CIFA Foundation Level
Introduction to Finance and Investments glossary
Every term this guide defines, A to Z, each with the chapter that teaches it. Open it when a word in a question is unfamiliar, and test yourself on it in the last week: cover the definition and say it in one sentence.
10 terms from the free first chapter
D
- Debt as a disciplining device
Mandatory debt repayments reduce the free cash flow available for managers to misuse on low-value projects.
Taught in Nature and purpose of finance
F
- Finance
The management of money: how individuals, firms and governments raise funds, allocate them, and manage the risk and return that follow.
Taught in Nature and purpose of finance
I
- Investment
Committing money now with the expectation of a financial return in the future, the specific activity this paper builds toward.
Taught in Nature and purpose of finance
M
- Monitoring by the board
Independent directors and board committees (see CIFA Professional Ethics and Governance) oversee management decisions on shareholders' behalf.
Taught in Nature and purpose of finance
P
- Performance-linked pay
Ties management compensation to share price or earnings performance, aligning managerial reward with shareholder outcomes.
Taught in Nature and purpose of finance
- 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.
Taught in Nature and purpose of finance
S
- 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).
Taught in Nature and purpose of finance
- 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.
Taught in Nature and purpose of finance
- 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.
Taught in Nature and purpose of finance
T
- 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.
Taught in Nature and purpose of finance
The full glossary adds every term from the other 12 chapters, A to Z, each with the chapter that teaches it.