Finance is a broad field in business that contributes to the bigger part of any organization, company or a nation. It involves national and international systems of financing business and banking. With the general field of finance, it is divided in to three distinct groups. That is the financial institutions and markets, financial management and investment. Financial institutions and markets consist of an overview of the financial system and its components of policy makers, monetary systems, and financial markets (Ronald, Melicher & Norton, 2010). A financial institution collects funds from savers and issues them to other individuals or invests them in people or businesses that need cash.
The financial management deals with how a business will manage its assets liabilities and equity to come up with goods and services in the business. The area of investment deals with individuals who invest in financial markets by using information from financial institutions to evaluate the various investments in securities. All this area is important in the identification of appropriate financial information before communicating to the managers and the decision makers. When an individual invest they normally expect a Return on Investment at the end of the stated period.
Return on investment
Return on investment is the total amount a company or a person Yield as a percentage of the total value of assets invested. It is calculated as income minus cost then multiple the results with cost of investment. This ratio helps express the total profit or loss on investment as a percentage of value invested.
Rate of Return
Rate of Return on the other hand is the discounting rate used in capital budgeting that makes the net present value equal to zero (Ben Best). It is normally used to rank the various projects to be undertaken and it appears in the cash flow as an expense.
A Cash Flow is the analysis of the essential movement of money in and out of business and it determines the business solvency. For a financial institution to make inform decisions and operate well, an efficient market should be available.
An Efficient Market is a market where security prices reflects all the information available and is in a position to adjust instantly to any new information in the market. In this efficient market, it comprises of a primary market and a secondary market for debt and equity securities.
A Primary Market is where they offering initials or origination of equity securities and debt. It is the only market, where the issuers of security directly benefit from the sale of the securities.
Secondary Market is a physical location or an electronic forum where equity securities and debts are traded. It facilitates the movement of beforehand issued securities from on hand investors to new investors. This market is divided into short term-money and long term-capital market categories.
Capital is the borrowed sum of money or equity with which the firm's assets are acquired, and its operations are funded. Financial capital is divided into three categories, equity capital, debt capital and specialty capital (Moyer, Joehnk & Koch, 2001). Equity capital also known as book value or stock is the value of assets minus liabilities.
Debt capital is the amount of money that an individual invest into a business with an understanding that it will be refund back at a future date to the lender. The period for the refund to be made is normally stated before the release of the debt capital and upon giving a security.
Security is the property, or good an individual gives to a financial institution where the money was borrowed, for example, giving out share as a security from a loan borrowed in a bank. Security can also be made upon an oversight of an identified risk in the business.
Risk can be defined as any threat that a company or an organization faces. When the security given represents the debt issued by a company or government it is called a bond. This allows them to borrow money from the bondholders.