Introduction to Finance and Investments cheat sheet

Key terms

Finance

The management of money: how individuals, firms and governments raise funds, allocate them, and manage the risk and return that follow.

Investment

Committing money now with the expectation of a financial return in the future, the specific activity this paper builds toward.

Scope

Spans corporate finance (a firm's own financing and investment decisions), investment/asset management (managing portfolios of financial assets on behalf of others), and public finance (developed fully in CIFA Public Finance and Taxation).

Profit maximisation

A traditional but incomplete goal: it ignores the timing of profit, the risk taken to earn it, and its effect on the share price, all of which matter to shareholders.

Shareholder wealth maximisation

The goal modern finance actually optimises for: maximising the market value of shareholders' equity, which properly accounts for the amount, timing and risk of expected future cash flows, unlike profit maximisation alone.

Stakeholder wealth

A firm pursuing shareholder wealth over the long run must still satisfy other stakeholders, employees, customers, lenders, regulators, echoing the stakeholder theory of CIFA Professional Ethics and Governance; ignoring them undermines the very cash flows shareholder value depends on.

Performance-linked pay

Ties management compensation to share price or earnings performance, aligning managerial reward with shareholder outcomes.

Monitoring by the board

Independent directors and board committees (see CIFA Professional Ethics and Governance) oversee management decisions on shareholders' behalf.

The market for corporate control

The threat of a takeover disciplines management, since persistently poor performance depresses the share price and invites an acquirer who would replace underperforming management.

Debt as a disciplining device

Mandatory debt repayments reduce the free cash flow available for managers to misuse on low-value projects.