Financial Terms and Definitions Essay

1. Finance: Finance is the study of how people and businesses evaluate investments and raise capital to fund them. 2. Efficient market: Efficient market is the concept that all trading opportunities are fairly priced. 3. Primary market: Primary market is a part of the financial market where new security issues are initially bought and sold. 4. Secondary market: Secondary market is the financial market where previously issued securities such as stocks and bonds are bought and sold. 5. Risk: Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). 6. Security: Security is a negotiable instrument that represents a financial claim that has value. Securities are broadly classified as debt securities (bonds) and equity securities (shares of common stock). 7. Stock: Stock is an instrument that signifies an ownership position in a corporation. 8. Bond: Bond is a long-term (10-year or more) promissory note issued by a borrower,  promising to pay the owner of the security a predetermined amount of interest each year. 9. Capital: Capital is the amount of cash and other assets owned by a business. These business assets include accounts receivable, equipment, and land/buildings of the business. Capital can also represent the accumulated wealth of a business, represented by its assets less liabilities. 10. Debt: Debt is money that has been borrowed and must be repaid. This includes such things as bank loans and bonds. 11. Yield: Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market  value or its face value. 12. Rate of return: The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains. 13. Return on investment: A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. 14. Cash flow: Cash flow is a revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities – financing, operations or investing – although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance