Introduction to Finance Lecture 1

Finance

The science of managing money matters.

Managerial finance

Concerned with the financial management of a company, including buying/selling assets and making financing choices.

Investments

The act of buying, holding, and selling various assets and securities, primarily stocks and bonds.

Financial markets

Platforms where financial instruments like stocks and bonds are traded.

Money market

The market where short-term securities are traded, including treasury bills.

Capital markets

The markets for long-term financial instruments, including stock exchanges.

Financial intermediation

The process of banks and credit unions channeling funds from savers to borrowers.

Financial disintermediation

Occurs when the usual flow of funds from savers to borrowers through financial intermediaries is disrupted.

Risk-return trade-off

The principle that potential return rises with an increase in risk.

Time value of money

The concept that money available now is worth more than the same amount in the future due to its potential earning capacity.

Cash is king

The idea that cash flow is more crucial than profitability for a business.

Incremental cash flows

The additional cash flows that are directly attributable to a particular investment decision.

Competitive markets

Markets characterized by numerous buyers and sellers, leading to efficient outcomes.

Efficient capital markets

Markets where prices reflect all available information, making it difficult to achieve excess returns.

Agency issue

The conflict of interest between the stakeholders (such as stockholders) and the management of a company.

Tax impact

The effect of taxation on business decisions and profitability.

Diversification

The strategy of investing in a variety of assets to reduce risk.

Ethics in finance

The principles of integrity and moral standards that guide behavior in finance and businessd.

Sole proprietorship

A business owned and managed by a single individual, where personal and business taxes are intertwined.

General partnership

A business structure where two or more individuals share ownership and liabilities.

Limited partnership

A partnership with one or more general partners and limited partners who have restricted liability.

Limited liability partnership (LLP)

A partnership structure that provides limited liability to all partners.

Subchapter S corporation

A special designation for small corporations that allows profits to be passed through to owners’ personal tax returns.

Continuity in business

The degree to which a business can continue its operations despite changes in ownership.