A Dance With Finance – Make Sure You Take The Lead!

FINANCE:

Definition – A branch of economics concerned with resource allocation as well as resource management, acquisition, and investment. Simply, finance deals with matters related to money and the markets.

Role – Finance is used to raise money through the issuance and sale of debt and / or equity. Institutions could also use finance techniques to create balance sheets, general ledgers, profit and loss statements, etc..to determine the health of the business.

EFFICIENT MARKET:

Definition – A market in which the values of securities at any instant in time fully reflect all available information, which results in market value and the intrinsic value being the same.

Role – A good example of efficient markets in finance could be seen with the stock markets because information is available to all participants at the same time and the prices respond immediately to the available information.

PRIMARY MARKET:

Definition – Transactions in securities offered for the first time to potential investors.

Role – To illustrate the role that primary markets have in finance, people could look at “initial public offerings (IPOs)” in the stock markets where companies offer shares of common stock to the public for the first time.

SECONDARY MARKET:

Definition – The market in which stocks previously issued by the firm trades.

Role – The role that secondary market has in finance could be seen with numerous stock exchanges on Wall Street, such as the DOW, NASDAQ, etc. Through these stock exchanges, people trade company stocks.

RISK:

Definition – The likely variability associated with expected revenue or income streams.

Role – Risk plays an integral role in finance because it determines the probability that an actual return on investment (ROI) will be lower, or higher, than the expected return.

SECURITY:

Definition – A financing or investment instrument issued by a company or government agency that denotes an ownership interest and provides evidence of a debt, a right to share in the earnings of the issuer, or a right in the distribution of a property.

Role – The role that security has in finance could be seen when people make investments in securities such as bonds, debentures, notes, options, and shares that may be traded in financial markets such as stock exchanges.

STOCK:

Definition – Equity capital raised through sale of shares and it is the proportional part of a company’s equity capital represented by fully paid up shares.

Role – Stocks has a major role in finance because investors commonly trade stocks on a daily basis from a variety of institutions in the secondary market.

BOND:

Definition – A type of debt or a long-term promissory note, issued by the borrower, promising to pay its holder a predetermined and fixed amount of interest each year.

Role – A good example of the role of bonds in finance could be seen with how the government uses the purchase and sale of bonds to inject money into the economy.

CAPITAL:

Definition – Wealth in the form of assets, taken as a sign of the financial strength of an individual, organization, or nation, and assumed to be available for development or investment.

Role – The role that capital plays in finance is that institutions use capital, such as stocks, to create capital gains that could be used to improve on the overall business.

DEBT:

Definition – Consists of such sources as credit extended by suppliers or a loan from banks.

Role – Debt is used in finance to determine certain ratios pertaining to individuals or organizations. For instance, prior to giving out loans to individuals, banks tend to do background checks to determine the individuals “debt-to-income-ratio,” thus knowing if the loan is repayable.

YIELD:

Definition – The annual income earned from an investment, expressed usually as a percentage of the money invested.

Role – Yield is used in finance to determine how profitable an investment is, along with knowing if the investment is priced at a good value based on the “rate of return.”

RATE OF RETURN:

Definition – The annual percentage returned realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. Expresses the nominal rate of return in real time, which keeps the purchasing power of a given level of capital constant over time.

Role – The role that the rate of return plays in finance is that people, including institutions, use this to adjust the nominal returns to compensate for factors, such as inflation, to determine how much of the investment is actually being returned.

RETURN ON INVESTMENT:

Definition – Return on investment (ROI) is the measure of a corporations profitability, equal to a fiscal year’s income divided by common stock and preferred stock equity plus long-term debt. The ROI is the income that an investment provides in a year.

Role – The ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better for the company.

CASH FLOW:

Definition – A measure of a company’s financial health, and equals cash receipts minus cash payments over a given period of time; or equivalently, net profits plus amounts charged off for depreciation, depletion, and amortization.

Role – In finance, investors and companies use cash flow to purchase assets in hopes of achieving higher ROIs. In addition, cash flow is also used to maintain the business or household, and is a necessary part of finance.

As mentioned, every entrepreneur must know their numbers. To do so, you must understand the lingual. Hopefully this post has assisted in helping you comprehend the common terms listed above better while taking the lead with your “dance with finance.”

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