Finance is defined by finance dictionaries as the science of managing financial resources that include money, and money equivalents (Keown et al., 2005). Money equivalents include all organizations assets such as security, bonds, shares and other tangible and intangible assets. In addition, finance concept imply supply, raise or providing of capital and managing that capital to maximize gain and minimize risks of loss. In management, finance terminology pertains to monetary expenditure relating to monetary items and monetary receipts, and all these add up to financial operations reported by organization through financial statements.
Investors utilize available information to change the supply and demand of shares. When stock markets information is deemed perfect and the dealers use that information to trigger change in demand or supply condition setting an equilibrium price of shares, the market is said to be efficient (Keown et al., 2005). Efficient markets usually prevail in a secondary stock market. In this case, perfect information is available to all investors in the market platform. In addition, the information available to one investor is also available to all the other investors and it is reflected in stock prices.
According to Keown et al (2005), trading shares for the first time by a company the quoted stock exchange are referred to as primary shares market. Companies can issue shares for the first time process called initial public offer, increase their outstanding share through right issue, or bonus issue. For example, when Starbuck sells shares for the first time in stock exchange, or when Wal-Mart increases its shares in the market to raise additional capital, all these refer to primary market.
Unlike the primary market, a secondary market occurs when an existing quoted company to stock exchange shareholders sells their shares to a second party (Keown et al., 2005). For example, when you possess 1000 shares and you want to sell 500 shares, trading occurs in a secondary market. In addition, when one has 500 shares and want purchase more shares from a quoted company, then this occurs in a secondary market.
The term risk refers to the possibility of making a loss or getting less than expected returns from an investment. In finance, the term risk include quantifiable probability of making loses or low returns from a financial investment especially from owners’ capital or shares (Keown et al., 2005). Financial risks include liquidity risks, interest rate risks, credit risks, purchasing power risks, business risks, inflation risks among others. To solve the problem of financial risks or suppress risks, companies adopt strategic continuous risk management approaches.
Security in finance means negotiable instruments (Keown et al., 2005). Financial security implies values of a negotiable financial instrument such as bonds, shares, equity securities and other short or long-term negotiable instrument as may be defined by stock exchange. In addition, instruments and activities such as futures, options, swaps and forward contracts are included in the definition of security. Actually, stocks to shareholders signify the percentage of ownership by the number of shares owned by an individual.
Companies are formed by shareholders who contribute capital. The total original capital contributed by shareholders is referred to as the capital stock. The shareholders common stocks are divided into shares and are traded in stock exchange markets. Stocks act as collateral to creditors since it cannot be withdrawn without dispensation of creditors.
Along with common shares and other marketable cash equivalent assets, corporations and government may borrow funds from the public in terms of bonds or debenture for a specific period earning interest at a fixed rate. Bonds in finance refer to public investing in companies or governments or municipalities without ownership or control in the entity (Keown et al., 2005). This way they become debt instrument issued to raise capital or finance. For example, United States can issue 5 years Treasury bond at an interest of 20 percent per year to finance federal projects. In this respect, the public purchase such bonds and earn interest at a rate of 20 percent fixed rate for 5 years.
Organizations functions due to the factors of production. Capital is one of the four factors of production. Organization capital includes goods and monetary items used in generating earnings from investments or productions of goods and services. Usually, capital in organizations comprises of the net worth of business entity. The amount of money and other assets that surpass total organizations obligations/ liabilities refer to entity’s capital. Therefore, capital comprises of the outstanding shares value, retained profits and all short term and long-term debts.
Debts refer to the amount borrowed by organizations to finance its operation. It is defined as obligation to pay certain amount of money from lenders in future. Debts are classified according to the period given, short or long term and the type, debentures or bonds, loan note or mortgage.
Yield is a term applied in finance and accounting to represent amount of money an investor gets from investment portfolio. Yield also refers to the annual rate of return of investment such as securities, bonds, notes. Yield is usually expressed in percentage in the terms of investment or loan repayment. For instance, bonds coupon rate and dividends from shares investment are yield.
Rate of return (ROR) and return on investment (ROI)
Rate of return is similar to the rate on investment. The two terms are applied in finance to measure the efficiency or the performance of an investment portfolio or financial securities. They are percentage annual gain of an investment. They are calculated by return or the total proceeds minus initial investment outlay divided by the original capital, multiplied by 100 percent (Keown et al., 2005). ROI and ROR are used to compare the performance or the efficiency of different financial securities.
Cash flow
Cash flow refers to movement of cash and cash equivalent in and out of business entity. This gives all the changes in the cash account since its comparison of expenditures and receipts of cash and cash equivalent. Changes in cash and cash equivalent occur in organization because of three activities. These activities usually have cash inflows and outflows. They are cash from operating activities, financing activities and cash from investing activities. Cash flow statement is a financial report used to show the amount of cash generated and used by an organization during a particular financial period.
Reference
Keown, A. J., Martin, J. D., Petty, J. W. & Scott, D.F. (2005). Financial Management: Principles and Applications. New Jersey: Pearson Prentice Education, Inc.