Finance Key Terms

February 24, 2022

4 minutes read

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.