Finance & Accounting

Finance Key Terms

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 proprietorshipAn unincorporated business owned by one person.
Stock marketGeneric term for institutions that facilitate the exchange of stocks between buyers and sellers.
interestThe cost to the consumer for borrowing the money.
Duty-based ethicsEthical framework that suggests each situation involves higher principles that determine the correct action.
wealth maximizationProcess whereby companies focus on maximizing a shareholders’ wealth by maximizing the net value of the business, thereby generating the highest possible return.
Money marketMarket for short-term, highly liquid debt instruments maturing in one year or less.
information asymmetryWhen one party in a relationship has more or better information than the other.
principal-agent problemWhen the interests of the agent (manager) do not align with the goals or interests of the principal (shareholders).
Virtue EthicsTheory of ethical action that suggests the correct course of action is the one that a ‘virtuous’ person would take.
Justice EthicsThe ethical belief that decisions should be made based on their ability to achieve equity, fairness, and impartiality.
required rate of returnThe minimum acceptable rate of return at a given level or risk that will induce an investor to invest in a security or a project.
corporationAn organization that is a separate legal entity, distinct from any individual or group of individuals.
ManagersAn 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) marketsMarkets 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 marketIncludes 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 NetworksAlternative securities trading systems that bring buyers and sellers together for electronic execution of trades. Also called ECNs
balance sheetA 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 maximizationProcess 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.
EgoismThe philosophical belief that acting according to self-interest is moral.
Secondary marketMarket where securities are bought and sold after they have been issued. (Also called the ‘aftermarket’)
RelativismThe view that there is no objective moral rule or law that is universally correct.
ShareholdersA person, company, or other organization that owns at least one share in a corporation. May also be referred to as ‘stockholders.’
partnershipAn 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 dividendsA 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 exchangesFormal organizations with tangible physical locations that conduct auction markets in designated (‘listed’) securities. (Example: NYSE)
interest rateThe rate that is charged to the consumer for borrowing a given amount of money.
UtilitarianismTheory of ethical action that suggests the correct course of action is the one that maximizes overall happiness.
EmployeesA non-executive level individual who is employed for a salary or wages.
Board of DirectorsA group of individuals that are charged to manage and oversee the operations of a corporation.
life-cycle model of financingFinancial strategy where a firm’s financing decisions match its stage in the life-cycle.
ethicsThe 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 assetsAn intangible asset whose value is derived from a contract or claim, such as a stock, bond, certificate of deposit.
Capital marketsFinancial markets where long-term debt (bonds) and equity securities (shares of stock) are issued and traded.
principal-agent relationshipRelationship 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 ethicsA form of applied ethics: theories and concepts are applied to practical problems and specific business situations.
rentCompensation that is paid for the privilege of borrowing another person’s property.
net incomeIncome for a period after subtracting expenses from all sources for that period. (Also called Net Earnings.) [CMA]
wealthThe 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 ethicsThe formal, written codes developed by organizations to guide employee conduct and behavior when confronted by ethical issues.
Financial intermediaryInvests 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 costsCosts that are incurred when attempts are made to manage issues that result from a principal-agency conflict.

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