Financial Terms Defined

Essay by angelz2uCollege, UndergraduateA, August 2009

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In order to understand finances, one must understand the terminology in order to build the foundation that a successful, financial business must have. Without a clear, defined understanding of simple financial terminology, confusion can arise early in finances. This paper will define important finance terminology and identify their role in today's finance world.

TerminologyEfficient market. Efficient market is defined as "a market in which the values of securities at any instant in time fully reflect all available information, which results in the market value and the intrinsic value being the same." (Mayo, 2007). Efficient markets have an integral role in management and analysis of investments and make the prices of stocks reasonable. These markets help to make corporate investing stable and predictable.

Primary Market. "Transactions in securities offered for the first time to potential investors." (Mayo, 2007). Primary market is important because the primary market is a financial market where other companies or organizations issue new securities.

Investors may often have their first opportunity at new securities through the primary market.

Secondary market. "The market in which stock previously issued by the firm trades." (Mayo, 2007). This is the market, which can also be known as the aftermarket, where previous financial business and securities will be bought and sold. The major stock exchanges are most noticeable on secondary markets. The secondary markets are important in order to make the capital markets more efficient and have high liquidity.

Risk. "The likely variability associated with expected revenue or income streams." (Mayo, 2007). Risk comes in different forms in financing. With investments, high risk investments will have greater rewards yet also have greater losses. With businesses, the risk of not bringing in a profit or breaking even is always there. Risks need to be taken but also need to be weighed with...