Financial Terms and Roles
April 8, 2014
FIN/ 370

1. Finance: Finance is the study of how people and businesses evaluate investments and raise capital to fund them. (It is how large firms or the government manage large sums of money). 2. Efficient market: An efficient market is a market in which all the available information is fully incorporated into securities prices, and the returns investors will earn on their investments cannot be predicted. (Past data stock prices cannot help in predicting future stock prices). 3. Primary market: A primary market is a market in which new, as opposed to previously issued, securities are bought and sold for the first time. In this market, firms issue new securities to raise money that they can then use to help finance their businesses. The key feature of the primary market is that the firms that raise money by selling securities actually receive the money. (Primary markets are done by underwriting groups like investment banks, they set a beginning price range and ensure its sales goes to investors.) 4. Secondary market: The secondary market is where all subsequent trading of previously issued securities takes place. In this market the issuing firm does not receive any new financing, as the securities it has sold are simply being transferred from one investor to another. (An easy way an investor can sell or liquidate investments.) 5. Risk: The chance that the investment’s actual return will be different. (The possibility of losing some or all of the original investment.) 6. Security: 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: An instrument that signifies an ownership position in a corporation. (A person who owns stock on a company is called a