fungible, negotiable financial instrument representing financial value.
Securities can be traded within markets such as primary and secondary markets. * * * Stock – Represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business because it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value. The purpose of businesses is to maximize the market value of existing shareholders’ common stock. * * 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. Bonds provide the borrower with external funds to finance long-term investments * * * Capital – Money used by entrepreneurs and businesses to buy what they need to make their products or provide their services. This refers to the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. * Debt – Anything owed or assets owed.
Debt is created when a creditor lends a sum of assets to a debtor. Debt is usually granted with expected repayment plus interest. * * Yield – Describes the amount in cash that returns to the owners of a security. Yield applies to various stated rates of return on stocks, bonds and other investment type insurance products. * Rate of return – The ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss.
This is also known as return on investment (ROI). * * Return on investment – The ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. This is also known as the rate of return (ROR) * * Cash flow – The movement of cash into or out of a business, project, or financial product. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation. *