Defining Financial Terms

Defining Financial Terms

S. Nick Smith

FIN/370

January 11, 2010

Lana Kopec

Individual Assignment: Defining Financial Terms

• Resource: Financial Management: Principles and Applications

• Define the following terms and identify their roles in finance:

o Finance

 Financial management is concerned with the maintenance and creation of economic value or wealth.

 Deal with financial decisions such as when to introduce a new product, when to invest in new assets, when to replace existing assets, when to borrow from banks, when to issue stocks or bonds, when to extend credit to a customer, and how much cash to maintain.

o Efficient market

 An efficient market is characterized by a large number of profit-driven individuals who act independently.

 In addition, new information regarding securities arrives in the market in a random manner. Given this setting, 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.

o Primary market

 Primary markets are those in which securities are offered for the first time to potential investors.

 A new issue of common stock by AT&T is a primary market transaction. This type of transaction increases the total stock of financial assets outstanding in the economy.

o Secondary market

 Secondary markets represent transactions in currently outstanding securities.

 If the first buyer of the AT&T stock subsequently sells it, he or she does so in the secondary market.

 All transactions after the initial purchase take place in the secondary market. The sales do not...