Financial Terms and Roles
University of Phoenix
June 6, 2013
FIN/370 – Finance for Business
Resource: Financial Management
Create a list of definitions for the following terms and identify their roles in finance.
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Finance is the study of how people and businesses manage and invest their money. The study of finance is the management and interpretation of information during the management of money.
The study of finance helps firms address three basic questions regarding investments and cash flow. These are the following: 1.) what long-term investments the firm undertakes? 2.) How should the firm raise money to ...view middle of the document...
Risk is what investors experience when making investments. Some investors opt to avoid risky investments for safer investments to get certain return on their investment rather than an uncertain return. When engaging in riskier investments, investors expected a higher rate of return. Risk in finance is the probability that an actual return on an investment will be lower than the expected return (WebFinance, Inc., 2012). To convince investors to take on added risk, they demand a higher expected return (Titman, Keown, & Martin, Chapter 1, 2012).
Security is a negotiable instrument that represents a financial claim and takes the form of ownership (stocks) or a debt agreement Firms issue new securities to raise money that they can then use to help finance their businesses. Securities are traded in securities markets by businesses and individual investors. Securities markets trade securities on primary and secondary markets (Titman, Keown, & Martin, Chapter 2, 2012).
Stock is equity capital raised through sale of shares (WebFinance, Inc., 2012). The two major types of equity securities are common stock and preferred stock. Common stock and preferred stock are both equity securities issuing ownership in a company. Common stock represents equity ownership in a corporation, gives the owner voting right in company decisions, gives the owner dividends, and offers capital appreciation in the value of the security. Preferred stock gives equity security, but owners do not have voting rights as that of common stockholders. Preferred shareholders receive payments dividends before dividends are distributed to common stockholders and have the right to the distribution of proceeds in the event of company liquidation or the sale of the company (Titman, Keown, & Martin, Chapter 2, 2012).
A bond is a debt security which firms sell in the debt market. Bonds are long-term promissory note, usually for the duration of 10 years or more, issued by a borrower that promises to pay the owner of the security a predetermined amount of interest each year (Titman, Keown, & Martin, Chapter 2, 2012).
Capital is the wealth of an individual, organization, or nation in the form of money or assets, taken as a sign of the financial strength of and assumed to be available for development or investment (WebFinance, Inc., 2012). Capital is the amount of cash and...