Financial Terms and Roles

Financial Terms and Roles

Judith J. Julian

FIN/370

Dr. Tami Bolder

September 17, 2013

Finance is the study of how people and businesses evaluate investments and raise capital to fund them. Its role in finance is to determine long-term investments (capital budgeting), how the money will be raised to fund investments (capital structure decisions), and how to best manage cash flows in daily operations (working capital management). The central focus of finance is management of money.

Efficient market – An efficient market represents a market where all relevant information is available to all participants and prices change immediately to reflect new information. The stock market is an example of an efficient market because all pertinent information is available to invested parties electronically at the same time.

Primary market – A primary market is where newly issued securities are bought and sold to raise capital to fund businesses. Its role in finance is help businesses grow by selling securities in the form of debt (loans from investors) or equity (stock) in company. The key feature of the primary market is the money gained goes back to firms.

Secondary market – A secondary market is where previously issued securities are traded by investors to other investors. In this market the firm that issues the securities does not receive any new financing. The role in finance is to allow shareholder’s the ability to sell securities to the public. This ability to sell makes securities in this market liquid investments, easily converted to cash.

Risk – Risk is the chance taken when making investments. There is no guarantee the return on investment will be profitable. Its importance in finance is the higher the risk the greater probability of a higher return. Such as investing in low-risk securities (U.S. Treasury securities), they are likely not to produce high yield. Whereas investing in stock like Apple in its infancy would yield a high return in the long-run...