Defining Financial Terms

Defining Financial Terms

Jackie Raynor

FIN 370/FINANCE AND BUSINESS

May 31, 2011

George Adkins

Defining Financial Terms

The purpose of this paper is to define 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 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 make a purchase. For instance, when a customer walks into a furniture store and is ready to purchase a few pieces of furniture, the salesperson draws up the paperwork and two items are needed. The first item is cash and the second is the search for a finance company to finance the purchase. 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 furniture.

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.

Primary market is when securities, stocks and bonds, are offered to potential investors for the first time. An example of a primary market is a new grocery being built in an area and the grocer issues stock for investors to purchase. 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.

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 effect on price. The price is more or less than...