Defining Financial Terms and Role in Finance

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Defining Financial Terms and Role in Finance
University of Phoenix
FIN 370/ Finance for Business
November 10, 2010

Defining Financial Terms and Role in Finance
The following paragraphs contain financial terms and their role in finance. The terms are finance, efficient market, primary market, secondary market, risk, security, stock, bond, capital, debt, yield, rate of return, return on investment, and cash flow. The fourteen terms all have an important relationship in the world of business.

The first term is finance. Finance is managing money or supplying funds to provide a resource. A bank or loan company is a source of finance because they both provide cash. Cash is the resource that one needs to survive or make a purchase. For instance, when a customer walks into a car dealership and is ready to buy a car, the salesperson draws up the paperwork and two items are in need. The first item is cash and the second is the search for a finance company to finance the car. The role of finance in this example is the customer can provide the cash to make the purchase and the finance company can supply the funds and terms of agreement to help the owner purchase the car.

The second term is efficient market. Efficient market is a hypothesis that prices prevail in the market is always fair. Its role in finance according to EMH is no one can make high return without buying riskier investment as market prices are always fair.

The third term is primary market. Primary market is when securities, stocks and bonds, are offered to potential investors for the first time. Companies like Verizon or AT & T can issue or sell securities directly to an investor. The primary market role in finance is to allow the potential investor to buy from the company and not other investors to increase the stock.

The fourth term is secondary market. Secondary market is opposite of primary because it allows the investor to buy stocks and bonds from each other rather than the original company. The role of finance in secondary market is its affect on price. The price is more or less than the issue price of the original company.

The fifth term is risk. Risk is the uncertainty or chance of a difference in the actual return earned on investment and the expected return earned on the investment. There are three types of risk: market, credit, and operational. The company return on an investment depends on which risk the company took. For example, people and companies take risk sometimes when they make a financial investment or provide equipment and supplies for an opportunity to receive a high return on their investment. The role of finance for a risk is the uncertainty if they will receive payment for their investment. The higher the risk means the higher the return. The lower the risk means the lower the return. The next three terms have a correlation. The terms are security, stock, and bond. Security in finance is the relationship and representation of stocks and bonds. Some securities are interest and dividend based. Common and preferred stock, bonds, notes, debenture, and option are some examples of securities. A stock represents ownership in a business, has face value, and may not carry a maturity date. A stock’s role in finance is as follows. Common stock has no fixed rate of dividend and has voting rights. Preferred stock has a fixed rate of dividend and no voting rights and preferred are the two types of stock. A bond is the last term of correlation. A bond is a fixed income security. A bond is a debt with interest, a maturity, mode of payment, and a principal. A bond’s role in finance is that it can be issued as a long term debt and requires the company to pay on the interest even if they made a loss in profit or not. Capital is the amount of money an owner has invested in his or her business. The role of capital in finance is simple. A sole proprietor has a single investment. A...
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