Fin370 Define Financial Terms

Topics: Investment, Bond, Net present value Pages: 3 (659 words) Published: August 11, 2012
Defining Financial Terms


Defining Financial Terms

The following information will define financial terms and identify their roles in finance: • Finance
o Finance is the financial management associated with maintaining and creating financial significance or financial. The finance role determines how decisions are made, investing assets, replacing assets, borrowing bank money, stocks and bond decisions, extending credit, and cash preservation prosperity. • Efficient market

o Characterized by a large number of profit-driven individuals who act independently. Because new information regarding securities arrives in the market in a random manner, investors adjust to new information immediately and buy and sell the security until they feel the market price correctly reflects the new information. Under the efficient market hypothesis, information is reflected in security prices with such speed that there are no opportunities for investors to profit from publicly available information. Investors competing for profits ensure that security prices appropriately reflect the expected earnings and risks involved and thus the true value of the firm. • Primary market

o Direct transfer when securities are initially sold to investors. This type of transaction increases the total stock of financial assets outstanding in the economy. The sales do not affect the total stock of financial assets that exist in the economy. Both the money market and the capital market have primary and secondary sides. • Secondary market

o Represents transactions in currently outstanding securities. All transactions after the initial purchase take place in the secondary market. • Risk
o The variation in returns is divided into firm risk and market risk. The portion of variations in investment returns that cannot be eliminated through investor diversification. This variation results from factors that affect all stocks. • Security


References: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005). Financial management: Principles and applications (10th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall.
Mayo, H. B. (2007). Basic finance: An introduction to financial institutions, investments, and management (9th ed.). Mason, OH: Thomson.
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