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Definition of Financial Terms and Their Relation to Finance

Finance is the management of money, assets, banking, investments, liabilities, or anything to do with money. It involves the management of money and cash in various sectors of an organization using various instruments and means. Assets, liabilities, bonds, risks, loans, expenses are all measurable in terms of money. Finance is the backbone of any organization and proper financial management will keep organizations running smoothly (Brigham & Ehrhardt, 2011).

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Efficient market: This is a market in which new information about shares and securities is reflected very well in terms of prices. Since share or security prices are accurately reflected in the market the expected rate of return can be estimated. As a result, one should not expect an abnormal rate of return (Pandey, 2009)

Primary market: A market in which newly issued securities are first released and sold. Due to that, the first buyer will buy such securities in the primary market from the organization which owns the securities and has released them to the market. Other buyers will buy the securities from the first buyer in secondary markets. (Brigham & Ehrhardt, 2011)

Secondary market: A market where investors buy securities from other investors instead of buying them from the issuing organization. Prices of securities in the secondary market are high. High prices of securities may result in high profits for the sellers. The profits are enjoyed by the sellers at the secondary but not the issuing organizations. (Brigham & Ehrhardt, 2011)

Risk: This is the degree of uncertainty of return of an asset or any other investment according to Pandey (2009). Most organizations employ a variety of risk assessment strategies to determine probable risks before embarking on certain investments to avoid undesirable outcomes or financial loss.

Security: Is a piece of paper that proves ownership of the business, premises, assets, bonds, and other investments. Concerning finance, securities are very important as they provide a guarantee for organizations to get loans from banks and other financing institutions (Brigham & Ehrhardt, 2011).

Stock: Stock refers to the total earnings and assets of any business at any given moment. The more stock a company has the more dividends the company will get as long as the demand for the stock stays constant (Brigham & Ehrhardt, 2011)

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Bond: A promissory note issued by the government, companies, or other financial institutions for a given period (Wei, 2005). By selling bonds, governments, and organizations gain money from the public to finance their investments. Repayment of bond is done with some interest.

Capital: Capital is the money invested in a business. According to Brigham & Ehrhardt (2011) capital refers to the financial resources available for use. High capital stabilizes organizations operations and keeps businesses running smoothly

Debt: This is the money borrowed from an outside source with the promise to pay back after a given period. In most cases, debts are paid back with some interest. New companies and start-up companies get debts from banks and private companies to finance their operations (Pandey, 2009)

Yield: Yield is the profit that an organization gets after selling stock or the interest gained on bonds and debts. Yields increase an organizations income and can be used to increase stock or to set up new businesses (Pandey, 2009)

Rate of return: This is a ratio that is used as a measure of the loss or gain of an investment over a given period. If an investment is found to be profitable, then more money can be channeled into such an investment to boost its output and increase profits as argued by Wei (2005).

Return on investment (ROI): A ratio used to compare the efficiency of various investments or to evaluate the efficiency of a given investment after a given period. Return of investment is determined by expressing income from an investment as a proportion of the cost of the investment (Brigham & Ehrhardt, 2011).

Cash flow: This is a term used to represent a company’s earnings before repayment of loans, taxes, expenses, depreciation, and deduction of other non-cash charges. It is sometimes referred to as cash earnings and it indicates a company’s ability to pay dividends or simply it indicates company’s financial strength (Pandey, 2009)

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Brigham, E.F., & Ehrhardt, M, C. (2011). Financial Management: Theory and Practice.13th Edition. South Western Cengage Learning.

Pandey, I.M. (2009). Financial Management. 9th Edition. Vikas Publishing House PVT Ltd. Jangpura, New Delhi

Wei, J.Z. (2005). A layman’s Guide to Financial Terms. University of Toronto. Web.

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