Finance and Market Theory Essay Sample

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Finance – Finance is basically the management of money and revenues. It deals with the value of money as well as wealth. Efficient Market Theory – A theory is an idea. The efficient market theory is the idea that the market will respond efficiently as things change and new information becomes available. The role it plays in finance is that investors and others will make decisions quickly based on the most recent information. This can be beneficial as it is important to stay on top of things; however a quick reaction may not be the best answer as more information may be needed for the best overall decision. Primary Market – A primary market is where new securities, bonds, stocks, etc. are being offered to investors for the first time. The role in finance is that it is the only time where purchases are made directly from the company. This can often save the investor money and mean bigger profits for the company as the middle person is removed from the equation. Secondary Market – The secondary market is how securities, bonds, stocks, etc. are classified after they leave the primary market. They have already been sold or traded in the primary market.

The role in finance is that the price will be different. It is also where the securities, etc. may be traded with each other and not just from the original company. Risk – Risk is the probability of a positive or negative result. The role in finance is that finance often deals with handling money for others. Typically, the greater the risk for a loss, the greater it will pay out. The lower risk investments can result in lower returns. Security – Security is safety and protection. In finance, security is used to negotiate deals. It provides the guarantee that there is value behind each decision. Stock – A stock is a percentage of the company that can be purchased. In finance, stocks can be purchased, sold, and/or traded. The larger the percentage owned in a company often means more decision making power. If the company does well, the value of the stock can increase. If the company fails, the stock can lose value. Bond – A bond is the documentation that represents a loan to be paid back by an agreed upon interest rate. In finance, corporate entities typically deal with bonds.

These corporations issue bonds for projects, etc. Bonds can also be resold to other lenders. Capital – Capital is the assets the owner owns and has available for collateral for investments. In finance, capital is determined by the number of owners. For example, if there is only one owner they will have 100% capital and can make the decisions alone. Debt – Debt is accumulated by borrowing money. It is the amount of money borrowed with the intention of repayment. In finance, it is a liability for a company. The amount of debt can decrease the value and credit of a company if not handled properly. Yield to Maturity – The amount of money promised to an investor that holds debt. The finance industry can be competitive. The yield is important in finance as it is one way to keep investors with their company and not go with the competition.

Rate of Return – It is how much money is gained or loss on an investment over a specific period of time. It is important in finance as it helps to measure if the investment was worth it or not and is often given as a percentage. Return on Investment – The return on investment (ROI) is the specific amount gained or loss per investment opportunity for a company. In finance, it will help a company or individual determine if the investment was worth it. It can be positive or negative based on the results and represents the profit made. Cash Flow – Cash flow is the amount of cash coming in and out of a business. This is important in finance as it can represent the stability of a company. Having cash on hand is also good security. It is easier to do business and get investors and loans if the company has the cash to back it up.

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