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Define basic financial terminology

Define the following terms and identify their role in finance:
a. Finance
b. Efficient Market
c. Primary Market
d. Secondary Market
e. Risk
f. Security
g. Stock
h. Bond
i. Capital
j. Debt
k. Yield
l. Rate of Return
m. Return on Investment
n. Cash Flow

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a. Finance: The science that describes the management of money, banking, credit, investments, and assets. Basically, finance looks at anything that has to do with money and the market.

b. Efficient Market: Market where all pertinent information is available to all participants at the same time, and where prices respond immediately to available information. Stockmarkets are considered the best examples of efficient markets.

c. Primary Market: A market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.

Also known as "new issue market" (NIM).

The primary markets are where investors can get first crack at a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. Exchanges have varying levels of requirements which must be met before a security can be sold.

Once the initial sale is complete, further trading is said to conduct on the secondary market, which is where the bulk of exchange trading occurs each day. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred.

d. Secondary Market: A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the New York Stock Exchange and the NASDAQ are secondary markets.

Secondary markets exist for other securities as well, such as when funds, investment banks, or entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market trade, the cash proceeds go ...

Solution Summary

The expert defines basic financial terminology.