Defining Financial Terms
December 10, 2012
* Finance is the study of how people and businesses evaluate investments and raise capital to fund them and allocate money over time (Titman, Martin, & Keown, 2011). Finance is the life blood of any organization; any organization cannot run without finance. There are three functions that characterize financial activities that managers use – making investment decisions with budgeting and making capital – deciding how to finance the investments – and managing the funding for the company’s day-to-day operations (Titman, Martin, & Keown, 2011).
* Efficient Market is when all pertinent information is available to all participants at the same time, and when prices respond immediately to available information. Stock markets are considered the best examples of efficient markets (Titman, Martin, & Keown, 2011). * Primary Market is a market that buys and sells new securities for the first time. The role of the primary market is to allow businesses to raise money needed to help finance the business. The key advantage for businesses is that they receive the money raised from the securities directly (Titman, Martin, & Keown, 2011). * Secondary Market is a market where securities bought or sold after the first time sold and more than once. An investor can purchase the securities directly from another investor rather than the issuer. These securities are originally issued in the primary market, and then they enter into the secondary market which is sold through the New York Stock Exchange. The secondary market connects investors’ securities for liquid capital (Titman, Martin, & Keown, 2011). * Risk is the uncertainty regarding the possibility of loss. It is the possibility of losing money if an investment has a loss or no return. Risk is the basis for evaluating any investment. Time and risk are the basic concepts of finance. The greater the risk...
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