
Here are finance key terms and their definitions, financial terminology may often appear to be a contest to see who can use the most syllables to explain a single topic.
sole proprietorship | An unincorporated business owned by one person. |
Stock market | Generic term for institutions that facilitate the exchange of stocks between buyers and sellers. |
interest | The cost to the consumer for borrowing the money. |
Duty-based ethics | Ethical framework that suggests each situation involves higher principles that determine the correct action. |
wealth maximization | Process whereby companies focus on maximizing a shareholders’ wealth by maximizing the net value of the business, thereby generating the highest possible return. |
Money market | Market for short-term, highly liquid debt instruments maturing in one year or less. |
information asymmetry | When one party in a relationship has more or better information than the other. |
principal-agent problem | When the interests of the agent (manager) do not align with the goals or interests of the principal (shareholders). |
Virtue Ethics | Theory of ethical action that suggests the correct course of action is the one that a ‘virtuous’ person would take. |
Justice Ethics | The ethical belief that decisions should be made based on their ability to achieve equity, fairness, and impartiality. |
required rate of return | The minimum acceptable rate of return at a given level or risk that will induce an investor to invest in a security or a project. |
corporation | An organization that is a separate legal entity, distinct from any individual or group of individuals. |
Managers | An individual that oversees and is responsible for tasks related to a certain subset of a company’s or organization’s business activities. |
Over the Counter (OTC) markets | Markets where products such as stocks, foreign currencies, and other cash items are bought and sold by telephone and computer networks and other electronic means of communication. |
Primary market | Includes securities dealers and financial institutions (such as investment banks) that issue new securities to the investing public. |
Maturity Risk Premium (MRP) | Compensates lenders for the risk that interest rates will change in the future. |
Liquidity Premium (LP) | The premium that investors expect when their investment is not readily convertible into cash. |
Electronic Communications Networks | Alternative securities trading systems that bring buyers and sellers together for electronic execution of trades. Also called ECNs |
balance sheet | A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a particular point in time. [CMA] |
Default Risk Premium (DRP) | The risk that a company will not pay back the loan or debt obligation. |
profit maximization | Process whereby companies determine what output level and price structure result in the greatest profit. |
The nominal risk free rate (Krf) | Rate of return that an investor would expect from a risk-free investment. |
Egoism | The philosophical belief that acting according to self-interest is moral. |
Secondary market | Market where securities are bought and sold after they have been issued. (Also called the ‘aftermarket’) |
Relativism | The view that there is no objective moral rule or law that is universally correct. |
Shareholders | A person, company, or other organization that owns at least one share in a corporation. May also be referred to as ‘stockholders.’ |
partnership | An unincorporated business owned by two or more people. |
limited liability company (LLC) | An unincorporated business where the business, not the owners who in this case are called members, are liable for the company’s debts. |
preferred dividends | A class of stock that takes precedence over common stock when it comes to paying dividends. A firm must pay dividends to preferred stockholders before it pays dividends to common stockholders. |
Organized security exchanges | Formal organizations with tangible physical locations that conduct auction markets in designated (‘listed’) securities. (Example: NYSE) |
interest rate | The rate that is charged to the consumer for borrowing a given amount of money. |
Utilitarianism | Theory of ethical action that suggests the correct course of action is the one that maximizes overall happiness. |
Employees | A non-executive level individual who is employed for a salary or wages. |
Board of Directors | A group of individuals that are charged to manage and oversee the operations of a corporation. |
life-cycle model of financing | Financial strategy where a firm’s financing decisions match its stage in the life-cycle. |
ethics | The moral principles that govern the behavior of an individual or organization with regard to what is right or wrong. |
The cost of debt (k) | The nominal interest rate a company must pay for its debt. |
Financial assets | An intangible asset whose value is derived from a contract or claim, such as a stock, bond, certificate of deposit. |
Capital markets | Financial markets where long-term debt (bonds) and equity securities (shares of stock) are issued and traded. |
principal-agent relationship | Relationship that is formed when one party hires another party to act on their behalf. |
Corporate Social Responsibility (CSR) | When a company considers the ethical, legal, economic, environmental, and philanthropic impact of its actions and tries to behave in a responsible manner. |
Business ethics | A form of applied ethics: theories and concepts are applied to practical problems and specific business situations. |
rent | Compensation that is paid for the privilege of borrowing another person’s property. |
net income | Income for a period after subtracting expenses from all sources for that period. (Also called Net Earnings.) [CMA] |
wealth | The total market value of all of the tangible and intangible assets of an entity (i.e., individual, company, country) |
Chief Executive Officer (CEO) | The highest-ranking individual in a company that is ultimately responsible for making all managerial decisions. Synonymous with President. |
code of ethics | The formal, written codes developed by organizations to guide employee conduct and behavior when confronted by ethical issues. |
Financial intermediary | Invests the money of an investor on their behalf. |
Chief Financial Officer (CFO) | Senior executive who is responsible for the overseeing of a company’s finances or institution. |
agency costs | Costs that are incurred when attempts are made to manage issues that result from a principal-agency conflict. |
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