An alphabetical glossary of financial and business terms, plus their definitions. In the world of business and finance there is a lot of jargon, or normal everyday words but with different meanings.
The Great Recession and the years following it have brought business and financial terms more frequently to the pages of non-specialist newspapers. For personal reasons, individuals from all walks of life have become more interested in the meanings of these words.
Below is our complete Financial Glossary, with a comprehensive list of financial terms along with their definitions:
Financial Glossary: A-Z
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
Abenomics – refers to the economic policies introduced by the Japanese Prime Minister Shinzō Abe after he won the December 2012 general election. Abenomics focuses on monetary and economic growth strategies to promote private investment.
Absolute Advantage – refers to what one country, company or person can produce at a better/faster rate than another. If I can make 3 shirts per day and Tom can produce 4, he has an absolute advantage over me in the world of shirt-making. The concept was first introduced by economist Adam Smith in the eighteenth century when talking about international trade.
Account – this word has many meanings, both in the world of business and everyday language. In banking it could mean a bank account or a bank-client arrangement, in accounting it is the separate pages in the ledger were entries are posted, while in commerce it could be a supplier-customer agreement with credit terms, etc. The word comes from Old French ‘Acont’, which originated from the Latin noun ‘Computus’ (calculation) and verb ‘Computare’ (calculate).
Accounting – the work done by accountants in keeping financial records of individuals, companies and other entities. It means the same as accountancy. It is concerned primarily with methods for recording financial transactions, keeping financial records, performing internal audits, and advising on taxation matters.
Accounting Ratios – also called financial ratios, are sets of figures within a company’s financial statements that we use to compare present-past performance, how the business fares with competitors, whether it is profitable, if it is able to pay its debts, and how financially healthy the commercial enterprise is overall.
Accrual – in accounting the term refers to entering an expense or income when the invoice is received/sent or the service is being provided/reeived, rather than when the money is paid or received. In finance, accrual means the adding together of different investments or interest over a specified period. The verb ‘to accrue’ means to grow in amount or increase in number over a period of time.
Accrued Interest – the interest that a security accumulates since the principal investment (or since the previous coupon payment). It is also the interest that has built up on a loan.
Accumulated Benefit Obligation (ABO) – an estimate of what the present value of an employee’s pension is if the employee stops work.
Active Market – a market with a lot of buyers and sellers; so there is heavy trading volume. In an active market, the difference between the bid and ask price (spread) is smaller than in markets where less trading is taking place. An active market is very liquid, and can withstand huge purchases without the price of a stock being disproportionately affected. That is why pension funds, hedge funds, investment banks and other large-volume traders prefer them.
Active Portfolio Strategy – an investment strategy that attempts to increase the value of a portfolio by using a wide range of methods to evaluate which bonds or stocks will generate the most gains.
Activist Investor – a person or group that buys up lots of shares in a company so that they can influence management decisions. The activist investor remains a minority shareholder. Also known as an activist shareholder.
Actuary – somebody who analyzes risk – the chances of something unpleasant like a death, accident or severe weather event happening. He or she also calculates what the financial consequences of the event, were it to occur, might be. There are two main categories: Life Actuary and Non-Life Actuary.
Adjustable-Rate Mortgage – a home loan with interest rates that ‘adjust’, i.e. they can fluctuate, usually depending on how the central banks sets the base rate. This is more of a US term – in the UK and other English-speaking countries, people say ‘variable-rate mortgage’.
Administrator – somebody who makes sure that an office, company or organization operates efficiently. He or she is in charge of all the paperwork – the administration – as well as some other organizational operations. A good administrator needs to be highly organized and have people skills. The word may also refer to somebody in charge of an insolvent company, or the person who is appointed by a court to deal with a deceased individual’s estate.
Advertising – the business of attracting people’s attention and encouraging them to purchase a good or service. Advertising is also used to invite people to join a movement or vote a particular way during elections. Adverts are placed in newspapers, magazines, trade journals, on the radio and TV, and online. Advertising has been around for thousands of years.
After-Tax Profit Margin – a financial measurement ratio that is derived from dividing net income after taxes by net sales. It shows the percentage of revenue after the costs of all goods have been deducted.
Agent Bank – a bank that acts on behalf of other entities, such as banks, people, companies or organizations. Also known as an agency bank.
Agreement Corporation – a type of bank that is allowed to operate in international business – in agreement to the terms of the Edge Act.
Alternative Investment – a fairly loose term that generally refers to investments that do not include stocks, bonds or cash (traditional asset classes). Alternative investments may include antiques, property, art, stamps, coins, commodities, infrastructure, etc.
Ambassador – an important diplomat who works in a foreign country representing his or her country there. He or she is the head of an embassy. Ambassadors may also be special envoys for organizations or charities. In business, a brand ambassador or corporate ambassador is hired by a company to represent a brand in a positive light.
American Depositary Receipts – these are stocks of companies based outside the United States that trade in US stock markets. Also known as ADRs.
American Depositary Shares – shares of a foreign-based company that Americans can buy and sell in the US. They are traded in US dollars. These types of shares are issued by American depositary banks under agreement with the foreign issuing company. Also known as an ADS.
American Economic Association – a US professional organization with 18,000 members. Just over half of them are academics, while the rest come from industry, business, local and federal governments. It claims to be completely non-partisan.
Amortization – this term can refer to either the repayment schedule of a loan, or the spreading of capital expenses for intangible assets over a given period.
Amortizing Loan – also known as an amortized loan, is one with scheduled regular installments that pay both principal and interest.
Analyst – anybody who performs analysis of a topic. There are many types, including accounting analysts, business analysts, investment analysts and systems analysts. Their jobs are similar to those of a doctor – they examine a company (patient), find out what’s wrong (diagnosis), and determine what needs to be done (treatment).
Angel Investor – a person who invests his or her own money in a start-up business. Usually, they invest in exchange for part-ownership of the nascent company, or convertible debt. Also called a business angel, angel, or seed investor.
Anglo-Saxon Capitalism – a term commonly used to describe a type of capitalism that is prevalent in English-speaking nations, i.e. the US, UK, Canada, Ireland, Australia and New Zealand. Taxes are lower, there is less government intervention, and regulations less limiting, compared to the German and Nordic models.
Annual General Meeting – often referred to by the initials AGM or simply as Annual Meeting, is a yearly gathering of a company’s or organization’s members. In a company’s AGM, shareholders and the Board of Directors are present. During the AGM, shareholders vote on several issues, including strategy, new members of the Board and getting rid of current Board members. The directors inform the shareholders about the business’ profits or losses, why it performed how it did, and what its strategy is.
Annual Percentage Rate of Charge (APR) – the yearly rate that it costs for a company or individual to borrow money. It expresses the interest rate for a whole year instead of just a monthly fee/rate. The term is also used in retail, when consumers are offered credit terms.
Annual Percentage Yield – also known as APY, is the effective annual rate of interest earned, including the effect of compounding. It is expressed as an annualized rate, based on a 365-day year.
Annual Report – a document reported by companies that provides a picture of their financial position, performance, and other corporate information. The report is given to shareholders.
Annuity – a terminating stream of fixed payments that is paid out over a specific period of time.
Applied Economics – involves understanding economic theories, trying them out in real world situations, and also using this data to make economic predictions.
Appraisal Fee – a fee to evaluate the market value of a house – a fee that estimates how much a property is worth.
Arbitrage – buying something in one place at one price and selling it somewhere else at a higher price – the buying and selling is done simultaneously. If it is not done simultaneously it is not arbitrage. The person who does this is an arbitrageur.
Arbitration – a non-judicial process for settling disputes. Rather than a judge in a court there is an arbitrator(s). The arbitrator makes the final decision, which is binding. A hearing may have one or more arbitrators – usually an odd number to prevent there being a tie. Arbitration is much cheaper and faster than litigation (using the courts) and has been shown to be effective in preventing major conflicts, and even wars between nations.
Article 50 – a clause in the 2007 Lisbon Treaty which any EU member state can invoke when it has decided to leave the trading bloc. The Treaty became law in 2009. When the UK invokes Article 50, separation negotiations begin, and should, in theory, end within two years.
Asset – anything tangible or intangible that has a positive economic value that can be converted to cash (such as property or stocks).
Asset Allocation – the way a portfolio is spread across a range of different investment classes so that they do not all rise and decline in tandem (together).
Asset Class – a broad group of securities people invest in. The components of an asset class behave in a similar way in the marketplace and are subject to the same laws. The main asset classes are cash equivalents, stocks and fixed income.
Asset Management – the managing of clients’ money and assets so that as much profit as possible is made. Clients may be rich people, governments, companies and other organizations.
Asset Stripping – the practice of purchasing a company and then selling off its assets in bits to different buyers. The target company’s total net worth is lower than the individual value of each asset (added up). The acquiring company is called a corporate raider.
Audit – a formal examination/inspection of an organization’s accounts, often by an independent auditor. Anything can be audited, not just accounts. In the world of business and finance, a company’s accounts are audited. By law, publicly-listed companies in most countries must be audited periodically.
Austerity – an economic policy that reduces government spending and raises taxes, typically employed to reduce budget deficits.
Austrian Economics – a school of thought that started with Carl Menger (1840-1921), the founder of the Austrian School of Economics, which promotes laissez-faire economics and liberalism. They believe the market can find its own path and that the government should not intervene.
Autarky – the concept that a country should become self-sufficient and not import or export, i.e. not trade with other nations. An autarky is a closed economy – it is isolationist. In every case, leaders who have pursued a policy of autarky have ended up seeing their country fall behind trading nations – their citizens became relatively poorer and had fewer goods and services available. The quality of products and services is considerably lower in a closed economy than in countries that import and export.
Authorized Capital – the maximum number of shares a company is allowed to sell to investors. Most firms do not issue their total authorized capital. Also known as authorized stock, registered capital or authorized share capital.
Authorized Stock – the maximum amount of shares a company is permitted to make available and sell to the public, according to what is stipulated in its Articles of Incorporation in the US and Canada and Memorandum of Association in the UK and much of the Commonwealth.
Auto Financing – methods of borrowing money to buy a car, also called vehicle financing and car financing. The money is lent by a bank, credit union or other financial institution. Auto financing is used widely by both individual purchasers and companies. Companies tend to go for contract hire, because of the tax and cash flow benefits.
Automated Bond System (ABS) – an electronic bond information and trading platform that tracks the prices of inactive bonds on the New York Stock Exchange.
Automated Customer Account Transfer Service (ACATS) – an automated system that helps facilitate the transfer of assets from one trading account to another.
Automation – a system, method or technique of controlling or operating a process by highly automatic means, using electronic devices such as computers and artificial intelligence. It also refers to the device – a mechanical device – operated electronically that functions automatically, without an operator’s continuous input. The aim of automation is to boost efficiency and reduce human intervention to a minimum. There is concern that automation will become so sophisticated that human labor will be superfluous and we will all be jobless.
Bad Debt – a loan or account receivable that will not be paid. Companies write off bad debts usually as expenses. Also known as a bad loan or delinquent loan.
Bailout – the act of providing financial resources to a business or economy that is failing (to save it from going bust or defaulting). Following the 2008 financial crisis, several companies, especially major banks, were bailed out by the taxpayer in North America and Europe.
Balance Sheet – shows the financial status of a person, company or organization at a particular moment in time; usually at the end of a reporting period such as a financial year, quarter or half-year. Essentially, it is a snapshot of the entity at a given date and provides important pieces of financial information for lenders, creditors, investors, management, suppliers and other interested parties.
Balloon Loan – see Bullet Loan.
Balloon Mortgage – this is a home loan where regular, small payments are made every month over several years, and then either one giant payment or a few large ones are made at the end of the term. Also known as a balloon loan or a balloon payment mortgage.
Bank – a financial institution that is licensed to receive people’s deposits and offer loans. A bank makes money by charging more interest on its loans than it pays on customers’ deposits. There are two types of banks – commercial banks and investment banks.
Bank Capital – the storage of cash and safe assets that financial institutions hold as a cushion to protect their creditors in case assets are liquidated. The more capital a bank has, the better it can withstand financial crises.
Bank Draft – this is a type of check (UK: cheque) where the funds are taken directly from the bank. Also known as a banker’s draft, bank check or teller’s check. The payee’s name is written on the document. Bank drafts are generally used for larger payments, or when the payee will not accept a personal check.
Bankers’ Bank – a financial institution that provides services to community banks in the United States. It belongs to a group of community banks and aims to help them compete more effectively with the larger institutions.
Bankmail – an agreement between a bank and a company that the bank will not fund a rival’s acquisition plan. The agreement may be between the bank and a company wishing to acquire, or the prey, i.e. the target-firm in a hostile takeover attempt.
Banknote – a piece of paper money used by consumers, retailers and other businesses. It is issued by a central bank, which promises to pay the bearer the sum stated on demand. Physical currency in circulation consists of banknotes and coins. Also called a bill in North America or a note in the UK/Ireland.
Bank Rate – the rate at which a country’s central bank lends money to its domestic financial institutions. Commercial banks base their own interest rates (what they charge their customers) on the bank rate. Also known as the base rate, or federal discount rate in the United States.
Bank Reference – a confidential statement from a bank about one of its customers, telling the inquirer whether this person or company is a good risk for a specific financial commitment. Also known as a banker’s reference, and within financial institutions as a status inquiry.
Bank Run – when huge numbers of depositors (bank customers) start withdrawing their money because they have lost faith either in the bank, the banking system, or the overall economy. Also known as a run on the bank.
Bankruptcy – a term used to define an entity or person that is unable to pay back debts that it owes to creditors. This is a legal status which is initiated by a court order (typically by the debtor).
Banksters – bankers who work recklessly, dishonestly or fraudulently. The word is a portmanteau (blend) of bankers and gangsters. The term appeared in the early 1930s in the United States.
Bank Statement – a document listing all transactions in a customer’s bank account over a specified period (usually one month). Also called an account statement.
Bank Stress Test – this is an analysis or a simulation of events to determine how well a financial institution would cope with a financial crisis. Since 2008, most banking authorities globally have required their banks to undergo stress tests.
Barriers to entry – obstacles or hurdles that new businesses have to overcome when trying to break into a new market. Some barriers to entry are very high and make it nearly impossible for startups to get a look in. When barriers are high monopolies are more common. The opposite of ‘barriers to exit’.
Basel Accords – a list of banking regulation recommendations that were created to make sure that banks globally operate responsibly.
Basel Committee on Banking Supervision (BCBS) – the international regulatory body of banking. The committee is in charge of creating banking regulation recommendations (the Basel Accords).
Bear Market / Bearish Trend – a downward-moving trend of in market prices (it is the opposite of a bull market).
Behavioral Economics – a branch of economics that applies elements of psychology to explain why humans, who tend to be irrational animals, make certain spending decisions.
Beta – more commonly known as The Beta, is a measure of an asset’s volatility; how much more or less it fluctuates compared to the market average. If something has a Beta of less than 1, it is likely to fluctuate less than the market average. Conversely, a Beta greater than one means its fluctuations in price will probably exceed the market average. Gold usually has a Beta greater than one, while Treasury Bills have a Beta of less than 1. Also known as the Beta Coefficient or β.
Better Business Bureau (BBB) – an organization containing 112 local BBBs in the United States, Canada and Mexico. It aims to foster honest and responsive relationships between businesses and customers, instill consumer confidence, and contribute towards a trustworthy marketplace for all.
Big Society Capital – an entity that was set up by the British Government in April 2012. It is an independent financial institution set to help grow the social investment market.
Bitcoin -the world’s first completely decentralized digital-payment system, it is a digital currency that can be exchanged without any sort of central authority.
Black Economy – a part of the economy that is not registered. All work and business dealings are done on a cash-only basis. There are no receipts, the income is never declared, and no taxes are paid. It is also known as the shadow economy, hidden economy, underground economy, or informal sector. A significant proportion of the GDP of developing countries comes from the black economy.
Black Market – the part of the economy where goods and services are traded illegally. The Black Market does not necessarily mean the products are illegal, but the activity definitely is. Also known as the underground market or underground economy.
Blue Chip Companies – these are companies that are considered to be reliable, they have a history of performing well financially.
Blue Chip Stocks – stocks that are from blue chip companies (well known and financially strong companies that operated for many years). These stocks normally show resilience in important market indexes.
Board of Directors – a group of people who are elected as representatives of the shareholders to establish much of company policy as well as making decisions on key issues.
Bond– a bond is issued by large organizations (such as companies or governments) to borrow money. The issuer of the bond is obliged to to pay the holder interest and/or to pay back the principal in the future.
Book-to-Bill Ratio – a measurement that tells us whether customer demand is slackening or growing. Any book-to-bill ratio that is greater than one suggests demand is outstripping supply. This measurement is followed widely in the semiconductor manufacturing industry. Also known as the BB ratio or BO/BI ratio.
Boss – an individual who is in charge of at least one person. A boss may be a junior supervisor, a departmental manager, a regional manager, a director, or the CEO of a giant corporation. The person you report to at work is your boss. The verb ‘to boss’ means to tell people what to do. A ‘bossy’ person is always giving orders.
Bottom Line – in the world of finance, the term refers to net profit, net income, net earnings, or earnings per share (EPS), because they appear at the bottom of a company’s financial statement. In other situations it can mean the final outcome, money owed, or the minimum amount accepted.
Bounce Rate – a measure of the proportion/percentage of web page visitors who leave the website instead of going to other pages within the same site. Webmasters aim for the lowest bounce rate possible. Some pages, such as contacts, checkout and customer support, always have high bounce rates.
Brand – one of the most important aspects of a company is a brand. A brand is “the image and personality of a product” that a company portrays – in the form of slogans, logos, etc.
Brand Management – involves using methods to improve the reputation of a certain brand or product.
Brand Loyalty – when consumers have a specific preference for a certain brand or product.
Brent Crude – a trading classification of sweet light crude oil. It is one of the main benchmark prices for oil in the world.
Brexin – the opposite of Brexit. Brexin means BRitain staying IN the European Union. Linguists say that Brexin as a term makes no sense – it should not include the word ‘exit’ within it.
Brexit – stands for Britain exiting the European Union. The term uses the first two letters of ‘Britain’, plus the whole word ‘Exit‘. A supporter of Brexit is called a Brexiteer. The opposite of Brexit is Brexin. Somebody who regrets voting for Brexit is said to Bregret his or her action.
BRIC – an acronym for “Brazil, Russia, India, and China”. A report by Goldman Sachs predicted that the four BRIC economies would be wealthier than the current world powers by 2050.
Bridge Loan – a short-term loan used by a person or company in order to secure a transaction or get short-term working capital, until an asset is sold or expected funds come in. Known as a bridging loan in the UK.
Broad Money – a measure of the money supply that usually (but now always) refers to M3. It includes currency and coins, as well as demand deposits at commercial banks, and other assets that can easily be converted into cash.
Broker – an intermediary who helps broker (effect) a transaction between a buyer and a seller. He or she usually specializes in a particular business, such as real estate or insurance. The broker charges a commission – usually a percentage of the total – for his or her services.
Budget – used as a noun, verb or adjective, the word has several meanings. 1. An estimate of the overall costs of a project. 2. A forecast of expenses and income over a specific period. 3. How much money a person, business or any entity has for a project, product or department. 4. Cheap, as in ‘a budget flight’.
Bullet Loan – a loan with a large ‘balloon’ payment at the end. The principal is not paid until the end of the term (maturity). In some cases, interest is paid in all the installments, but the principal is never paid until maturity. Also called a balloon loan.
Bull Market / Bullish Trend – an upward moving trend of market prices that are increasing in value (it is the opposite of a bear market). An investor who is bullish expects share prices to go up.
Bureaucracy – a system in which important decisions are carried out by state officials instead of elected representatives. It also refers to red tape.
Business – the word has many meanings, such as the act of buying and selling goods and services, a company, market sector, to be occupied and unavailable, to be deadly serious, issues to be dealt with, and to do a bowel movement when talking about one’s pet.
Business Acumen – a skill that experts say can be learned. People with business acumen are able to see the ‘big picture’, make good judgments and take quick decisions that usually lead to positive outcomes.
Business Agent – a person who manages the business affairs of an individual, company, union or organization. Virtually all successful professional athletes, musicians, actors, authors and artists have a business agent. They may also handle their client’s public relations, travel arrangements and personal investments.
Business Angel – a wealthy, entrepreneurial individual who invests money in early-stage start-up companies in return for a percentage ownership in the business. Some are just sleeping partners while others are actively involved in the firm they have invested in. Also known as an angel investor.
Business Case – a persuasive explanation on how a business decision will improve a product or business. It is either a written document or verbal presentation which describes a problem, possible options to address it, and reasons why one of them is the best choice. It should also include a warning of what might happen if no action is taken.
Business Cycle – also known as a boom-bust cycle, refers to the alternating periods of recession and recovery caused by fluctuations in production and trade in a market economy.
Business Driver – a process, component, resource, or rationale that influences a company’s performance. Some business drivers are under our control, while others, such as political unrest or the national economy, are not.
Business Finance – the money required to start, run, or expand a business.
Business Hours – the hours during which office people work, which is generally from 9am to 5pm in English-speaking countries, Japan and most advanced economies. The term could also refer to the times shops and/or banks are open.
Business Intelligence (BI) – a set of techniques and tools used to transform unintelligible raw data into meaningful and useful information which company managers and directors can use to give their business an edge in the marketplace.
Business Liability Insurance – a type of insurance companies have to protect them against claims for damages or injury due to negligence. There are three types: Professional Liability Insurance, Product Liability Insurance, and General Liability Insurance.
Business Manager – a person who oversees and supervises a company’s (or department’s) activities and employees. In smaller companies the business manager may be in charge of all operations.
Business Model – a business’ plan for making money. It shows how a firm creates value for itself while selling products or services to customers. For example, the business model of a restaurant is to cook meals and sell them to hungry people who will pay money for them.
Business Objective – explains in detail how a company plans to reach its goal. A business’ goal is a less specific term for where it plans to be one day, while its objective describes how it plans to get there. ‘We want to be the largest bicycle maker in the world one day,’ is an example of a goal. ‘We will increase sales by 3% per quarter over the next 12 months and open two factories in Canada and Mexico by March next year,’ is an example of an objective.
Business Park – an area of land where several companies have their offices. They are usually located in suburban areas or just outside a city. Also known as an office park.
Business Plan – a document that summarizes business goals, strategies, and financial forecasts.
Business School – a university faculty/department or independent institution that teaches degree and postgraduate level courses on business administration, business management, and other specialized business-related topics. Also called a school of business, school of business administration or school of management.
Buyer’s Market – when supply exceeds demand and goods or services take longer to sell and generally fetch a lower price. In a buyer’s market, the purchaser has the upper hand. Also known as a soft market.
Capital – the assets (other than labor and land) needed for production. Examples include machinery, buildings and vehicles. It also refers to money used to start up a business or expand one, as well as funds used for investments.
Capital Adequacy Ratio (CAR) How CAR is calculated – expresses how capable a bank can absorb losses. It is determined by calculating the ratio of capital to risk.
Capital Assets – things that a business needs to produce its goods or deliver services, like machinery, computer equipment, vehicles, etc. Capital gains tax must be paid if a capital asset is sold.
Capital Controls – measures taken by either a central bank or government to restrict the amount of money flowing in or out of a country. They may include tariffs, volume restrictions, legislation, and minimum-stay requirements.
Capital Flight – when huge quantities of money flow out of a country because its citizens and foreign investors have lost confidence in the economy. Reasons include defaulting on an important debt, a steep increase in taxes, political instability, or a natural disaster.
Capital Formation – the expansion of capital goods through savings, which results in economic growth. Capital goods are things like buildings, equipment, machinery, tools, vehicles that are used for producing goods and providing services. Also known as capital accumulation.
Capital Gain – when you sell a capital asset for more than you bought it for, you have made a capital gain. If you sell it for less, it is a capital loss. In most countries, people have to pay capital gains tax.
Capital Goods – products and things that are used to produce goods and services. Examples include buildings, computers, machinery, equipment, vehicles, etc.
Capital Growth – the increase in value of an investment or asset over time. It is measured by comparing an asset’s original value with what it is worth today. Also known as capital appreciation.
Capitalism – an economic system in which industry, trade and production are mainly owned privately and operated to generate profit.
Capitalization – this term has several meanings. 1. The provision of capital for a business. 2. The conversion of assets or income into capital. 3. A quantitative assessment of a firm’s capital structure. 4. Writing or printing words using capital letters, or starting each word with a capital letter.
Capital Markets – markets where long-term debt or equity-backed securities are traded. Funds from savers are directed to companies, organizations and government that require medium- and long-term finance.
Captain of Industry – a leading business person who apart of amassing a great fortune, has contributed positively to his or her country and its people by creating jobs, boosting production, improving productivity, or founding colleges, museums and centers of culture. A robber baron, on the other hand, also got rich, but usually at the expense of his/her people and nation.
Captive Market – a group of potential buyers who have to purchase a particular product because there is a lack of choice. The seller has a monopoly. People buying food and drink in sports stadiums, movie theaters, and airports are part of a captive market.
Carbon Market – an environmental policy device that makes businesses and countries pay for carbon emission. Governments set a cap on how much CO2 each company can emit. Those that exceed their cap can purchase leftover allowances from low polluters. Also known as carbon emissions trading, emissions trading, or carbon trading.
Cash – the most liquid asset there is. In layman’s terms it means just coins, notes and traveler’s checks. Technically, short-term deposits, checks and other negotiable instruments are also considered as cash.
Cash Accounting – a method of bookkeeping in which payments and receipts are entered on the day they occur, instead of when the orders are placed. More commonly used by smaller enterprises. Contrasts with accrual accounting.
Cash Against Documents – an arrangement in which the buyer, typically an importer, may only collect goods delivered by the seller (exporter) after paying the related bill of exchange in full.
Cash Conversion Cycle (CCC) – measures how long it takes invested money to start appearing in a firm’s cash flow. CCC measures liquidity risk when a company grows. Also known as net operating cycle or cash cycle.
Cash Cow – refers to a brand (product), company division or business that makes good profits in a mature market and does not require heavy reinvestment. The cash cow generally has a leading market share.
Cash Crop – a crop a farmer sells to get money, as opposed to a subsistence crop, which feeds the farmer and his family.
Cash Equivalents – assets than can be rapidly turned into cash; they are highly liquid, are very short term, and have a high credit quality. They are normally grouped with cash (cash and cash equivalents) in a company’s financial statement.
Cash Flow – an expense or revenue stream that increases or decreases a cash account over a specified period. It is the flow of money in and out of an organization, business, or an account.
Cashier – an employee who operates the cash register in a store, movie theater, hotel, hairdresser or other type of business. In the UK it also means a bank employee who deals directly with customers (US: bank teller). In accountancy, a cashier is the person in charge of disbursing and receiving payments.
Cashier’s Check – a check guaranteed by a bank, drawn directly on a customer’s account. The bank assures the receiver that the amount stated will be paid. Also known as a banker’s draft, treasurer’s check, or teller’s check.
Cash Management – managing the amount of money a company receives and pays out and when these receipts and payments occur. It is also a service banks offer to customers, usually their larger corporate ones.
Cash Market – a public market where financial products or commodities are purchased and delivered immediately (up to two working days from trade date). Also known as the spot market or physical market. It contrasts with the futures market.
Cash Ratio – calculated by adding up all cash and cash equivalents, and dividing the total by all current liabilities. It is one of several ways of measuring a company’s liquidity. Also called cash asset ratio or cash coverage ratio.
Cash Register – a machine used in stores, restaurants and other businesses to store money and record the amount received from each sale. It also prints out a receipt. In the UK it is also called a till.
Central Bank – an institution that is in charge a country’s currency, interest rates, and money supply. It is not the same as a commercial bank. It is in charge of how money functions in a country, or a group of countries as is the case with the European Central Bank.
Certificate of Deposit – an interest-bearing, short- or medium-term debt instrument issued by a bank. It is a type of promissory note commonly sold in the USA and other countries by banks, credit unions and thrift institutions. It offers greater interest rates than bank savings accounts. There are many different types of certificates of deposit (CDs), including callable CD, traditional CD, zero-coupon CD, bump-up CD, liquid CD and brokered CD.
Challenger Bank – a small or young bank that is competing against the giant high street banks, such as the Big 5 in the UK. Challenge banks have become much more common since the 2007/8 global financial crisis, with central banks such as the Bank of England loosening regulations and trying to encourage more competition.
Champagne Stock – a stock that greatly rises in value over a very short period of time. During that short period, the share price will typically have doubled or tripled.
Chattel Mortgage – a type of loan in which a movable personal property is put up as security. Chattel could be a car, cattle, machinery, a boat, or any personal possession that is movable. While the loan is being repaid the lender owns the possession that was used as security.
Chief Executive Officer (CEO) – the most senior corporate officer or administrator. The CEO is in charge of managing a for-profit or non-profit organization. Some companies (and countries) use the term ‘President’ with the same meaning.
Chief Investment Officer (CIO) – an executive (often board level) who heads investments in a company or financial institution. They are in charge of managing and supervising all investment activities, maintaining good investor relations, managing pension investments, and working with outside analysts.
Classical Economics – an economic school of thought that emerged after Adam Smith wrote the book ‘The Wealth of Nations’. Classical economists believe that the government should not intervene in the market, because it is better at find its own way toward a natural equilibrium.
Client – a customer with whom you build a relationship. When a customer makes a purchase, the seller then focuses on the next one. With a client it is different, you see him or her again and again – it is a longer term relationship. In most cases, the term client can be replaced by customer, but not the other way round. However, lawyers, psychologists and people who offer advice have clients, and not customers. In computing, the client is the device that communicates with a server.
Client-Centric – or ‘customer-centric’, refers to a method of doing business where the client or customer is at the center of the company’s effort. The customer is king. The commercial enterprise concentrates on the client rather than the product or sales. Client-centric businesses tend to be more successful and achieve better growth and profits than those with other cultures.
Closed Economy – a country that does not trade with other nations. There are no imports or exports. A closed economy is an autarky. It is the opposite of an open economy. Closed economies claim they are self-sufficient and do not wish to or need to engage in international trade. Today, entirely closed economies do not exist.
Closed fund – a mutual fund that has stopped issuing shares to new investors, mainly because it has grown too big.
Cloud Computing – a type of computing where files and other data are stored in remote computers rather than your own hard drive. Data is stored and shared in ‘the cloud’, which basically means the Internet. Imagine an external hard drive in ‘the sky’, with ‘the sky’ being remote servers on the Internet.
Collateralized Debt Obligation (CDO) – a security that turns individual fixed-income assets into a product that can be sliced into different products and then sold. CDOs are structured financial products backed by a pool of loans.
Coinsurance – has several meanings: 1. The sharing of risk between insurer and insured – in health insurance similar to copayment or copay, but copayment is a fixed amount while coinsurance is a percentage that the insurance firm pays. 2. The sharing of risks between two or more title insurance companies. 3. In the real estate business, coinsurance is imposed by the insurer on the insured – a type of penalty – for under-insuring, under-declaring or under-reporting the property’s value.
Combined Ratio – a calculation that tells us how profitable an insurance company is in its underwriting operations. The measurement excludes investment income. Typically expressed in percentage terms, any figure below 100% means it is profitable.
Command Economy – an economy in which the supply of goods and services as well as their prices are regulated and controlled by central government, and not market forces. Central government has planners who decide which goods and services are produced, as well as their distribution. Also called a centralized economy, planned economy or controlled economy. It is the opposite of a market economy.
Commerce – a component of business that focuses on the purchasing and selling of products and services for money or other products (barter). The term is synonymous with ‘trade’. Humans have been involved in commercial activities for many tens of thousands of years. The Internet brought e-commerce (electronic commerce), which is dramatically changing how most of us do business.
Commercial Bank – a financial institution that takes people’s, companies’ and organization’s deposits, and lends its customers money in the form of loans, in contrast with investment banks, which deal with securities, mergers and acquisitions, and asset management.
Commercial Paper – an unsecured money market instrument that is issued as a promissory note. It is a short-term loan taken out in the form of an IOU that can be traded.
Commodity Market – a market where raw materials and primary agricultural products (commodities), rather than manufactured goods, are bought and sold. It is similar to the equity market, but instead of buying and selling stocks, investors trade in commodities.
Common Stock – a type of security that serves as evidence of part ownership of a company. Common stockholders usually have voting rights, but are only paid dividends after preferred stockholders have been paid. Known in the UK as ordinary shares. Also called voting shares.
Competitive Advantage – when a business has an edge over another in the provision of a certain good or service. For example, Mercedes has a competitive advantage over most other luxury car-makers because its automobiles break down less often and maintain their value. Being able to sell a product at a lower price than competing companies is another example of competitive advantage.
Computer-Aided Design – also known as CAD, refers to computer software that helps designers create, modify and optimize designs. It replaces drafting by hand with an automated and efficient process. A growing number of professions are today using CAD. An architect would find it extremely difficult to function properly in today’s environment without computer-aided design software.
Communism – a social, political and economic system in which, in principle, the workers (state or government) control the production of food, goods and services, and there are no different social classes.
Company – an organization or any entity that makes or sells goods or services in order to make a profit. A small minority of companies are non-profit. The term is synonymous with ‘firm’ and ‘corporation’. There are many different types of companies.
Company Secretary – the person responsible for making sure the company operates according to the law and is managed correctly. This is a senior position. Since the turn of the century, the breadth and importance of the role of the company secretary has expanded considerably. The term Corporate Secretary is more commonly used in North America.
Comparative Advantage – an economic theory put forward by the 18th century British economist David Ricardo in which two nations are better off specializing and trading with each other than trying to be completely self-sufficient, even if one of the countries has superior productivity in making all goods. The products that the country opts not to make should be imported.
Compensation – either refers to money and other benefits that are paid to an employee for work done, or money that is paid to somebody to make up for something that has been lost or damaged or some problem. The term also has non-business meanings, which the article covers briefly.
Competitor – somebody, a business or entity that is trying to win or do better than the others. In many cases, the focus is to compete successfully against just one adversary – often called a rival. Competitors are vital components of a free market economy.
Comprehensive Insurance – a type of car (vehicle) insurance that covers you for all types of damage, and not just the collision damage to the other party’s car. The policyholder is also covered against theft, fire, floods, broken glass, rockslides, vandalism, tsunamis, earthquakes and all non-collision events. ‘Third Party, Fire and Theft’ insurance only covers you for damage to the other car plus fire and theft.
Consolidation – combining two separate companies (merger) and creating a new entity, a process of maturation in the market, when a company reduces the number of outstanding shares (reverse share split), in information technology when resources are shared among several users and applications, to get stronger, to show the financial results of a group of companies in one set of figures, a loan that is used to combine all the payments on other loans.
Consortium – an alliance of individuals, companies, organizations or even governments that get together to achieve a common objective that benefits them all. The plural is consortia or consortiums. In the travel industry, consortia are formed so that each member can get better deals and prices and offer their clients more than they could on their own.
Consumer – a person, organization or economic entity that buys or hires goods or services. The consumer purchases the product or service, and does not sell it on or use it to manufacture something else.
Consumer Confidence – an economic indicator that measures how optimistic/pessimistic consumers are regarding the state of the economy and their own financial situation. Consumer confidence is closely monitored by most sectors of the economy.
Consumer Price Index (CPI) – an index that represents changes in the price level of a market basket of consumer goods and services bought by households. The aim is to measure the change in the prices of goods and services.
Consumer Surplus – the difference between how much a consumer paid for a product (market price) and how much he or she would be willing to pay (his/her highest acceptable purchasing price). Along with Producer Surplus, it forms part of the Economic Surplus. Consumer surplus is a measure of the welfare that consumers gain from buying products and services.
Content Marketing – an innovative approach to marketing that focuses on creating and distributing content that online viewers find useful, engaging and interesting. The aim is to engage potential customers with material that answers or addresses their questions. The brand is woven into the material, thus boosting brand awareness, and ultimately sales.
Contrarian Investing – refers to behaving like a bear in a market full of bulls, and like a bull in a market full of bears. Going against the herd in the investing world.
Conversion Rate – the percentage of visitors to a website who end up taking a desired action such as buying something, filling in a form, adding their signature to a petition, subscribing to a newsletter, becoming members of an association, downloading software, or requesting a free sample. The term is also used in exchange rates, meaning how many units of one currency you’d get if you converted it into another currency.
Cookies – tiny tracking devices with bits of data that are sent from a website’s server to your browser and deposited in your hard drive. It tracks you browsing habits. Cookies do not gather sensitive information from your computer such as your bank details, contact list, email correspondences, etc.
Corporate Strategy – strategies designed to help companies achieve their goals. There is a difference between a business-level strategy and corporate-level strategy.
Corporate Tax – tax that companies in the United States and Canada pay their governments on their profits. Known as corporation tax in the UK and Ireland and company tax in Australia. Also known in the US/Canada as corporate income tax. Many people complain that corporate tax rates in the US are too high.
Corporation Tax – tax that limited companies, cooperatives, clubs and some other entities in the United Kingdom and Republic of Ireland have to pay on their profits. In the USA/Canada it is called corporate tax. Corporation tax in the UK now stands at 21% – there is talk of reducing it further.
Corporation – a company or group of companies that is authorized to act as a single entity, just like you or me, and recognized as such in law. Corporations are owned by shareholders (stockholders) who share in profits and losses, and whose liability is limited to the money invested in the entity’s shares (stocks). The meaning of corporation is not the same in the US and UK. In the UK it generally means a large company or a state-owned company, such as the BBC (British Broadcasting Corporation).
Cost – the resources used to make a product, expressed in monetary terms. The word has several meanings. It also means the amount of money required or spent to acquire/buy something. Cost, unlike price, does not include the mark-up.
Council of Economic Advisers (CEA) – a body consisting of economy experts that advises the US President on domestic and international economic policy. The Chairman is nominated by the President and approved by the Senate, and other members are appointed by the President.
Coupon – can mean the annual interest on a bond, a voucher/ticket that you can redeem for a discount, rebate or free purchase, or a form in a newspaper, magazine or printed advert that you cut out, fill in, and send off for information, a purchase or a sample. In metallurgy, a coupon is a sample of metal or metalwork that is submitted to a customer or testing agency for approval or confirmation.
Coupon Rate – the sum of a bond’s annual coupon payments divided by the bond’s face value, i.e. the interest rate on the payments of a bond. In most cases, payment is done twice a year.
Creative Accounting – a slightly ironic term for imaginative ways to make a company’s accounts reflect it in a better light; make it look financially healthier than it really is. The practice, although frowned upon, is legal. The creative accountant works within the law, taking advantages of loopholes. Also known as innovative accounting, aggressive accounting, or window dressing
Credit – money (loan) lent to a person or business, a positive balance in somebody’s bank account (‘his account is in credit’), or to add money into a bank account. The loan may also be in the form of goods or services.
Credit Bureau – firms that specialize in gathering people’s and companies’ payments and credit histories. They sell this information to lenders, who then decide whether to offer customers credit and how much interest to charge. Also known as a credit agency.
Credit Card – a plastic card that consumers use to purchase goods and services on credit. They can also use it to get cash, and pay back later. The arrangement is that the issuer pays for the purchase, and the cardholder pays back at a later date.
Credit Card Loan – whenever you make a purchase using your credit card, the issuer is lending you money, which if you pay back by the ‘grace period’ deadline, will incur no interest charges (as long as you don’t carry a balance). Also called credit card debt.
Credit Control – a department in a company under a credit controller that chases overdue invoices and decides whether to offer customers trade credit. The term also refers to the department’s activities.
Credit Crunch – when banks and investors become more apprehensive about lending money because economic conditions or political problems have worsened. In other words, available credit shrinks considerably. Also called a credit squeeze or credit crisis.
Credit Default Swap – a type of insurance protection against a third-party borrower defaulting. A credit default swap contract states that the issuer will pay the buyer if a third party defaults. It is also known as a credit derivative contract.
Credit Easing – a strategy central banks use to improve credit conditions (increase liquidity) in the economy by purchasing private sector assets. The aim is to get banks to increase lending and boost economic activity.
Credit Freeze – refers to either when governments force their banks to stop lending money, or individuals stopping credit bureaus from selling their personal data. Also known as a credit report lock down, security freeze, or credit lock down.
Credit History – forms part of a credit report. It contains a record of how promptly an individual pays back loans, credits, etc., over time.
Creditor – the party that is owed money. When you take out a bank loan, the bank is the creditor and you are the debtor. The creditor might be a person, company, financial institution, or government.
Credit Score – a score that tells lenders whether you are a good or bad credit risk. Depending on your score, lenders decide whether to offer you credit, and what the interest rate will be on the loan.
Credit Union – a mutual financial organization that is owned by depositors, i.e. people who have an account. To be accepted, you usually need to have a common bond with the other members, such as belonging to a trade union, church, company or organization. Members save money and borrow at competitive interest rates. Credit unions are not-for-profit institutions.
Creditworthiness – an entity’s ability to borrow money and pay back on time. Also written as credit worthiness, it might refer to a person, company, organization, or country. Banks check applicants’ creditworthiness before deciding whether to lend them money.
Cross Holding – when one publicly-listed corporation owns shares in another company that is listed in the same stock exchange. Also called cross shareholding.
Crowdfunding – using online platforms to get contributions to help fund business ideas or other projects. With crowdfunding, many people contribute a small amount of money each.
Current Assets – cash, cash equivalents and other things a company owns that could be turned into cash easily (within 1 year). Also known as current accounts in the UK.
Current Ratio – a calculation that tells us whether a company might find it difficult to meet its short-term debt obligations, i.e. debts that need to be paid back over the next 12 months. Current Ratio = Current Assets ÷ Current Liabilities.
Customer – a person who buys goods or a service. It could also be a company or organization. It has virtually the same meaning as consumer, in that the customer is the end user (not always). The words customer and client have similar meanings, but the vendor tries to build a relationship with the client – this is less the case with a customer. When the seller receives the money from the customer and hands over the purchased item, he or she immediately focuses on the next one.
Cyclical Share – a company share whose performance closely follows how well or badly a country’s economy is doing. When GDP is expanding strongly cyclical shares appreciate. Conversely, when there is a recession their prices decline. Also known as cyclical stock.
Database Marketing – a method of obtaining and analyzing a large amount of information about a company’s customer base. The aim is to then for businesses to tailor their marketing plans and sales decisions.
Dark Pools – trades that are secret and not available for the public to see. Some stocks are traded in dark pools, exchanges hidden from the public eye, as opposed to normal public stock exchanges, such as NYSE or NASDAQ.
Debt – refers either to money (or a physical thing) owed to the lender, or gratitude, as in being forever in debt to somebody who saved your life. The party receiving the debt is known as the borrower or debtor. Some economists say levels of debt globally are far too high, and predict another debt crisis will strike soon and spread rapidly across the world.
Debt Ceiling – also known as the debt limit or statutory debt limit, a debt ceiling is the maximum amount of money the U.S. Treasury is allowed to borrow. This limit is set by the US Congress.
Debt Equity Ratio – a measure of the relationship between capital that came from creditors and capital that originated from shareholders. It is a calculation that reveals the relative proportion of stockholders’ equity and debt used to finance a business’ assets. Also called debt-to-equity ratio or D/E ratio.
Debt Ratio – a calculation that shows us what proportion of a company’s or individual’s assets consists of debt. It reveals the extent of a business’ (or person’s) leverage. At national level, the term may also refer to the ratio of government debt to GDP.
Debt Service Coverage Ratio – also known as DSCR or debt coverage ratio, is the ratio of available cash for debt servicing to interest, principal and lease payments. In government finance, it refers to the amount of export earnings required to meet a country’s external debt obligations. Banks look carefully at a loan applicant’s DSCR when deciding whether to lend money.
Defensive Shares – stocks that fluctuate much less severely when the economy does very well or badly. They belong to companies that provide products and services people need all the time, regardless of their financial situation, such as electricity, natural gas, water and essential foods. Also known as non-cyclical stocks or defensive stocks.
Deflation – when the price of goods and services decreases (it is the opposite of inflation).
Demand – an economics term that refers to a measure of desire to have or own a good or service, or all goods and services when talking nationally. It is the opposite of supply. When prices rise, demand declines, but when prices go down demand increases. Market economies rely on the forces of supply and demand, which regulate prices, rather than a central authority, like in a command economy.
Demand Loan – a loan with no maturity date or payment schedule. The lender can ask for full payment of the remaining debt at any time. Also known as a demand note, call loan or broker loan.
Demography – the study of human populations and the factors that make them change, such as births, deaths and migration. A demography specialist is called a demographer. He or she studies populations and the people within them.
Depreciation – when assets decline in value over time. It is also an income tax deduction that enables a taxpayer to recover the cost of certain assets.
Derivative – a contract between two or more parties that is derived from or based on a specified asset. The parties involved in the derivative decide what that asset will be. Most common derivatives are based on the value of commodities, currencies, stocks, bonds, real estate or interest rates. There are several types of derivatives, including futures, forwards, options and swaps.
Development Economics – the study of how low-income and emerging economies become more developed, i.e. countries that are changing from being agricultural economies to industrial ones. Also known as Economics for Development.
Diluted Share – a share in a company after it has issued additional shares. Ownership, voting rights, earnings per share and possibly its value are ‘diluted’, just like concentrated syrup is if you add water.
Discount Loan – with this type of loan the lender discounts interest and other charges first from the face value, before lending to the borrower. Only used for short-term loans.
Discount Rate – has several meanings: 1. The interest rate a central bank charges commercial banks for very-short term loans. 2. The interest rate used in discounted cash flow analysis. 3. A reduction in the value of an invoice if the client pays before a certain date, or buys more than a minimum amount. 4. The discount on a bill of exchange or draft if it is cashed in before its maturity date.
Diversification – refers to spreading out into new fields, sectors or geographical areas so that risk not concentrated in one area. If one sector experiences a decline, the company has other activities which continues doing well. Diversification follows the idiom ‘Do not place all of your eggs in one basket.” Many large companies today, however, say that specialization is the future, not diversification.
Dividend Payout Ratio – the proportion of a business’ profit that is paid out as dividends to stockholders over a specified period. The ratio can be expressed as a decimal or percentage.
Dividend Price Ratio – a calculation that shows a stock’s dividend as a percentage of its price. It can alternatively be calculated by dividing a company’s total dividend payments in one year by its market capitalization. Also known as dividend yield.
Domestic Market – where goods and services are traded within the borders of where a company is based. For example, Ford’s domestic market is the US market, while Renault’s domestic market is the French market. Also known as the home market or internal market.
Dow Jones Industrial Average (DJIA) – commonly known as “the Dow,” this is an index that represents the weighted average of the 30 major stocks listed on the New York Stock Exchange or the NASDAQ Stock Market.
Downsizing – refers to the reduction in the size and of operating costs of a company. In most cases, this involves reducing the workforce.
Due Diligence – a comprehensive check of the operational and financial status of any company, individual or entity you plan to come to a business arrangement with. Put simply, it means carrying out research to make sure the other party is reliable, honest, and will stick to their side of the agreement.
Dumping – this refers to companies exporting products at a lower price than their domestic price or the cost of production.
Earnings – the profit that a company generates over a specific period (usually over a quarter (three calendar months) or a year).
Earnings Per Share (EPS) – the amount of profit a company allocates to every outstanding share of common stock. A business’ total profits, minus dividends, divided by the total number of common stock.
EBITDA – an acronym for earnings before interest, taxes, depreciation, and amortization, i.e. Revenue minus Expenses (excl. interest, taxes, depreciation and amortization).
Economic Bubble – also known as a price bubble or a market bubble, an economic bubble happens when securities are traded at much higher prices than what they are intrinsically worth.
Economic Capital – how much risk capital a financial institution should have so that it can survive market or credit shocks. The amount is determined by the company itself or its shareholders.
Economic Cost – the accounting cost plus opportunity cost, i.e. how much doing something costs in money terms, as well as how it compares against doing something else.
Economic Downturn – when the economy contracts or growth slows down, stock market and property prices decline, unemployment rises, borrowing decreases, and companies invest and produce less. Sometimes an economic downturn may be a prelude to a recession.
Economic Geography – a sub-field of Geography and Economics, studies the location, distribution and spatial organization of economic activities across the world.
Economic Globalization – the increasing mobility of capital, goods, services, technology and people internationally. It also refers to a nation’s integration into the global economy. Also known as simply globalization.
Economic Growth – an increase in GDP (gross domestic product) over a given period in a nation or region. When the value of all goods and services produced rises.
Economic Life – the length of time a machine, factory, vehicle or building (an asset) generates more income than it costs to operate and maintain, or before the repair costs become so high so that it should no longer be kept. Also known as depreciable life, useful life or service life.
Economic Model a simplified description of reality. Economic models are either simulations or predictions of what might happen in different scenarios. Specialists who have to present to lay people will use models to make their complicated data easier to understand. Simulations tend to be more accurate that forecasts.
Economic Risk – the likelihood that an investment or company may be disadvantaged by regulatory changes, exchange rate fluctuations, higher taxes, nationalization, or economic sanctions. Economic risk applies to either the domestic or foreign economy, depending on where the investment is done or the company operates.
Economics – the study of the factors that determine the production, distribution and consumption of goods and services. Economics examines how people use scarce resources that have alternative uses.
Economic Sanctions – punitive measures taken against a country to get it to change policy. Actions may include travel bans, arms embargoes, capital restraints, foreign aid reductions, and trade restrictions. The aim may be to resolve a trade dispute, human rights violations, stop a nation getting nuclear weapons, to counter terrorism, cybersecurity, or combat drug barons.
Economic Surplus – also called the Marshallian Surplus or Total Welfare, is the Producer Surplus and Consumer Surplus combined. The Consumer Surplus is the monetary gain obtained by consumers because they were able to buy a product for less than the highest price they would have accepted. The Producer Surplus is the difference between how much a supplier sold a good or service for minus his or her minimum selling price. British economist Alfred Marshall used the three terms in his 1890 book – The Principles of Economics.
Economic System – a system that defines how all the players in an economy interact. It is an organized way in which a nation allocates resources and distributes goods and services. An economic system includes the combination of all the entities, agencies, institutions and decision-making processes and patterns of consumption that constitute the economic structure of a specific community.
Economic Tigers – Singapore, South Korea, Taiwan and Hong Kong; four countries whose economies grew by more than 7% annually from the 1960s to the 1990s. In a few decades they changed from being low-income economies (third world countries) into advanced economies (industrialized nations). Also known as Asian Dragons or Asian Tigers.
Economic Value – the value of an asset calculated according to its ability to generate income. The most a consumer is willing to pay for a good or service.
Economic Value Added – a measure of how well a company has performed in relation to the funds invested in it. If the measure is a positive number, it means the business or project generated more profit from invested capital than how much it had to pay out to get that capital. Also known as economic profit.
Economies of Scale – in microeconomics, it refers to the overall unit costs of production – they go down when production increases, and rise when production declines. With higher production, fixed costs – which remain relatively unchanged – can be spread over a larger number of unit costs. There are internal and external economies of scale. The opposite is diseconomies of scale.
Efficacy – means the same as effectiveness in most cases. Efficacy is the ability to produce an intended or desired result. The term is more commonly used in the world of medicine and pharmacology than business & finance.
Effective Margin – the amount generated from an asset when taking into account the financing costs of a prepayment and interest. It represents potential profits if funds change but income remains the same.
Efficiency – is all about getting the most out of the available resources. Efficient businesses maximize outputs from the inputs they have. Efficiency looks at what is currently being produced and compares that with what could be achieved without changing current resources, such as time, machinery, labor numbers and skills, and money.
Efficient Diversification – refers to the organizing principle of portfolio theory, which attempts to help boost the expected return for a portfolio, given a specified level risk.
Efficient Portfolio – refers to a portfolio that gives the best return given a specific level of risk. The concept was introduced by American economist Harry Max Markowitz in 1952.
Embargo – an order to stop something temporarily, usually trading with a country. An embargo may involve banning ships from a certain country from using your nation’s ports. It can also mean to stop giving information, as in “The police asked for a new embargo while they tried to locate the kidnappers and free the hostages.”
Emerging Markets – the term refers to countries that are neither low-income nations (frontier markets) nor advanced economies. They have a growing industrial base and middle class, high literacy rate, and a young population that wants the same things that the citizens of developed countries want.
Endowment Mortgage – a mortgage which also has a life insurance policy (endowment policy). At the end of the contract the life insurance policy is used to pay off what is owed. This type of loan was popular in the UK and Ireland in the 1980s.
Enterprise – can refer to a skill some humans have to be daring in business and pursue their new ideas, regardless of the risks. An enterprise is also a business. The term can also mean a difficult or important challenge. An enterprising person is called an entrepreneur.
Entity – in business it is anything that is formed and administered, according to commercial law, in order to conduct business, engage in charitable work, or carry out other allowable activities. In lay English, an entity is a real thing, a being, something that exists, a separate being that exists in its own right. For tax purposes, a company is a separate business entity from its human owner(s).
Environmental Factors – all the elements that influence the well-being of a company, including internal and external factors. Internal ones include the quality and attitude of the workforce and the leadership characteristics of the management. External ones include levels and types of competition, technological changes, consumer attitudes, legislation, and the availability or scarcity of certain resources. The term also has scientific, biological and geographical meanings.
Equity Finance – also called equity financing, is a method of raising capital for business expansion by selling partial or complete ownership of the company’s equity. Sometimes the equity is sold in exchange for other assets.
Equity – the value of ownership of an asset after liabilities with that asset are cleared. Equity or shareholders’ equity is equal to the capital in a business. If you own a house worth $200,000 and your outstanding mortgage is $120,000, your equity is $80,000.
Ergonomics – also known as ‘Human Factors’, is concerned with the understanding of interactions among people and other elements of a system, and the profession that applies theory, data, principles, and methods to design in order to optimize human well-being and overall system performance.
ESG (Environmental Social and Governance) – a type of screening done by investors and many portfolio managers today which includes only companies that meet certain criteria related to the environment, society and governance (how the firm polices itself). ESG is a rapidly-growing segment in the world of capital markets, and is expected to continue expanding at an accelerated rate. ESG-screened investments are not, like many people believe, inferior investments that give you a lower-than-average return – in fact, the opposite is frequently the case.
Ethics – the moral principles that govern how we conduct ourselves at work and in our everyday lives. Business ethics, also called corporate ethics, is all about how we perceive and respond to ethical and moral issues. It affects how we deal with customers, other companies, regulations, employees, etc.
European Central Bank (ECB) – the central bank for the euro. it manages the monetary policy of the Eurozone (which has 18 EU member states).
European Investment Bank (EIB) – a European Union financial institution that lends money for infrastructure projects such as tunnels, roads, railways, as well as business development, mainly within the EU (but also outside). It is the largest public lending institution in the world.
Evergreen Loan – a type of loan that goes on and on. The credit facility is repeatedly renewed. The principal does not have to be paid off within a certain period. Also called a revolving loan or standing loan.
Expense – a cost incurred over a specific period which is part of a business’ operating activities. An outflow of money from one person or entity to pay for a good or service. It is a cost that is paid for usually in exchange for something of value.
Expense Ratio – represents a mutual fund’s total operating expenses as a percentage of the average net assets of the fund.
Exports – these are goods and services that are sold by people, businesses and other entities in one country to consumers in another country, i.e. products and services sold abroad. The opposite of exports are imports. Exports and imports form part of international trade. China is the world’s largest exporting nation.
Export Credit Agency (ECA) – a (usually) government-sponsored entity that helps domestic companies export, especially to higher-risk markets such as low income nations and emerging economies. Also known as ECAs, they provide loans, credit insurance and guarantees.
Face Value – represents the value of a tradable asset that is stated by the institution that issues it. Also known as the nominal value.
Factor Portfolio – a diversified portfolio that has a variety of stocks, with different levels of risk exposure (including alterations in interest rates and inflation).
Factors of Production – the elements or building blocks we use to produce economic goods and services. The factors of production are divided into four categories: land, labor, capital and enterprise (entrepreneurship). Subdivisions of a factor may include management, machines, materials and money – known as the 4 Ms. The main article also explains what the primary and secondary factors of production are.
Facism – a way of organizing a country or society, usually with extremely harsh control and ultra-nationalist propaganda. The country is led by a dictator who controls the government and the lives of his or her citizens. Dissent is not tolerated and is dealt with violently. A person who believes in fascism is a fascist.
Fair Trade – a cooperative movement whose aim is to buy and sell products that make sure that the people who produce them receive a fair price, operate in an internationally-accepted work environment, are paid a decent wage, receive training, and improve their standard of living and quality of life. Fair trade also means to make sure that international trade is conducted on a level playing field, without subsidies, taxes and quotas that favor one party or country unfairly.
F-Commerce – which stands for Facebook Commerce, refers to the selling of goods and services within a Facebook page. Social Commerce has a similar meaning, but includes selling within any social media website. F-commerce started off badly, with many retailers shutting down their Facebook shop operations within twelve months. It then took off again, and promises to become a major trading vehicle.
Feasible Portfolio – a pool of investments that can realistically be put together, given all available alternatives, that an investor can buy, according to his or her investment goals, capital resources limits, and tolerance for risk.
Federal Home Loan Mortgage Corporation – a US government corporation that trades in mortgages on financial markets in order to raise money to lend to home buyers. Also known as Freddie Mac.
Federal National Mortgage Association – colloquially known as Fannie Mae, it is a a government-sponsored enterprise (GSE) that buys and guarantees mortgages that comply with its funding criteria. It guarantees mortgage payments, even if borrowers default.
Federal Open Market Committee – known commonly by its abbreviation FOMC, is a 12-member committee within the Federal Reserve System that sets US monetary policy, including the discount rate and Fed funds target.
Federal Reserve System – commonly known as the Federal Reserve (or simply the ‘Fed’). It is the central banking system of the United States of America.
FICO Score – a metric (number) that banks and other lenders use to measure a loan applicant’s creditworthiness. The FICO Score is used by more than ninety-percent of US lenders when deciding whether to lend a consumer money.
Fill or Kill Order (FKO) – an order to buy a considerable amount of stock – the broker is instructed buy straightaway or cancel the order (kill it).
Finance – a set of activities related to the trading of capital assets between multiple entities. Finance is different from economics, which also includes also the production, consumption and distribution of services.
Financial Assets – intangible assets including stocks (shares), bonds and bank deposits. The value of a financial asset is derived from a contractual claim of what it represents. Unlike tangible assets (e.g. real estate), they are not physical.
Financial Center – a financial hub, a district or city where there is a high concentration of financial institutions, and a highly-developed commercial and communications infrastructure. In financial centers, massive volumes of domestic and international trading transactions are performed. London, New York and Tokyo are the three largest financial centers in the world.
Financial Market – a market where traders buy and sell financial securities, foreign exchange, commodities, and other fungible items. Banks, insurance companies, pension funds, and other financial institutions form part of the financial markets.
Financial Ratios – several ratios using data from a company’s financial statement that compare its performance and ability to pay off short- and long-term debts. Also known as accounting ratios.
Firm – a company or any entity that purchases and sells goods or services to consumers in the pursuit of profit. Examples of firms include, limited liability companies, partnerships, public limited companies, and sole proprietorships. Most law, accountancy or consultancy partnerships are known as firms (not companies).
First-mover advantage – also known as FMA, is a term used in marketing strategy where the advantage is gained by the initial significant occupant of a market segment, i.e. the first one to launch a new type of product or service. Also called Technological Leadership. The first-mover can gain rapid and significant market share, huge profits, customer loyalty, brand name recognition, and near-monopoly status. However, not all first-movers succeed, sometimes they fail and the second-movers or late-movers make all the money.
Fiscal Policy – refers to government spending and the collection of taxes. An expansionary fiscal policy is used to kick-start a sluggish economy, while a contractionary fiscal policy is adopted either to slow down the economy or pay off public debt. Governments deal with fiscal policy while central banks focus on monetary policy.
Fiscal Year – also known as a financial year, it is the 12-month-period that an entity uses for calculating and disclosing annual financial statements. The fiscal year may not be the same as the calendar year (Jan 1 to Dec 31).
Fixed Assets – assets that help a company produce things and earn income. Fixed assets cannot be converted into cash easily. Examples include PP&E (property, plant & equipment), vehicles, etc. Also known as fixed capital.
Fixed Costs – costs that do not change according to output or sales volume levels. They are the opposite of variable costs. Examples of fixed costs include rent, utilities and insurance premiums.
Fixed-Rate Mortgage – for a set period, which can be up to thirty years, the monthly payments on the mortgage do not change because the interest rate is ‘fixed’. This type of home loan is popular with households on a tight budget, and for people who like to plan ahead.
Forecasting – a planning tool that managers and directors of companies, economists, investors, and government departments use in their attempt to cope with the uncertainty of the future. Forecasting relies mainly on historical and current data, as well as the analysis of trends. There are several different forecasting methods.
Foreclosure – occurs when a borrower defaults and the lender demands he or she sells an asset (such as a house) in order to pay back a loan.
Forex – also known as the foreign exchange market, it is the international market for trading currencies. The abbreviation for ‘foreign exchange’ is ‘Forex’.
Fractional Reserve Banking – occurs when a bank has reserves that are less than the amount deposited by its customers. It is what makes the money supply grow.
Franchise – an arrangement in which the franchisor (owner of the business) gives the franchisee the right to distribute and sell the franchisor’s goods or service and use their business name and business model. Sometimes the franchisee gets the rights for a geographical area.
Free Market – an economy where the purchasing and selling of goods and services are not under the control of the government. Individuals and businesses can buy and sell freely. Also known as an open market.
Frictional Unemployment – consists of people who are between jobs, they are still going to interviews, and searching for their ideal job. When there is near-full employment, frictional unemployment is higher, because individuals tend to spend longer going to interviews and deciding whether what is offered to them is what they really want. When unemployment is high, frictional unemployment dries up rapidly – people are less fussy and want to get a job as quickly as possible, even if it is not ideal.
Fungible – refers to something that can be exchanged for something else. For example, I can trade a $10 bill for ten $1 bills, two $5 bills, or another $10 bill. Fungible items are goods or commodities that are freely exchangeable for or replaceable by another of exactly the same or very similar nature. Pure gold is fungible – one bar of gold is interchangeable with another identical bar or 2 bars of half the weight. Fungible is an adjective – the noun is fungibility.
Futures Contract – a contract to exchange a specified security (of a specific quantity) for a price that is determined on the day the contract is created for delivery and payment on a future date. Futures contracts are appealing for those seeking price stability.
Game Theory – the study of how we and others make decisions of strategy in situations. It is the formal study of cooperation and conflict. Game theory is a branch of mathematics that is concerned with the analysis of strategies humans use for dealing with competitive situations where one individual’s outcome depends critically on actions taken by other individuals. It is a game of strategy and not chance.
Generally Accepted Accounting Principles (GAAP) – these are the standard rules and guidelines for accounting. GAAP is also referred to as standard accounting practice or accounting standards. They are a series of rules on how financial statements should be prepared.
General Equilibrium – an economic state in which demand and supply are in perfect harmony, i.e. one equals the other, they are in balance. Also known as Walrasian general equilibrium, it is a state that economists say we can never attain, but should set as our goal. It contrasts with partial equilibrium, where demand and supply are equal in only a part of the economy, in a certain market.
General Ledger – a chronological account record that an entity uses to keep track of financial transactions, including income and expenses. Also known as ‘the book of final entry’. Transactions are categorized and posted into the general ledger account.
Giffen Goods – products for which demand grows when they go up in price. In the vast majority of cases, a rise in prices is followed by a fall in demand – not Giffen goods. Giffen goods are ‘inferior products’ – usually staple foods for poor people, such as rice in Asia, tortillas in Mexico, and bread in Victorian Europe. The term was named after Sir Robert Giffen, a Scottish economist and statistician.
Gig Economy – where employers hire freelancers, part-timers and short-term contract workers instead of permanent, full-time employees. In a gig economy, finding a job for life is extremely difficult. Since the 2009 global financial crisis, most countries in North America and Western Europe have drifted towards gig economies. Economists believe this trend will continue. A person whose work consists mainly of gig work is known as a gig worker.
Gold – a precious metal that serves as a store of wealth and a form of investment. Humans have been investing in gold, and using it in jewelry, art and coin-making for thousands of years.
Good Til-Canceled (GTC) Order – an order to exchange a security at a specified price. The order is open until it is completed or cancelled. With a GTC order, the brokerage company does not usually hold the order for longer than 90 days.
Goodwill – in business the term refers to the established reputation of a commercial enterprise as a quantifiable asset and calculated as part of its total value. When the whole is worth more than the sum of its parts, the difference is the company’s goodwill. If the book value of a company is $10 billion, but a predator offers $12 billion to acquire it, the $2 billion premium is the goodwill value.
Government National Mortgage Association – commonly called Ginnie Mae or GNMA, is a US government-owned corporation set up in 1968 to expand home ownership across the nation. It guarantees investors the timely payment of principal and interest on mortgage-backed securities.
Graduated Payment Mortgage Loan (GPM) – a mortgage that initially offers low monthly payments that gradually increase over time to a set level. This type of loan is appealing for younger borrowers who do not earn much at the moment, but expect their salaries to increase over time.
Grant – money given by an organization, local authority, national government, charity or individual for a specific purpose. It is different from a loan because the receiver does not have to pay it back. Grants are typically awarded for research, study, home improvements, to expand or improve a community project, or to set up a business. The verb ‘to grant’ has several meanings, including to give, accept, take as a given, because, or accept that something is true. It is also the first name and surname of some people.
Graphene – the strongest, thinnest and lightest material in the world that we know of. It is about two hundred times stronger than the strongest steel. It is also the best conductor of electricity and heat on Earth. It is a single layer of pure carbons arranged in a honey comb, hexagonal lattice pattern. It is so incredibly thin it is considered to be a 2D object.
Gresham’s Law – a monetary principle that says that when there are two forms of money, people hoard the more valuable one and use the cheaper one to buy things. Imagine there were $5 coins and they were all made of gold. Then the government started to issue $5 coins made of steel. People would hold onto the gold ones and use just the steel ones for transations. It would not be long before there were no gold coins in circulation at all – that is Gresham’s law. The term is named after Sir Thomas Gresham, who was financial adviser to Queen Elizabeth I in the 16th century.
Growing Equity Mortgage – a type of mortgage loan which has a fixed rate interest rate and monthly payments that rise over time – there is never a negative amortization associated with this loan. The first payment is an amortizing payment.
Gross Domestic Product (GDP) – a measure of production that is equal to the all the goods and services that an economy produces within a set time period. GDP data are followed very closely by economists, investors and governments.
Gross National Product (GNP) – a measurement of the value of all final goods and services that a country produces, in addition to the income earned by its citizens (excluding income that foreigners make in the country’s economy). Often confused with GDP, which is quite different.
Gross Income – all income that an entity makes (no matter the source). It represents how much income is generated before taxes. The term can refer to corporations or individuals.
Growth Investing – an investment strategy that prioritizes capital appreciation, rather than annual income. It contrasts with value investing. The person is a growth investor.
Guaranteed Investment Contract (GIC) – also known as a ‘funding agreement’. It is a contract that instructs the repayment of the principal and a floating or fixed interest rate for a set period of time.
Guaranteed Mortgage Certificate (GMC) – a bond that is backed up financially by a mortgage. GMCs have been issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) since 1975. It has a guaranteed average life, and interest and principal are paid twice a year.
Haircut – in finance a haircut is the percentage of an asset that is used as collateral – deducted from its market value. It has the same meaning as ‘margin’ in the context of exchange traded products.
Hard Brexit – a total separation from the European Union for the UK. Britain would regain complete control of its borders, i.e. how immigrants from EU member states are treated. With a hard Brexit, Britain would likely lose unfettered access to the EU market, and would also no longer have passporting rights.
Hard Currency – also known as a safe-haven currency or strong currency, is a currency that people trust, because they expect it to maintain its value. It can be exchanged easily and virtually everywhere for other currencies. This type of currency is used for most international transactions and is kept in the reserves of country’s central banks. Examples of hard currencies include the US dollar, euro, British pound sterling, Japanese yen and Swiss franc.
Hawala – an ancient and currently popular way to send money. Hawala, also called Hewala, leaves no paper trail, and relies completely on trust. No money is actually transferred, but the recipient gets paid. Today, Hawala is practiced mostly in North Africa, the Middle East, the Horn of Africa, and the Indian subcontinent. It is illegal in many countries and some US states, because their authorities do not like the fact that no records are kept.
Hedge Fund – an investment vehicle that can make a diverse range of investment strategies. They can be traced back to the 1940s, although most lay people would not have heard of them until the early 1990s.
Herfindahl-Hirschman Index – also called the Herfindahl Index, is a measure of market concentration – how many or few competitors there are in a market. The aim is to detect markets where consumers may be at risk of monopolistic practices. A Herfindahl-Hirschman Index score of 10,000 means there is just one company – a monopoly – while a score of 100 means there are one hundred companies. In the US, mergers and acquisitions that change the score by over 100 points in a concentrated market may raise antitrust concerns.
Home Equity Loan – a loan that can be taken out using a house as collateral. Most lay people refer to it as a ‘second mortgage’.
Homo Economicus – also known as ‘Economic Man’, is an economic term used in most economists’ models. It describes humans as self-interested and rational beings who are capable of making judgments towards subjectively-defined ends, such as the accumulation of wealth and resources. Homo Economicus avoids unnecessary work. These assumptions regarding human consumers are challenged by many economists, sociologists and psychologists, who say we are also motivated by altruism, spite and charity.
Horizontal Integration – when a company expands within the stage of the supply chain where it operates by merging with another company, acquiring another firm, or investing in the project internally. For example, if a supermarket chain acquires another supermarket chain, this is an example of horizontal integration – they are both in the retail stage of the supply chain. It is also called lateral integration, and contrasts with vertical integration, when the business expands into another phase in the supply chain, for example, from retail into distribution, manufacturing or commodities (raw materials).
Hostile Takeover – the acquisition of a company by another commercial enterprise; however, the target company does not want to be acquired. The target company’s board of directors are against the transaction. It is the opposite of a friendly takeover.
Hot Money – funds that are held in one currency but are liable to be suddenly and unexpectedly moved to another currency. The term is also used for investments – money that might suddenly be moved to another investment. The aim is speculation – to move money to places where it will get the best possible yield. Some people say ‘speculative money’ with the same meaning. Hot money also means stolen cash that is easy to trace, money earned from illegal activity, and money that has not yet been laundered.
Human Capital – investments we make in human beings in order to make people more productive. Examples include education & training, experience, skills, talent, judgment, etc.
Hypothecation – the granting of a hypothetic (collateral) to a lender by a borrower. In the terms of a secured loan, the lender – usually a bank – can take possession of a borrower’s asset, such as a house or car, if he or she is unable to keep up with the repayments. The borrower retains ownership of the asset and enjoys its benefits as long as he or she complies with the terms of the loan. In a mortgage, the hypothetic is the house that is being purchased, in auto financing the collateral (hypothetic) is the car. Hypothecated tax is earmarked tax – the Government pledges to spend a specific proportion of its expenditure or a specified amount on something, such as health or eduction.
Hysteresis – the lag in time between cause and effect. The term can be used in science and economics. For example, when there is a recession, unemployment rises. However, unemployment does not immediately fall when the recovery starts. There is usually a lag – this is known as the hysteresis effect.
Idiosyncratic Risk – or unsystematic risk, is risk that is specific to a particular firm or sector of the economy. It is the opposite of systematic risk. If workers in a company are on strike, this is an example of an idiosyncratic risk, because it only affects the value of the shares of that company and not the whole market. However, an increase in interest rates affects all businesses – that is a systematic risk.
Imperfect Competition – a market where there are barriers to entry, which prevent a state of perfect competition. In an imperfect market, the participants are often in a position to abuse their power, raise prices, and manipulate the marketplace to their advantage. Perfect competition across a whole economy does not exist, there are always sectors with monopolies, oligopolies or monopolistic companies.
Imports – goods and services bought by people, companies or the government of one country that originate from another country. If a car is made in Japan and is bought by an American in New York, it is an imported product. The American consumer is an importer while the Japanese car company is an exporter. Imports and exports form part of international trade.
Inbound Marketing – a marketing strategy whereby the company or organization uses content that appeals to potential customers or followers (if it’s a movement or political party), rather than placing banner ads and embedded videos. It is the opposite of outbound marketing. Inbound marketing uses blogs, video, podcasts, social media marketing, newsletters – content people are interested in – to lure them in.
Income – also known as earnings, it is money that comes in for work done, goods sold or services rendered. In accounting, it refers to an excess of revenue over expenses for a month, quarter or year (accounting period).
Income Share – a share in a mutual fund that gives the investor good dividends, but does not appreciate in value. The opposite of an accumulation share, which appreciates but gives little income.
Indemnity – compensation paid by one party to another to cover losses, damages, or injury. When you take out a home insurance policy, you will be indemnified if the house sustains damage from an earthquake, storm, fire or any other hazard listed in the agreement.
Indexation – adjusting an economic variable such as wages, pensions, taxes, or expenditure to a cost-of-living index, so that the variable goes up or down in accordance with the inflation rate. When economists talk of the indexation of wages, they mean making sure that people’s pay keeps up with inflation.
Index Number: an economic data figure reflecting the quantity or price compared with a standard value – a base value, which generally equals 100. For example, if something cost three times as much in 2010 as it did in 2000, an index would be 300 relative to 2000. Index numbers are commonly used to compared employment percentages, the cost of living, and business activity. They allow statisticians and economists to reduce unwieldy business information into easily-understood terms.
Index Option – a financial derivative that represents an index of a collection of stocks. The index option can be tied to indexes such as the S&P 500 Index or the Russell 3000 Index. Tied narrow-based indexes represent a specific industry, such as the energy or technology industries.
Indirect Taxation – also called indirect tax is tax that doesn’t come from people’s incomes, company profits or assets. The opposite is direct taxation. Examples of indirect taxation are sales tax or VAT, excise duty, environmental tax such as carbon tax, and expenditure tax. Lawmakers tend to focus on indirect tax when they want to raise government revenue, because taxpayers are less aware of any changes.
Inequality – sometimes referred to as economic inequality, is the difference between what the rich and poor, men and women, and other groups of people have in wealth, education, health, lifespans, etc. When a tiny percentage of the population owns fifty percent of its wealth, inequality is large. Studies have shown that the economies of countries with great inequality do not grow as rapidly as those with more equal societies.
Inflation – inflation occurs when general market prices rise (products become more expensive). It is the opposite of deflation. Inflation figures are closely monitored by economists, central banks, investors and companies.
Informal Sector – part of the economy that operates ‘below radar’. People who work within the informal sector, also known as the shadow economy, gray economy or underground economy, never declare their income to tax authorities, and consequently pay no tax on those earnings. What makes the activity ‘informal’ is not the work itself, but the evasion of taxes. Some parts of the informal sector are criminal, such as drug dealing, while others legal.
Infrastructure – all the structures and systems in a country which we take for granted but without which our economy could not function, including road & rail networks, bridges, tunnels, subways, power generation and distribution, healthcare, education, emergency services, air control towers, cell towers, telephone lines, etc. The term may refer to a whole country, a company or any entity.
Initial Public Offering (IPO) – an IPO occurs when shares of stock of a company become available for the public to buy for the first time. In an IPO, a private company becomes a public one.
In Lieu Of – a term that refers to replacing something with something else; commonly used in business, finance and everyday English, especially in the United States. For example, a restaurant that has run out of onions, carrots and celery may serve asparagus soup in lieu of minestrone soup. The term originates from Latin (‘locus’ meaning ‘place’), via French.
Innovation – involves inventing, creating and producing new goods and services, new business models, or new process methods. It is more than invention. Commercial success depends on a good innovation system with the company. Some famous innovators, such as Alexander Graham Bell, dramatically changed people’s lifestyles across the world.
Insider Trading – buying and selling shares in the company you work for. This activity may be legal or illegal. If you use material non-public information – relevant information the public does not know about – to trade or help others trade, it is an illegal activity.
Inspection – the act of examining something carefully, usually visually, to make sure it is up to standard and conforms to stipulated requirements or rules and regulations. The word may refer to an official visit to an organization or building to check that everything is legal and correct. In the US and Australia, it is an examination of the structure of a house or building by a specially-trained professional (UK/Ireland: a survey). An inspection is carried out by an inspector. The verb is ‘to inspect’.
Institutional Investor – an organization (firm) that buys and sells shares and other financial assets in huge quantities. Examples include pension funds, mutual funds, endowments, and insurance companies.
Insurance – a financial product that insurance companies sell to safeguard the policyholder against the risk of loss, damage or theft (such as an accident, burglary or flooding). Some types of insurance are compulsory – you cannot drive a car in most countries without the minimum 3rd-party insurance. Many lenders will not grant mortgages if the borrower does not agree to take out a mortgage insurance policy. Insurance has existed for many thousands of years.
Intangible Assets – valuable things a company has, but we cannot touch them because they have no physical form. Examples include brands, trademarks and patents.
Intellectual Property – patents, trademarks, slogans are examples of intellectual property. Intellectual property refers to the creation of the mind, such as literary and artistic works, inventions, designs, symbols, images, and names used in commerce.
Interest – money a borrower pays on top of the principal (original amount), which compensates lenders for the risk they take as well as having to manage without that money for a specific period. Interest is a rental cost for the borrower and income for the lender. In some cultures and religions today and in the past, charging interest on loans is/was forbidden.
Interest Rate – typically expressed at an annual rate, it is the amount of interest that has to be paid during a year. Loans and savings accounts have interest rates – banks charge interest on loans and overdrafts and pay out interest on people’s savings accounts. Banks’ interest rates are closely linked to the rates imposed by the central bank – if the central bank’s rate (bank rate) increases, so do those of the rest of the banks in the country.
International Bank Account Number (IBAN) – a series of alphanumeric characters used as a means of identifying a specific bank account internationally. The use of IBANS helps speed up automatic processing of international payments and receipts.
International Banking Facility (IBF) – an account that an American bank creates to provide banking services to non-US residents and institutions. Essentially, the facility allows banks to operate loan and deposit business with foreigners.
International Depository Receipts (IDRs) – also known as Global depository receipts (GDRs), these are receipts that purchase shares of foreign companies that the bank holds in trust. In the US, they are called American Depository Receipts (ADRs).
International Monetary Fund (IMF) – an organization that focuses on fostering global monetary cooperation, securing financial stability, facilitating international trade, promoting sustainable economic growth and high employment, and putting an end to poverty. The IMF is different from the World Bank.
International Monetary Market (IMM) – one of the four divisions of the Chicago Mercantile Exchange, the largest futures exchange in America. The IMM trades foreign exchange, interest rate and equity index futures, and all IOM and GEM products.
International Trade – the buying and selling of goods and services across borders; from one country to another. International trade’s two main data items are imports and exports. If countries did not trade so extensively, our current industrial world would be quite different.
Internal Rate of Return (IRR) – also known as the economic rate of return (ERR), it is the rate of return used in capital budgeting to predict the rate of growth of an investment and how much it will generate in return. The IRR is calculated to determine whether a project is worth doing.
Internet – also called the Net, is a global network of networks that interlinks billions of computers – a bit like the physical postal system, but at ultra-fast speeds. In the Internet, small packets of digital data are sent from one computer to another using a language called Transmission Control Protocol/Internet Protocol (TCP/IP). The Net was not invented by one person or organization. It gradually evolved in the 1960s, when the military were worried that the telephone system could be knocked out of operation with just one missile attack.
Intrinsic Value – what a company, stock, option, currency or property is really worth, rather than its book value or market price. It takes into account several variables including the firm’s business historical performance, regional and global market conditions, the quality of its directors, its financial condition, business trends, trademarks, copyrights and brand name.
Investing – refers to committing money, energy or time for a future benefit. We invest money in order to make our money grow, boost production, or make our businesses more successful.
Investment – the application of resources, e.g. money, to make more money or provide a future benefit. It may also mean purchasing goods that are not consumed today, but are utilized for future production and income generation. In finance, it may mean an asset that will appreciate (rise in value) and either be sold at a higher price or provides an income.
Investment Analyst – somebody who specializes in studying investments and providing advice and recommendations to portfolio managers, stockbrokers, and market traders. Also called an equity analyst or financial analyst.
Investment Bank – a financial institution that specializes in services for companies and major investors such as pension funds. Investment banks, unlike commercial banks, do not take deposits. Also known as a merchant bank in the UK/Ireland.
Investment Club – a group of up to 100 people who pool their money to make investments. The investment club meets regularly and decides (usually by voting) which investments to buy and sell.
Investment Horizon – how long a person expects to have his or her money tied up before they liquidate it. A young woman investing in a pension, for example, has an investment horizon several decades away. Also called investment time horizon.
Investment Philosophy – a person’s particular style and approach to investing. How they view the market, how long they plan to invest, the type of companies they wish to focus on, plus other factors all contribute to building an investment philosophy. Also called investment style.
Investor – a person, company, organization or other entity that invests capital (money) into a business or project with the expectation of making a profit or gaining an advantage.
Investor Relations – a department in larger companies that deals with the investor community, i.e. shareholders, investors and other people and entities who may be interested in a company’s stock or financial stability. Also called financial public relations and financial communications, investor relations is a sub-function of public relations.
Invisible Hand – a metaphor used by Scottish political economist and philosopher Adam Smith (1723-1790) that people’s self-interest is what makes economies great. The term refers to the ability of the free market to allocate factors of production, goods and services to their most valuable use. If each individual in an economy acts from self-interest, driven by profit, then the system will work more efficiently and productively, compared to an economy with some type of central planner.
Inward Investment – investment in capital goods that comes into a country from abroad, specifically from foreign companies, individuals or other entities. It is the opposite of outward investment. The US is the largest recipient globally of inward investment. The US by far is the largest investor in the UK and vice-versa. Inward investment creates well-paying jobs.
J-Curve – refers to the trend of a nation’s trade balance immediately after a devaluation under a specific set of assumptions. The trade balance initially worsens after the devaluation. After a while, the desired effect – greater exports and reduced imports – starts to kick in. J-curves also exist when calculating returns and losses on private equity. The Davies J-Curve shows that social unrest occurs when an unexpected recession is preceded by many years of economic growth and high expectations.
Job – this word has many meanings: 1. A part-time or full-time position of paid employment. 2. The execution or performance of a task, as in ‘He did a terrible job!’ 3. A duty or responsibility. 4. A specific task carried out as part of the routine of a person’s occupation. 5. A piece of work, generally at an agreed price. 6. A robbery, as in ‘John Smith is suspected of being responsible for the string of bank jobs in South London’.
Job Characteristics Theory – also called the Core Characteristics Model, is a work design theory developed forty years ago. It is widely used today as a framework to study how matched an employee is to his or her job, and if job redesign is required, how to go about it. The aim is to reduce job dissatisfaction, minimize absenteeism and turnover, increase motivation, and ultimately optimize the productivity of the worker.
Joint Supply – a term used in economics that refers to a product that turns into two or more other products (by-products). For example, a farmer breeds cattle, which eventually are sold to consumers as a number of different product, such as beef, milk, cheese, butter, yogurt and leather products.
Joint Venture – a partnership between two or more parties that each contribute capital and assets. The parties involved may be groups of people, corporations, companies and even governments.
Jumbo Mortgage – a mortgage loan that offers more than a conventional loan. It does not have the same rules and limits imposed by Fannie Mae and Freddie Mac compared to a conventional loan. Most jumbo mortgages charge higher interest rates than conventional loans.
Just in Case – also known as JIC or Just in Case Manufacturing, is the traditional inventory and/or production management model used by companies. Levels of stock of finished goods and raw materials are maintained at the highest levels possible. The aim of this strategy is to be prepared for unexpected events, such as a very large order or a halt in supplies. It is the opposite of Just in Time.
Just in Time – an inventory or manufacturing strategy in which companies keep stock levels at an absolute minimum. As orders come in, suppliers are contacted to make immediate deliveries of the raw materials and components required for manufacturing finished products. It is the opposite of Just in Case. Japanese car-maker Toyota started ‘just in time’ in the 1960s – it was known as the Toyota Production System. North America and Western Europe began adopting the strategy in the late 1970s.
Keynesian Economics – the economic theories of John Maynard Keynes, who led the idea that economic performance is calculated by aggregate demand (an economy’s net spending). Keynes’ approach was used by several governments following the 2008 global financial crisis.
Kleptocracy – a country whose leader, politicians and public officials use their powers of state to steal money and resources for their own personal gain – to line their pockets. These dishonest people are called kleptocrats. They feather their nests at the expense of the taxpayer and other citizens.
Laffer Curve – a graph that suggests that as you increase tax rates, government revenue rises, but begins to fall beyond a certain point. In other words, if you raise taxes too high, people and companies become less interested in working and investing, or move their activities abroad, which leads to less tax income for the government and a weaker economy. The Laffer Curve was drawn by economist Arthur Laffer in a restaurant in 1974 while he explained his point of view to his dinner companions.
Laissez-Faire – an economic system in which the business activities of and between private citizens, companies and other entities are free from government interference such as subsidies, tariffs, privileges and regulations. It means the same as a free-market system or pure capitalism. The emphasis is on the government having a hands-off approach.
Last In, First Out (LIFO) – an accounting and valuation technique that the newest assets to be added to inventory are the first ones to be sold or used, while the older ones are the last ones to be sold.
Layoff – the suspension or permanent termination of a position (job) in a company. The verb is ‘to lay off’. When a worker is laid off, he or she has done nothing wrong – it is not their fault. Layoff, when it is permanent, means the same as redundancy. It can happen if sales decline, during a recession, the business goes bankrupt, or it cannot produce goods because it cannot get a vital component or raw material.
Leading indicators – indicators that usually change before the whole economy changes. They are used as short-term predictors of the economy. Stock market returns – a leading indicator – usually start to decline before the general economy weakens, and pick up just before the economy starts recovering from a slump. Other examples of leading indicators include building permits, the money supply, and consumer confidence.
Legacy System – a computer term that refers to an obsolete IT system in a company. It is also called a legacy platform. The term is pejorative that refers to an out-of-date computer system or application program. When ‘legacy system’ is mentioned, the speaker is suggesting that the company or organization’s computer system needs to be replaced.
Lender of Last Resort – when a bank needs money and no other bank or entity can or is willing to lend to it, the lender of last resort – usually a central bank – intervenes and supplies the required funds. This happens when a commercial bank is in trouble. The central bank often lends with strings attached; it may take control of the financial institution, find it a new owner, or close it down. The function of the lender of last resort is to: 1. Prevent the bank from failing. 2. To protect the country’s financial system.
Letter of Credit – a document from a bank saying that it guarantees payment to the exporter, as long as it meets a list of conditions. If the importer fails to pay, the bank pays. Also known as documentary credit.
Leverage – the ratio between equity capital and credit in a financial exchange. Typically, it means using borrowed money to fund the purchase of an asset.
Liability – in accounting a liability is a legal debt or obligation that a company or other entity is required to pay back. Liabilities are reported on the right side of a balance sheet.
Libor – also known as the London Interbank Offered Rate or ICE Libor, is the rate at which banks offer to lend wholesale money to other financial institutions in the international interbank market.
Life Insurance – a contract made between an individual and an insurance company. The person being insured pays a premium in return for a lump-sum payment (“a death benefit”) to a designated beneficiary following the their death. Cover may either be temporary or permanent.
Limited Company – a business entity we can set up to run our business. It is responsible in its own right for all its activities. Its finances are separate from the personal finances of those who own shares in it. Profit made (after paying tax) is owned by the company. A limited company can pay dividends to shareholders from its net profit. There are two main types: 1. Private Limited Company. 2. Public Limited Company.
Liquid Assets – current assets that can be quickly turned into cash (usually within a period of a month). Cash and checking accounts are the ‘most liquid’ of assets.
Liquidity – refers to how rapidly an asset can be converted into cash and spent, if so desired. Cash is the most liquid of all assets. In accounting, liquidity is a measure of an entity’s ability to pay its bills as they come due, as well as its ability to access money when it needs it. The term also refers to how much activity there is in a market. A liquid market has many buyers and sellers.
Liquidity Trap – a situation in which cash injections from the central bank into the private banking system to decrease interest rates and thus kick-start the economy have no effect. The aim of the cash injections is to get people and companies to borrow and thus spend more. However, for some reason everybody wants to hoard cash and are risk averse. The USA and UK experienced a liquidity trap during the Great Depression of the 1930s, and so did Japan in the 1990s.
Loan – something that is borrowed (usually in the form of money or property) that is eventually paid back to the lender with interest. There are many types of loans, such as a mortgage, which is money borrowed to buy a property.
Loan Capital – money that a company borrows from banks, other organizations and people for an agreed period on which it pays interest. The most common ways to raise loan capital are with a bank loan, a bank overdraft or debentures.
Loan Guarantee – this is a loan where a person, government or other entity pledges to become liable for a debtor’s debt obligation in the event of a default.
Loan Modification – changes that are made to an existing mortgage loan, due to the borrower’s long-term inability to pay. It is not the same as a refinance.
Loan Shark – a moneylender who charges exorbitant rates of interest. Many of them work outside the law, threaten borrowers with violence, and sometimes force defaulters into criminal activities.
Loan to Value Ratio (LTV Ratio) – calculates the risk of people who want to borrow money. The LTV ratio is commonly used by banks and financial institutions. The greater the LTR ratio, the higher the risk.
Logistics – a subset of supply chain management that focuses on the challenge of planning and coordinating the flow of information and materials, all the way from purchasing raw materials, making the product, storing it, right through to delivering to customers.
Luxuries – goods or services that are not necessary for living, but are highly-desired by consumers. They are more expensive than ‘normal’ or cheap items. People’s ability to buy or finance luxuries is directly proportionate to their assets or income. Rich people purchase luxuries more often than individuals further down the socioeconomic ladder. ‘Little luxuries’ are simple things that can make somebody happy, such as a quiet evening watching TV with a glass of wine and some chocolates while the children spend the night away at their grandparents’.
Macroeconomics – a branch of economics that is concerned with general or large-scale economic factors, such as national output, interest rates, unemployment and prices (inflation). It contrasts with microeconomics, which focuses on the behavior of individual consumers, households, workers, companies and markets. The macroeconomy equals the total sum of all microeconomic activities.
Majority Shareholder – a person or entity that owns more than 50% of the common stock (ordinary shares) of a company. They can choose the members of the board of directors and make policy decisions. Also known as a majority interest or controlling shareholder.
Management – this involves the leadership, staffing, organization, and planning of a company to reach a goal or target. The term refers to either the people who manage, or the function of managing.
Manager – a person in a company or organization who exercises managerial functions primarily. These functions include hiring, firing, disciplining, doing performance appraisals, monitoring attendance, approving overtime, and authorizing vacations. The manager is in charge of a part of a company, which usually has a team of employees.
Margin – the difference between one price and another, usually related to the profit a trader or speculator can make. For a trader, it is the difference between the cost of production or purchase of a product, and how much it is sold for. In futures trading it is the difference between the current and future price.
Marginal – in business, economics and finance, the term usually has a similar meaning to ‘additional’ or ‘by adding one more’. For example, marginal price is the price of buying one more – imagine you bought 10 cars for your fleet, and then asked for one more in the order; it is the price of that extra one. There are many terms with the word ‘marginal’, such as marginal cost, marginal propensity to spend/save, marginal revenue, marginal utility, marginal output of labor, and marginal tax rate.
Market – a place where people and businesses gather to buy and sell products and services. The term may refer to a physical place, such as a flea market, store, or farmers market, or an abstract description that includes all the possible buyers, as in “The semi-conductor market is forecast to grow by 7% this year.”
Market Capitalization – the net value of shares issued by a public company. Market capitalization is determined by multiplying the price per share by the number of shares outstanding. It is one of the main factors in determining stock valuation.
Market Economy – an economy where prices are set by levels of supply and demand, rather than central or local government. All decisions regarding production, distribution, investment and salaries in a market economy are driven by market forces.
Market Equilibrium – a situation in which demand for a good or service is equal to its level of supply. When market equilibrium is reached, the price remains stable. Also known as the market clearing price.
Market Failure – when the market does not function as efficiently as it is capable of. Market failure typically has four causes: 1. Deficiency in the provision of public goods. 2. Externalities, such as a factory polluting the drinking water of nearby villagers. 3. The abuse of market power, such as monopolistic behaviors. 4. Asymmetric information – when one person knows more about something than the other person in a business transaction.
Market Forces – the forces of supply and demand, which in a free market economy determine the price of goods. When demand rises faster than supply, prices rise, when it is exceeded by supply, prices fall.
Market Garden – a small farm that grows vegetables, fruits and flowers and sells them to the public. The crops are grown for profit. Also known as a microfarm.
Marketing: refers to analyzing the market, determining what consumers want, finding out whether your company can produce it at the right price, producing it, and then selling it to them. It is an aggregate of functions related to the movement of goods from producer to consumer. Marketing is much more than simply promoting a product – it involves all the activities from before the product has been developed, through to after it has been sold.
Market Intelligence – the gathering and analyzing of data about products, customers, competitors and their products, etc., in a specific market, that a company uses to help it determine where to allocate more resources, what products to sell, and how much to charge for them.
Market Leader – a corporation or country that has the greatest sales in a specific product in the market. The market may be a country or the world. It is calculated either by volume or value of sales.
Market Orientation: – a business philosophy or culture where the number one priority is identifying what the customer wants and needs, and meeting that need with suitable products and/or services. It contrasts with product orientation, which focuses on the product and tries to persuade customers to buy it. The most successful commercial enterprises today are definitely market oriented.
Market Power – the extent to which a company can influence the price or supply of a good or service. Market power may refer to a producer or buyer. It is a firm’s ability to profitably increase the market price of a product over marginal cost. In a marketplace where perfect competition exists, market power is zero for all the competitors. If a company is the only supplier – a monopoly – its market power is absolute.
Market Rate – the usual price paid for a product, service or somebody’s labor in the open market. Also known as the going rate.
Market Research – the gathering and analyzing of data regarding customers, competitors, a product, and market trends. It is the study of how a product or service is sold, who buys it, why they buy it, and how competitors behave.
Market Risk – the risk that an investment might face due to market volatility and changes in the overall economy. Market risk can reduce the value of an investment. Also known as systematic risk.
Market Sector – part of the economy. Market sector covers a broader area than an industry. Some sectors may include two or more industries. Stock markets classify shares according to market sector. In bond markets the term refers to the type of issuer (government or company).
Market Segmentation – businesses should ensure that their products are being properly targeted for the right consumer base. Market segmentation is a strategy that focuses on targeting different consumer bases – which attracts more consumers, and consequently boosts sales.
Market Share – refers to how big your slice of the total market pie is, in percentage terms. In other words, what your total sales represent relative to the size of the industry. Market share may be measured by units sold, or the value of total sales.
Market Value – the price that buyers and sellers both agree on when a security or asset is traded on the open market, based on the forces of supply and demand. A company’s market value is what investors believe it is worth. Also known as market price, fair value, fair market value and open market value.
Marshall Plan – a US program of international aid, named after General George Marshall, destined for Western Europe after WWII, to help the war-torn countries get back on their feet. It formed part of the ‘Truman Doctrine’, President Harry Truman’s attempts at stopping the spread of Soviet communism in Europe. During the Marshall Plan – 1948-1952 – the United States and Canada donated 1% of their gross national product.
Material Nonpublic Information – confidential information that can affect the share price of a company, or how investors make decisions. Only a small number of corporate insiders currently know about this information. Acting on this information to sell or buy shares, before the public has access to it, is known as insider trading and is illegal. Passing on material nonpublic information to others is also illegal.
Matrix organization – a management structure in which some employees are responsible to managers in two or more different departments within a company. An engineer may have to report to the head of the engineering department as well as the project manager or product manager. Matrix organization structures emerged in the 1960s in the aerospace industry in the United States.
Media the plural of medium, describes the various ways through which people communicate in society. It refers to the communication channels through which news, movies, music, promotional messages, education and other data are disseminated. It includes newspapers, magazines, books, TV, radio, billboards, and the Internet.
Mercantilism – an economic theory and practice that was common in Western Europe from the 16th to 19th century. Mercantilists believed that global GDP was fixed, so that a country could only become wealthier at the expense of others. Governments tried to get domestic producers to export as much as possible, and kept imports down to a minimum by placing hefty taxes on them. Countries like Great Britain, France, Spain and Portugal gained colonies in order to expand their markets, and accumulated as much wealth, gold and silver as possible.
Merchandise – any type of product, including commercial or personal goods, as well as commodities that are sold or given away to the public (retail) or other commercial enterprises (wholesale). When a political party gives away T-shirts with a photograph of its candidate during an election campaign, it is an example of free merchandise. The aim in merchandising is to get consumers to spend their money, or encourage customer loyalty.
Merger – the combination of at least two companies into a new legal entity. A merger is a marriage of equals, unlike an acquisition or takeover, where there is a predator and a prey – one company literally consumes the other.
Mergers and Acquisitions (M&A) – a practice of corporate finance that deals with combining, dividing, selling, and buying different companies to create a new enterprise, merge them together, or help a company complete a takeover. A merger is a marriage, while an acquisition is a takeover.
Menu Costs – in economics the term refers to the costs to a company resulting from a price change. It will have to redesign its catalogue, get new ones printed, tell customers about the change, and perhaps hire a team of price experts. Companies are reluctant to change prices for this reason. In times of high inflation, menu costs can significantly undermine a firm’s ability to make a profit. Studies have shown that menu costs amplify the business cycle.
Microeconomics – the study of the economic behavior of individual units of a country’s economy, such as a firm, household or person. It contrasts with macroeconomics, which is the study of the aggregate economy. Microeconomics is mainly concerned with the factors that influence individual economic choices.
Millennial Generation – refers to people born in the early 1980s up to about 1995, and in some cases the end of the last century. Also known as Generation Y, the Echo Boomers, the Me Me Generation and the Boomerang Generation. Unlike previous generations, most Millennials were brought up in homes with Internet connection and electronic devices & games in their homes.
Minimum Wage – the lowest amount an employer is legally allowed to pay a worker. It is always calculated at an hourly rate. Employers can pay more but never less than the minimum wage. More than ninety countries across the world have a minimum wage.
Minimum-variance portfolio – this is a portfolio with the lowest risk possible. Each individual investment has a higher risk than all of them combined.
Misery Index – the sum of a nation’s unemployment and inflation rates. It is an informal measure of how healthy or unhealthy a country’s economy is. The lower the score the better off a country is, the higher the score the worse off it is. There are some variations – the Barro Misery Index or BMI adds to the Misery Index total the interest rate, plus (minus) the surplus (shortfall) between the actual and trend rate of GDP growth.
Modern Portfolio Theory – a financial theory that attempts to achieve the best expected return for a specific level of risk, or the smallest possible risk for a set level of expected return. This is possible if the investor carefully chooses the proportions of different assets. It is a mathematical formulation.
Monetarism – a school of thought that says that high inflation is caused by increasing the money supply faster than GDP growth. If you manage to control the money supply, monetarists say, the rest of the economy will take care of itself. Monetarism contrasts with the Keynesian economic policies of demand management. President Ronald Reagan and Prime Minister Margaret Thatcher were great believers in monetarism. Their monetary policies were influenced by one of the pioneers of monetarism theory, Milton Friedman.
Monetary Policy – the decisions a Central Bank of a country makes to manage the money supply and make sure inflation is on target and that the economy is moving in the right direction. During a recession, monetary policy will be expansionist, but when the economy is overheating monetary policy will be contractionary. The setting of interest rates forms part of monetary policy.
Money – any intangible or tangible thing that represents a unit of value and can be used as a medium to exchange goods. Money has been around for thousands of years.
Money Illusion – the erroneous notion that many people have that a unit of money does not decrease in value over time, which it does because of inflation.
Money Laundering – the process of turning ‘dirty’ money into ‘clean money’. The funds were obtained from illegal activities. The criminals need to launder their proceeds in order to be able to use them openly and place them properly in the financial system.
Moneylender – an individual or organization that lends money, usually at very high interest rates and outside the official banking system.
Money Markets – places where money and various types of extremely liquid assets – money market instruments – are lent and borrowed between a few hours and just over a year. In the money markets, money managers, retail investors and banks can make short-term investments, effectively lending money to governments, broker-dealers, banks, and non-financial corporations. Together with capital markets, money markets make up the financial market and provide liquidity for the global financial system.
Money Order – a financial instrument that allows the payee to receive a certain amount of cash on demand – considered as safer than a check.
Money Supply – also known as money stock, refers to the amount of monetary assets that an economy has access to at a certain period of time. It is measured by monitoring currency in circulation and demand deposits.
Monopoly – a market where there is just one producer/supplier of a product or service; there is no competition. The monopolist controls the price and it is either extremely difficult or impossible for any other entity to enter the market.
Monopsony – a situation where a market has just one buyer, or one buyer dominates that sector. In a monopsony there are usually many suppliers, and they all exist at the mercy of the buyer, who can dictate terms, prices, delivery dates, product specifications, etc. A monopsonist may be a buyer of products or services, or an employer. For example, in an isolated town, a large company, organization or entity may employ most of the workers in the area.
Mortgage – a loan to a purchaser of real estate that is secured on the property that is being bought. A mortgage could also be provided for any other purpose, when the borrower already owns a property and uses it as security.
Mortgage-Backed Securities – these are bonds that are backed by either a mortgage or a collection of mortgages (mortgage pool). The borrower is essentially paying the bondholder through his or her monthly installments.
Mortgage Bond – this is a bond in which the issuer has granted the bondholders a lien against the pledged assets (property). If the borrower defaults, the bondholder can resell the property.
Mortgage Protection Insurance – also known as mortgage payment protection insurance, covers the policyholder if he or she is unable to meet payments due to accident, sickness or unemployment. Policy prices vary considerably, so consumers are advised to shop around.
Motivation – in business, it is about finding ways to encourage staff so that they can give their best. A workforce that is motivated cares about the success of the business and works more effectively. Motivation is all about why a person acts or behaves in a particular way – it is about enthusiasm.
Multinational Company – a company that has business, staff and premises in more than one country. They typically have a centralized head office from which global activities are managed. Also called a multinational corporation or transnational corporation.
Multiplier – also known as the ‘multiplier effect’, is a calculation that tells us how big an initial expenditure can eventually become when it has worked its way through the economy. For example, the government spends an additional $5 billion on education, schools consequently hire more teachers, the new teachers buy goods in shops and eat out in restaurants, shops and restaurants consequently hire more workers, their workers spend on … ,etc. Multiplier effect theory was created by John Maynard Keynes during the Great Depression of the 1930s.
Mutual Fund – a company that gathers the money from several investors – pools it – and invests it in securities such as stocks, bonds and short-term debt. Some mutual funds are huge, with several hundreds of thousands of investors. People buy shares in the mutual fund, i.e. they become owners of a proportion of the fund. Mutual funds in the United Kingdom are known as unit trusts.
Mutual Savings Bank – a financial institution that belongs to its depositors. It has no shareholders, i.e. no equity capital. They were first founded two hundred years ago to encourage low-income workers to save.
Naked Short Selling – a type of short selling where the trader chooses not to borrow (or arrange to borrow) securities before exchanging them. In many areas this practice is illegal. It has been against the law in the US since 2008.
Narrow Money – the most liquid forms of assets, i.e. they can immediately be used for transactions and commerce. Includes coins, notes, travelers checks, and checking accounts in banks. Also known as M1 (M0 in the UK).
Nash Equilibrium – a concept in game theory where the game’s best outcome is one where none of the players has an incentive to veer from his or her chosen strategy after considering all the choices available to other members of the group. The player cannot receive any incremental benefit by changing plans, assuming that all the other players keep to their strategies. A game may have just one Nash equilibrium, several, or none.
National Debt – the total amount borrowed (total outstanding borrowings) by a central government and all local authorities within a country. The national debt includes what the government owes foreign creditors – external debt – and its national creditors – internal debt. Also know as the Sovereign Debt, Public Interest, and Government Debt.
Nationalization – when a government or state becomes the owner of a private industry or controls private assets. This can occur for several reasons, such as a socialist government taking over certain sectors of the economy, or the taxpayer bailing out collapsing banks.
Nation-Building – refers to either 1. Getting a failed state to function properly again. 2. Help a country or region get back on its feet after a war. 3. Government policies aimed at encouraging a strong sense of national identity. In South Africa, it refers to the advocacy of national solidarity that emerged in the country after the apartheid era. The most successful nation-building program in history was the Marshall Plan, which helped speed up Europe’s recovery after WWII.
Natural Monopoly – a monopoly that exists because a particular market’s economies of scale make it the most cost-effective solution and the best deal for consumers. If several companies operated in that market, prices would be higher and quality might be affected. The provision of water, for example, requires a massive infrastructure investment – having two companies laying down two separate pipelines for the same end users would not make economic sense.
Natural Rate of Unemployment – that rate of unemployment at which inflation does not fluctuate – it neither accelerates nor decelerates. When an economy is at the natural rate of unemployment, inflation is constant over each 12-month period. Employers and employees come to expect this annual inflation rate and base their decisions on it. That is why it is often called the constant inflation rate of unemployment or the non-accelerating inflation rate of unemployment.
Near Money – assets that are not as liquid as money, but can be converted into cash rapidly, such as short-term money market instruments and bank deposits. Also called quasi-money.
Negative Income Tax – a system in which people on low incomes or no income receive supplemental pay from the government instead of paying taxes. In the US it is known as Earned Income Tax Credit, and Working Tax Credit in the UK. It is said to have less stigma attached to it than other forms of welfare financial help.
Negotiable – refers to something that can be transferred to another individual or entity as a form of payment, or sold on. Negotiable instruments, such as banknotes, bills of exchange and promissory notes are documents that guarantee the payment of a specific amount of money, either immediately (on demand) or at a future date, with the payer named on the document. Negotiable also means that the sale price might be reduced, or the terms of a contract or agreement could be adjusted.
Negotiable Instrument – a written document where the payer guarantees the payment of a specified amount of money, to be paid either on demand or at a future time. The payer promises payment without condition. Examples include banknotes, checks, bills of exchange, demand drafts, promissory notes and certificates of deposit.
Neo-classical Economics – can also be written without the hyphen (neoclassical economics). It is a school of economics, a theory, that believes that the consumer is ultimately the driver of price and demand, because the consumer’s goal is utility maximization (customer satisfaction), while that of the company is profit maximization.
Net Asset Value (NAV) – the value of a company’s total assets minus the value of its liabilities. This might also be the same as the book value or equity value of a business.
Net Income – also known as net profit or net earnings, net income is income after paying for the cost of goods sold, expenses, taxes, as well as depreciation. The term may refer to businesses as well as individuals.
Net Profit – a business’, person’s or entity’s total sales (revenue) minus all its expenses. In the UK it might not take into account taxes paid, while in the US it nearly always does. Net Profit is part of an income statement, which covers an accounting period of either one month, one quarter, six months, or one year. Also known as net income, net earnings or the bottom line.
Network Effect – the effect that an individual user of a good or service has on its value to other subscribers or users. When a network effect exists, the product or service’s value depends on how many people are using it. Also called demand-side economies of scale and network externality.
Net Worth – the value of an entity (be it a person, company, or other organization). Net worth equals assets minus liabilities.
Neutrality of Money – also called neutral money or monetary neutrality, is an economic theory that says that changes in the money supply make no difference to GDP and the basic structure of the economy. If you double the money supply, everything will rise, including wages, prices, etc. If they all increase by the same proportion, then nothing really has changed. The real economy (real variables), including total employment and total output remain the same.
New Economy – a term some economists and journalists began using during the last two decades of the last century. They believe that the Internet, state-of-the-art information technology, other hi-tech, and globalization have created a completely new kind of economy – one that does not follow the rules that existed in the old economy. In the new economy, productivity is considerably greater, as are growth rates, and inflation is virtually non-existent, they say.
New Money – wealth that was not inherited; it was created during the lifetime of the individual. The opposite of old money. A derogatory term for new money is nouveau riche.
Nobel Prize for Economics – seen as the most prestigious award globally in the field of economics. Officially called the Nobel Memorial Prize in Economic Sciences, and often referred to as the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel. The Swedish National Bank, the country’s central bank, pays the $1 million annual prize money.
Nominal Price – an asset’s ‘estimated’ price that does not always accurately reflect the market price of an asset (as it does not change based on inflation).
Nominal Value – the value of something expressed simply in the money of the day. Nominal figures are misleading because they do not take into account inflation. ‘Real value’ factors in the inflation effect. If a bag of sugar cost $5 in 2010 and $5 in 2016, its nominal value was the same. However, if average annual inflation over those six years was 1.2%, the real value of a bag of sugar declined.
Non-Disclosure Agreement – a confidentiality contract that parties in a meeting or presentation sign so that sensitive information remains a secret. It is also known as an NDA or ‘confidentiality agreement’. There are two types of NDAs, one-way or mutual.
Non-Participating Preferred Share – shares that only pay a fixed rate of interest and have a limit on how much can be paid out in dividends each year. The dividends are not proportional to the company’s profits. Holders of these shares get their money before common stockholders do.
Non-Performing Loan – when payments on interest and principal are overdue for more than 90 days it is a non-performing loan. It is likely (but not certain) the borrower will not be able to pay back the debt.
Non-Price Competition – marketing campaigns carried out by companies that do not involve altering the price of their products or services. Rivals may focus on providing extra services, inviting consumers to join a raffle or competition with a nice prize, improving the quality of their product, pointing out their excellent workmanship, etc. Non-price competition is more common in markets where there are very few competitors – oligopolies. The companies like to give the impression that they are competing aggressively, but they have probably colluded to keep their prices artificially high.
Nonprofit Organization – an organization whose purpose is other than making a profit. Nonprofit organizations typically focus on education, scientific research, scholarships, health, human rights, religious bodies, trades, professions, worker’s rights, etc. If you donate money to a nonprofit organization, in most cases your contribution is tax-deductible.
Normal Goods – includes all goods for which demand rises when incomes increase. Demand for normal goods always rises when incomes rise, but by a smaller amount – goods for which demand increases are matched or are greater than income growth rates are called luxury goods. Normal goods contrast with inferior goods, for which demand declines when income grows.
Normative Economics – a branch of economics that makes value judgments and looks at how things should be or should have been, rather than observing current or past facts. Normative economics contrasts with positive economics, which focuses purely on tested or proven facts. Normative economics expresses value regarding economic fairness, or what the economic goals or outcomes of policymakers ought to be.
Objective – in business it refers to the specific aims a company has including details of how it will get there plus a time frame. It is not the same as a goal, which is less specific and is longer-term. A company’s aims are the same as its objectives, hence the term ‘aims and objectives’.
OECD – which stands for Organisation for Economic Co-operation and Development, is a unique forum where the governments of thirty-five nations – all democracies with market economies – work with each other. The aim is to promote sustainable development, prosperity and economic growth. The OECD was founded in 1960.
Offshore – in finance and business, the term means any other country other than one’s own – foreign, overseas. An offshore account is one that is held abroad. An offshore financial center offers financial services to people from abroad, they are usually tax havens or places with considerably lower tax rates than the home country of the bank account holders. The majority of offshore financial centers have small populations – many of them are or used to be British colonies or protectorates.
Okun’s Law – an empirical relationship in economics whereby a certain decline or increase in gross domestic product results in a different but correlated rise or fall in the rate of unemployment. The GDP and unemployment fluctuations do not change by the same amounts due to a number of factors, including increased/declining productivity, changes in the average number of hours worked each week, and people who stop seeking work (they drop out of the job market).
Old Money – refers to rich families that inherited their wealth. The wealth was passed down multiple generations. It contrasts with nouveau riche. In the UK the term generally only applies to members of the aristocracy.
Oligopoly – a market in which very few companies dominate supply. These ‘oligopolists’ are able to control prices as well as output. This type of market may have dozens of competitors, but only very few dominant ones. If a market with 100 suppliers has three giant ones that control 90% of all sales, it is an oligopoly.
Omnibus Account – an account opened in the name of an account provider with the securities that belong to two or more clients of the account provider.
Online Banking – a service where customers can manage several aspects of their account over the Internet, rather than physically visiting a branch, using the telephone, or sending letters and forms via surface mail. Online banking can be done through your smartphone, tablet or personal computer. Also known as e-banking, Internet banking, and virtual banking.
OPEC – Organization of the Petroleum Exporting Countries. An economic carter whose members collaborate to fix the price of oil.
Open Interest – the number of derivative contracts (such as futures and options) that are not closed or delivered on a particular day. Also called open commitments or open contracts.
Open Market – one where all the participants, i.e. buyers and sellers, compete on a level playing field. There are no tariffs, taxes, subsidies and regulations that favour some players and hinder others. There are no regulatory barriers to entry in an open market.
Open Market Operations – activities carried out by central banks to give or take liquidity to/from the economy. When the central bank wants to kick-start the economy it purchases bonds – and sells them when its goal is to control inflation.
Opening Price – the price of a security when it is first available to be exchanged in a business day (which occurs as soon as the market it’s listed on opens).
Operating Ratio – generally refers to a business’ operating expenses divided by its net sales (operating revenues). It may also refer to any type of financial or business ratio that measure’s a company’s efficiency, including net profit to gross income ratio, net profit to net worth ratio, or sales to cost of goods sold ratio. The higher a company’s operating ratio is the less efficient it is.
Opportunity Cost – the value of the best alternative choice when deciding to go along with a certain action. Looking and evaluating the option you gave up when you made a choice.
Organizational Change – occurs when a company or organization makes a transition from its current state to a desired future state. In today’s marketplace, commercial enterprises must undergo changes nearly constantly if they are serious about remaining competitive. Globalization of the markets and evolving technology have forced companies to respond rapidly and frequently in order to stay alive.
Organizational Development – commonly known as OD, refers to a planned and systematic approach to enhancing the effectiveness of a company or any organization. OD includes the practice of planned, systematic change in the attitudes, values and beliefs of a company’s workers through the creation or reinforcement of long-term training.
Organizational Structure – defines how activities within a company or any type of organization are directed towards the achievements of its goals and objectives. A company can be structured in many different ways, depending on what it does and where it seeks to go. Its structure will determine the modes in which it operates and performs.
Outplacement – the process of helping employees who have been laid off or made redundant to find jobs elsewhere. Instead of just handing out redundancy notices, a progressive employer arranges of its workers to receive career advice and assistance in seeking employment.
Output – in business, it is the quantity or amount produced by a person, firm, town, region or country over a specified time, usually one year. In electronics and computers, it refers to data that has been processed and sent out. In electronic devices, it may be where power leaves a system.
Outsourcing – involves farming out work to a third party supplier, not doing the task in-house. It also refers to the practice of contracting out control of public services to profit-making companies. When outsourcing is done with a foreign provider it is called offshoring.
Overdraft – occurs when your checking account balance goes below zero – into negative numbers. This may occur by accident, when you draw more money than was available in the account, or because you have an ‘arranged overdraft’, a previous agreement with your bank with interest charged at an agree rate. Overdrafts should be used as a last resort contingency, rather than an everyday spending limit, banks and financial advisors say.
Overdraft Protection – an arrangement a customer has with his or her bank in which debit card payments and checks are honored, even if there are insufficient funds in the checking account. Savings and checking accounts, for example, may be linked up, with the savings account providing the backup funds if they are needed.
Overhead – refers to all ongoing business expenses. It is also called the “operating expense”.
Over-The-Counter Shares – shares in the smaller and/or newer companies that are not traded through stock exchanges, such as the New York Stock Exchange or London Stock Exchange. Also known as over-the-counter securities or over-the-counter stocks. ‘Over-the-counter’ is often written as ‘OTC’.
OTC – or over-the-counter, refers to trading that is carried out directly between two parties, rather than on an official exchange such as the New York Stock Exchange or the London Stock Exchange. OTC derivatives come from deals negotiated bilaterally and privately between a buyer and a seller, rather than traded on a formal securities exchange. In healthcare, over-the-counter refers to medications that you can buy without a doctor’s prescription.
Pareto Principle – also known as the 80/20 rule or principle, is a theory that maintains that a minority of causes are responsible for the majority of effects. The Pareto Principle is frequently used in business to determine how to get the best return on investment; channel your resources into priority areas.
Paris Club a group of officials from major creditor nations who try to find coordinated and sustainable solutions for debtor nations that are having difficulties in paying back the money they borrowed. Sometimes the Paris Club members may offer to reschedule the terms of the loan. Since the Paris Club was formed in 1956, it has lent $583 billion, and signed more than 433 agreements to ninety debtor countries.
Partner – a member of a partnership, such as a law or accounting form, business, international arrangement between two nations, or a joint venture. A business partner is an individual or commercial entity which has some type of alliance with another individual or commercial entity.
Partnership – a relationship, generally a business one, formed by the agreement of two or more individuals or entities (corporations may be partners) to run a firm as co-owners. It is a business with two or more owners, each one having invested in the partnership and being liable to its debts and obligations. The owners of a partnership are called partners. Limited partners are usually liable just for the money they have initially invested, and do not risk losing their private savings and assets if the partnership is unable to pay its debts.
Passive Portfolio Strategy – tries to maximize diversification with little expectational input. A passive strategy often mirrors a market index.
Passporting – often referred to as passporting rights, refers to the rights that financial institutions have to do business freely throughout the European Economic Area (EEA). The EEA consists of the 28 EU nations plus Norway, Iceland and Liechtenstein. London risks losing passporting rights if no agreement can be reached when Brexit occurs. This may encourage companies to move from London to mainland Europe.
Patent – a certificate that protects an inventor from the illegal copying, sales and other uses of his or her invention without permission. It is like being given a sword and shield that you can use to protect your inventions. Patentable inventions include products, processes that give new technical solutions to problems, methods of doing things, technical improvements for existing products, or the composition of new goods.Copyright, trademarks and patents are examples of intellectual property.
Path Dependence – an idea that tries to explain that many of the things we do and the decisions we make today are the result of choices and decisions we made in the past – history really matters! Where we have been in the past and what we did then determines where we currently are and where we can go in future. Even seemingly insignificant differences in the path we have taken may have major consequences for where we are now and where we can go.
Penny Stocks – shares that trade at extremely low prices. The US Securities and Exchange Commission (SEC) defines a penny stock as being a share valued below $5. They are cheap and can be very volatile.
Per Capita – means per head, per person, or for every man, woman and child in the population. The term is commonly used in human geography, economics and statistics, but may be used in virtually any description of a situation that includes populations. ‘Per capita’ is also used in legal English when talking about inheritance. The term has been part of the English language since the seventeenth century. In Latin, ‘capita’ means ‘head’, while ‘per’ means ‘by’ or ‘by means of’.
Percentage Point – also called a percent point or pp, is a one-hundredth (1/100). If something is one percentage point greater it does not mean it is one percent greater. Five percent (5%) is one percentage point more than four percent (4%), but 25% (twenty-five percent) more than four percent.
Percentile – also called centile or pp, is the value below which a percentage of data falls. If you are at the 75th percentile in your test score, it means that you did better than seventy-five percent of the test takers. The poorest one percent of a population is at the bottom percentile, while the wealthiest 1% is at the top percentile.
Perfect Competition – a theoretical free-market Utopia in which there are many buyers and sellers so that none of them has any significant impact on the prices of goods and services, all buyers and suppliers seek to maximize their income (profit), buyers and sellers can freely enter or leave the market, transactions do not incur costs, and all the players – both buyers and sellers – have access to information regarding the goods’ quality, availability and prices. Also known as a perfect market or pure competition. It is the opposite of an imperfect market
Personal Loan – a loan taken for personal use, rather than business use. The individual may need to borrow money to buy a car, renovate the home, cover the costs of a wedding, a vacation, etc. Personal loans are for smaller amounts than mortgages and for shorter periods.
Peter Principle – a management concept that employees in a hierarchy are promoted until they reach their ‘level of incompetence’, and are then promoted no more. The term was coined by Dr. Laurence Peter, who suggested that all over the world there are millions of managers who are in way over their heads.
Phillips Curve – a graphical representation of Professor A.W.H. Phillips’ theory that the inflation and unemployment rates have a direct inverse relationship – when one goes up the other falls. The theory was disproved, to a certain extent, by the stagflation in the 1970s experienced by the United States and most other advanced economies.
Pigou Effect – an economics concept that suggests that when there is negative inflation – a decline in prices – the economy is stimulated because consumers’ purchasing power increases. If consumer spending rises, company sales will increase, which will result in them taking on more workers. Consequently, employment rises. The Japanese deflationary recession that started in the 1990s revealed some major flaws in the arguments behind the Pigou Effect.
Pip – also known as ‘percentage in point’ or ‘price interest point’, it is simply a measure of change in the exchange rate of a currency pair.
Plaza Accord – an agreement between the United States, West Germany, Japan, the United Kingdom and France in 1987 to work together to bring down the value of the US dollar, which during the Reagan administration had appreciated considerably. The Accord was successful, and the dollar fell over the next two years. In fact, it was so successful that they needed another meeting – the Louvre Accord – to stop the dollar’s slide.
Political Capital – this is the goodwill, trust and influence that a politician builds up with the public and other lawmakers. The more political capital a politician has, the more effectively and rapidly he or she can get things done. This goodwill is like a type of political currency that lawmakers are able to use to mobilize voters or spend on policy reform.
Portfolio – a group of investment products held and managed by an entity such as a financial institution, an individual, a hedge fund, or a corporation. Your portfolio is your spread of investments.
Portfolio Insurance – a strategy of hedging a portfolio against market risk by short selling stock index futures. Institutional investors often use this strategy when the market is volatile.
Portfolio Manager – a person or firm who manages clients’ portfolios, or somebody who works in a financial institution and is in charge of asset and liability portfolios.
Positional Goods – goods that people buy in order to enhance their socioeconomic status. These products are purchased because the buyer wants others to think that he or she belongs to an exclusive group of people – that he or she has class, style, money, and good taste. Demand for most positional goods goes up when their prices rise. Examples include designer clothes and shoes, expensive vacations, diamond necklaces and other jewelry, Swiss watches, and luxury cars.
Positive Economics – the economic study of what is, what was, and what will happen. It focuses on facts and things that can be proven. It contrasts with normative economics, which tells us what should or ought to be – it is a value judgment.
Poverty – the condition or state of being poor; having very little or no money, goods, food, shelter, clothing or access to health care. In the advanced economies, poverty refers to people or families whose incomes fall below a specified threshold. Measuring levels of poverty is not easy. There is more to being poor than simply not having enough money. All or nearly all a poor person’s income is spent on food, they have no or very limited access to schools, they may spend much of their lives feeling hungry, they fear for tomorrow, and live one day at a time.
Predatory Pricing – a strategy taken by a product’s market leader in which prices are drastically cut in order to kill off the competition. Predatory pricing may be in response to a newcomer that has just entered the market, or a decision to destroy existing rivals. When successful, predatory pricing helps the dominant seller either re-establish or establish a monopoly. If there is a strong likelihood that the strategy will result in a monopoly or less competition, the authorities will intervene.
Preferred Stock – (also known as preferred shares) is a type of stock that has a higher claim on earnings and assets compared to common stock. Holders of preferred stocks are paid a specific dividend before common stock holders get their dividends.
Price – the amount of money we have to pay for anything that is on sale. It is how much the vendor will accept for the sale of a good or service. Prices today are expressed in currency, but used to be quoted in quantities of other products (barter). Price minus cost equals the profit the seller makes.
Price Discrimination – setting different prices for the same product for different purchasers. Bus companies and movie theaters, for example, offer discounts for children, students and seniors (aged 65+). Supermarkets may offer you a discount if you buy in bulk, or telephone companies may charge less per minute for calls after you have used up 10 minutes. Airlines charge frequent flyers less by allowing them to clock up air miles. Companies take the price discrimination approach to maximize profits.
Price-Earnings Ratio (P/E ratio) – calculates a corporation’s current share price compared to its earnings per-share. It can be an indicator of high earnings and the growth that is to come.
Price Elasticity – a measure of how the demand (or supply) for a product or service is affected by a price rise or price cut. If a good or service is very price elastic, it means that demand changes by a greater percentage than the price change. If the demand change is smaller or not at all, it is said to be price inelastic. Except for Griffen goods and Veblen goods, the relationship between price changes and demand is inverse – when prices go up demand goes down, when prices fall demand rises.
Price-to-Book Ratio – a financial multiple used to compare a share’s current market price to its book value. Investors use this metric to determine whether a stock is worth buying. Also known as market-to-book ratio and P/B ratio.
Price-to-Sales Ratio – the ratio of the market value of equity to sales. It is calculated by dividing a company’s stock price by its sales revenue per share over a 12-month period. Also known as the P/S ratio, PSR or price-sales ratio.
Primary Market – where securities (stocks and bonds) are sold for the first time. The money from the sale goes straight to the issuer. The primary market is part of the capital market. Also known as the New Issue Market.
Prime Rate – the interest rate that American banks charge their ultra-creditworthy customers, their lowest-risk customers, for loans. The Prime Rate is typically determined by the Federal Reserve System’s key rates. It is a benchmark for all commercial lending rates across the country. The Fed says the Prime Rate is also known as the Base Rate, and is a reference rate for many types of loans, including lending to small businesses, credit card loans, some private student loans, adjustable-rate mortgages (ARM), and home equity lines of credit with variable interest rates.
Prisoner’s Dilemma – a situation described in Game Theory that illustrates a problem when two accomplices are accused of the same crime and are locked in different cells. The Prisoner’s Dilemma shows why cooperation is sometimes hard to achieve in a business environment, especially in an oligopoly (too few competitors), where one rival does not know what the other one is going to do. If every player chose one particular option, they would all be better off. However, none of them will risk being the first to make that choice, because they do not know how their rivals will respond.
Private Banking – a service offered to wealthy individuals by banks. Private banking is much more personalized than general retail banking – it is focused on the needs and preferences of each customer.
Private Company – an enterprise (firm) whose shares are not offered to the general public for sale, i.e. they are not traded at a stock exchange. The term might also mean companies that do not belong to the state.
Private Equity – money invested in certain types of private companies, i.e. businesses that are not publicly listed – they are not listed on a stock exchange. Investors may want to acquire a struggling business and turn it round, or inject funds into a startup. Private equity may include mezzanine capital, distressed investments, growth capital, venture capital or leveraged buyouts.
Producer Surplus – the difference between how much a producer sold something for and how low he or she was willing to go. If something is sold for $10, and the producer would have gone as low as $6, the producer surplus is $4. In economics, it is part of the Economic Surplus, which also includes the Consumer Surplus – the difference between how much a consumer paid and how high he or she would have gone.
Production Function – in economics, it relates physical output of a production process to factors of production (physical inputs) using mathematical equations. In other words, what production figures would you get with one combination of land, labor and capital, compared to a different combination (with different proportions of each one)? Companies want to produce goods using the cheapest combination of inputs.
Productivity – refers to how much is produced per unit of input. For example, how many shirts a worker produces per hour in a factory. There are several kinds of productivity depending on the input, and different was to calculate it. For instance, labor productivity can be calculated per hour, per worker, etc. When calculating the return from an investment, capital productivity would be examined.
Profit – the financial reward that business people aim to receive in compensation for the risks that they take. It refers to how much money a business is making.
Profit Margin – also known as net margin, is a measure of profitability. It is the net profit as a percentage of net revenue. In other words, it is the amount by which revenue from sales exceeds a business’ costs.
Progressive Tax – a tax system that charges a higher percentage of higher earners’ incomes than that of lower earners. It is called progressive because the tax rate ‘progresses’ upward as incomes increase. Progressive tax applies to both income tax and sales tax, as well as the income of individuals and businesses.
Project Management – involves planning, organizing and managing many things, including a team of people to make sure a project is completeted properly, on time and within budget. Put simply, it is about getting things done – knowing about what you want to accomplish, how it is going to be done, how long it will take, and what the cost will be. Project management professionals are called project managers.
Propensity – in economics, generally refers to what percentage of a person’s income is channeled in a specific direction. For example, our propensity to consume is the percentage of our income that we spend. There are two types – marginal and average propensities. The former measures what we do with any additional income, while the latter focuses on total income.
Property Rights – the legal rights that you and I, companies, organizations, charities, governments and other entities have on a thing that is owned. They are among the most basic rights in free societies, and are generally taken for granted in today’s Western democracies. Property rights include the right of the owner to use the good, earn income from it, transfer ownership to others, and enforce property rights.
Prospect Theory – a theory that suggests that people make decisions based on the potential value of gains and losses, rather than the final outcome, and that we place more weight on a loss than its equivalent gain. For example, losing $50 earns more negative points in our perception of things than the number of positive points earned by receiving $50. The theory was put forward by Daniel Kahneman and Amos Tversky in the 1970s.
Prospectus – a legal document that describes a financial security for potential investors. It contains material for potential buyers of stocks, bonds, mutual funds or other investments. It describes the company’s business, officers’ and directors’ biographies, how much they earn, financial statement, and other data potential purchasers might be interested in.
Protectionism – a government policy that tries to reduce imports and possibly also promote exports. The government may impose tariffs or quotas on imported goods and services, subsidize exports or offer domestic suppliers financial assistance.
Public Company – a company whose shares are bought and sold freely by members of the public on a stock exchange or over-the-counter. Contrasts with a private company. Also known as a public corporation, publicly held company, or a publicly-traded company.
Public Goods – goods and services that we all consume and are provided by the state (in most cases). Public goods are available for the well-being or benefit of all citizens. When an individual consumes a public good, it does not stop another individual from consuming it – it is non-rival. We cannot avoid consuming it; it is non-rejectable. If one person can consume it, it is impossible to stop another person consuming it; it is non-excludable. Examples of public goods include clean air, national defense, emergency services, the judiciary, and public parks.
Public Limited Company (PLC) – a public company under British and Irish law, in addition to some Commonwealth nations. Members of the general public can buy and sell a PLC’s shares on the open stock exchange.
Public-Private Partnership – also known as 3P, PPP or P3, is a cooperative agreement between a local or national government and a private company; usually a long-term arrangement. The two partners provide a public asset or service. PPPs have become considerably more common since the 1980s. In a public-private partnership, the private company bears significant risk and management responsibility. Remuneration (how much the private company gets paid) is linked to performance.
Public Relations – also called PR, is the discipline that focuses on a company’s or organization’s reputation – how customers and other people perceive it. Public relations is all about reputation. PR specialists attempt to create and maintain a favorable public image of a company, organization or famous person.
Public Utility – a company that supplies consumers with a utility such as water, electricity, natural gas, sewage treatment, and telephone service. The term may refer to the company or the utility itself. Public utilities are usually monitored by a national or local government regulator. They are often natural monopolies, because it would not be economically viable to have more than one supplier. Public utilities may either be state-owned or private companies.
Purchase – as a verb means to buy something, and as a noun something that is bought. Can also refer to a firm hold – ballerinas add powder to their shoes in order to get a better purchase on the floor (prevent slipping).
Purchasing Power Parity (PPP) – an economic term that calculates the relative value of different currencies. PPP allows economists and investors to determine the exchange rate between currencies for the trade to be on par with the purchasing power of the countries’ currencies.
Q Theory – gives you a ratio of the market value of a company to the net replacement cost of its assets. If q is greater than 1, this suggests that you should invest in that company. If q is less than 1, you should sell – it means the shares are worth more than the stockholders currently expect the company to earn in profit by retaining them. Also known as the q Ratio, Tobin’s q, Tobin’s q Theory, or Kaldor’s V.
Quantity Theory of Money – a theory that states that the money supply and prices in an economy go up and down in direct proportion to each other. When the money supply goes up, so do price levels by approximately the same percentage – the same happens when the money supply declines. It is the foundation stone of monetarism.
Quick Ratio – measures a company’s ability to use its most liquid assets to clear all current liabilities. It is an indicator of a business’ financial strength.
Quitclaim Deed – a legal instrument in which the owner of a property (grantor) transfers interest to another person (grantee). The grantor gives up all rights to the grantee.
Quota – in international trade the term refers to the imposition of limits in either the quantity or monetary value of targeted imported goods or services. Quotas may be directed at imported goods or specific countries. In business, a quota could mean the sales target that sales reps or their departments have to meet by a speficied date. Basically, the term means a set amount.
Random Walk Theory – also called the random walk hypothesis, states that it is not possible to forecast accurately and consistently which way stock prices will go, regardless of how carefully you think you have observed and detected past trends. Shares and markets move randomly and unpredictably, and our ability to determine whether prices might go up or down or by how much is no better than trying to guess where a drunkard might go next as he zig-zags up and down the road. Some economists – those who support the non-random walk theory, disagree.
Rate of Return – the profit or loss that you can make on an investment. This is usually a ‘per year’ calculation. It is the ratio of the income from an investment over the cost of that investment. We use ‘rate of return’ to measure economic or financial success. When deciding which investment to buy, we usually compare their different historical rates of return.
Ratings – in the business world there are several meanings: 1. An assessment by a credit agency on a company’s or government’s ability to pay back a debt (bond). 2. An analyst’s or expert’s recommendation on whether to sell, purchase or hold onto a specific company stock. 3. The percentage of viewers who chose a particular channel or program on television or radio at a specific time on a specific date.
Rational Expectations Theory – a behavioral economics theory that states that, on average, most people can predict future conditions fairly accurately, because we analyze ALL available data and then take measures accordingly. It contrasts with adaptive expectations theory. It is also known as the rational expectations hypothesis or the theory of rational expectations (TRE).
Rationing – a system of limiting how much of something each citizen is allowed to buy or consume. It may include food, fuel, certain clothing or materials for making clothing, other household items, and utilities (water, electricity, natural gas). Rationing is common in times of war, after natural disasters, or following a terrorist attack. It was also common in the old communist Soviet Union and its satellite nations, as well as in Cuba and North Korea today.
Real Estate Investment Trust (REIT) – a company that owns and typically operates a portfolio of real estate properties and mortgages. REITs investors earn a share of the income that is generated through the ownership of commercial real estate.
Real Interest Rate (RIR) – the amount by which the nominal interest rate is more than than the inflation rate, i.e. it is the nominal interest rate minus the inflation rate.
Real Options Theory – a relatively new theory on how to make decisions on capital investment projects when the future is uncertain. Real options relate to tangible projects, such as renewing a factory, building a new plant, purchasing or leasing land for oil exploration, or deciding when to pump oil. Real options do not include financial instruments such as bonds or shares, i.e. intangible things.
Real Terms – after adjusting for the effects of inflation. It contrasts with ‘nominal value’. If my salary goes up by 10% today, and the inflation rate for the past 12 months was 8%, my pay increase has been: 1. Two percent in real terms. 2. Ten percent in nominal value.
Recession – a contraction in the business cycle. It is characterized as a decline in economic activity, which can be measured by various macroeconomic indicators (such as GDP and the unemployment rate). There was a global recession (Great Recession) following the 2008 financial crisis.
Red Chip Shares – shares in Chinese companies that are listed in the Hong Kong Stock Market but belong to entities (such as local and regional governments) in mainland China. Also known as red chip stocks. The companies are called red chip companies.
Reciprocity – the practice of doing as we are done by. Reciprocity is common among individuals, companies and governments. One country or organization might grant privileges to another, usually in return for a gesture in kind. Reciprocity may also refer to harmful acts – tit-for-tat behaviors – if one country kicks out three of our embassy staff, we will expel three of theirs from our country. Reciprocity is an important skill to learn and use for negotiators and sales people.
Redlining – the practice of refusing financial services, such as loans or insurance, to people who live in certain parts of a city, because they are considered ‘a poor financial risk’. Historically, those ‘poor risk’ areas have had a majority black or Hispanic population. When a loan or insurance applicant is ‘redlined’, he or she is not assessed according to his income or credit history, but rather where he or she lives. Redlining is illegal if the bias is for racial or ethnicity reasons. It is allowed if there is a fault line going through the area (earthquake risk), or it is especially prone to flooding.
Redundancy – a form of dismissal. Employees are laid off permanently because their jobs no longer exist. If a person is dismissed and his or her post is filled by another individual, it is not redundancy. With redundancy that post disappears. Voluntary redundancy is usually offered before the employer has to choose who to dismiss.
Reflation – refers to measures taken by the government and/or the central bank to boost demand so that the economy grows and inflation goes up to its long-term annual target rate. Measures taken by the central bank include altering interest rates and changing the money supply, while those taken by the government include increasing spending and reducing taxes.
Regional Policy – refers to government policy that targets specific regions of a country or trading bloc, such as the European Union. In the majority of cases, regional policy targets economically poorer regions or those experiencing greater problems than their neighbors. The term may also refer to targeting wealthier regions to prevent them from becoming over-congested.
Regression Analysis – in statistical modeling it is a way to mathematically determine which variables affect something you are focusing on. For example, if you want to know what affects your sales figures (dependent variable), you might look at special offers, price discounts, the weather, competitors’ prices, etc. (independent variables). Regression analysis is commonly performed by investment and financial managers, sales and marketing managers, and professionals in several different fields.
Regressive Tax – a tax system that takes a greater proportion of income from people on low wages compared to their better-off counterparts. It is the opposite of progressive tax. Sales tax is usually a regressive tax – the sales tax on $100’s worth of supermarket shopping represents a greater percentage of an office cleaner’s salary who earns $1,500 per month than that of a brain surgeon in a top hospital on $10,000 per month.
Regulatory Capture – when a regulatory agency fails to accomplish what it was set out for – to protect consumers. A ‘captured’ agency fights more for the interests of the very industry it is supposed to be policing than those of the people it should be protecting. Some economists believe that the only solution is not to set up these regulatory agencies in the first place.
Regulatory risk – refers to all the bad things that can happen to businesses, sectors, markets, or the economy in general due to changes in laws and regulations. Since the global financial crisis of 2007/8, regulatory bodies across the world have become much stricter. Regulatory risk management is today an important focus for companies.
Relative Income Hypothesis – states that a person’s attitude to saving and consumption is determined more by his or her income in relation to other people rather than by abstract standard living. In other words, I perceive my own well being according to how I see those around me. I’d rather get a $50 wage rise if nobody else got one than receiving a $100 wage rise along with everybody else. Poorer individuals spend more of their income than their wealthier counterparts because they want to close the consumption gap.
Rent – this word has several meanings. 1. Income from hiring out something like land, property, a vehicle or any other durable good. 2. The difference between what one is paying for a factor of production and the minimum amount of money required to keep it going – often referred to as ‘economic rent’. Technically, ‘to rent’ means to borrow and pay for it, while ‘to hire’ means to lend and be paid. However, in North America, ‘to hire’ is commonly used with both meanings (a trend that is spreading into the other English-speaking nations).
Rent-Seeking – refers to trying to increase one’s share of the total current wealth in one sector without creating any additional wealth in return. It is the equivalent of attempting to obtain a larger slice of the wealth pie, without trying to make that pie any larger. The rent-seeker’s gain is another entity’s loss – it is a zero-sum game.
Replacement Cost – also known as replacement value or replacement cost value, refers to the total cost of replacing a current asset at today’s market prices with an asset that performs the same function. The term is also used to determine the cost of replacing an item that a company has sold, or inventory that became unsalable.
Replacement Rate – in the world of economics, demographics and geography, the term has two meanings: 1. How much of an employee’s pre-retirement income his or her current pension represents. 2. The rate at which the people who die in a country and emigrate is replaced by the rate of babies being born and individuals who come in from abroad to live in that country. In the rich countries, a replacement rate of 2.1 babies per mother is required to prevent the population from shrinking.
Rescheduling – in finance, the term means to renegotiate the terms of a loan. Rescheduling usually occurs when the borrower is having problems keeping up with his or her repayment obligations. Rescheduling may also apply to rearranging a booking, as in “I will have to reschedule my flight to Moscow.”
Reservation Wage – the lowest pay that a person would accept for doing a particular job. The reservation wage of a brain surgeon will be significantly higher than that of a window cleaner. People usually have a lower minimum for jobs they find pleasant, compared to unpleasant or dangerous occupations. Our reservation wage can change during our lives.
Reserve Currency – a hard, foreign currency that is traditionally held by governments and central banks as part of the nation’s official reserves. The most important reserve currency today is the US dollar. Other currencies, including the French franc, Dutch guilder, Portuguese and Spanish real, Greek drachma, and the British pound sterling have all been dominant currency reserves.
Reserve Ratio – is the proportion of customers’ deposits that a bank or any other financial institution has in the form of available cash. Reserve ratio requirement is the statutorily enforced proportion. Most countries’ central bank sets a reserve ratio requirement (some don’t). The reserve ratio may be referred to as the ‘bank reserve ratio’, ‘cash reserve ratio’, or ‘bank reserve requirement’.
Reserves – liquid assets held by an individual, business, bank, central bank, or government in order to meet expected payments in the future, unexpected emergency needs, and take advantage of opportunities that may arise. Energy reserves are the oil, gas and coal reserves we know of around the world or specific to countries or regions, which we could extract with our current technology.
Reshoring – the opposite of offshoring. It is a term used to describe bringing back offshored manufacturing to a country. For example, a US automobile company closing manufacturing facilities in other countries and opening new ones in the US. This typically occurs when production costs, such as labor or raw materials, become cheaper at home or more expensive abroad.
Residual Risk – a risk that is still there after all attempts have been made to either eliminate or minimize the risks that an investment or business project might face. Sometimes the residual risk-taker knows it exists, but often he or she doesn’t.
Responsible Investment – an investment which the investor hopes will provide not just an economic return, but also some kind of benefit, which could be environmental, related to justice and human rights, the reduction of poverty, etc. Also known as sustainable investing, ethical investing, green investing, and triple-bottom-line investing.
Restrictive Practice – or ‘restrictive practices‘ (plural) refers to an arrangement by a group of people, often workers, to restrict the entry of other workers or limit output. Companies that abuse their dominant power in the market are guilty of restrictive practice. Another example is when a trade union only allows its members to work in certain jobs – a closed shop.
Résumé – a page containing all relevant information about an applicant. It is used for the job positions. It is your opportunity to tell employers about your work experience, education, and skills. In the UK and other Commonwealth countries, the term CV (curriculum vitae) is more common. In the US, a résumé is shorter than a CV.
Retail Banking – the banking service provided to individuals (members of the public) and small companies, as opposed to the service banks provide to other banks, financial institutions, and large corporations.
Retail Investor – a person who invests using his or her own money, rather than other organizations’ or people’s funds. Retail investors tend to trade in much smaller amounts than institutional investors.
Retained Earnings (RE) – the earnings of a company that have accumulated since it started doing business, after dividends are paid. On a company’s balance sheet its accumulated retained earnings appears as owner’s equity.
Return on Capital – how much people get back from an investment in one year in relation to the total they invested in that year.
Return on Equity (ROE) – an important metric of profitability. It compares a company’s net profit directly to the value of the company’s equities (what the shareholders outright own).
Return on Investment (ROI) – also known as return on net worth or return on owners’ investment, it is a measure of how profitable an investment is. A high ROI means that an investment generates favorable profit when compared to its investment cost. In other words, it measures how much you got back from your initial investment.
Revealed Preference Theory – a theory that suggests that we can determine what consumers’ preferences are by observing their purchases under a range of different circumstances, particularly different levels of incomes and prices. According to the theory, our preferences are fairly constant – given a set of choices, we tend to make the same choices again and again over time – if our circumstances have not changed.
Revenue – the money a company receives from the sale of goods and services to clients and customers, as well as income from royalties and interest. It is a business’ income over a specified period.
Reverse Mortgage – a special kind of home loan that lets the homeowner convert a portion of the equity of his or her house into cash. It is a mortgage where the bank pays the borrower, rather than the other way round. The borrower must be aged at least 62 years.
Reverse Stock Split – when a company reduces its total number of shares outstanding by merging them. The total could be halved, brought down to one quarter, or any fraction. Each share will go up in value proportionally. Also known as a stock merge, reverse split or reverse share split.
Revolving Credit – a type of credit line that renews every time the borrower pays it off, as opposed to installment credit. Also known as an evergreen loan.
Ricardian Equivalence – a proposition that suggests that when the government boosts spending with borrowed money, it does not result in increased consumer demand. The theory was developed by David Ricardo, and later elaborated by other economists.
Ricardo, David – David Ricardo was an early 19th century English political economist whose writings and concepts continue to influence modern economic thinking. He was a believer in free trade and a free market economy. He became interested in economics after reading Adam Smith’s The Wealth of Nations. He is one of the few people in history who apart from having a significant impact on how economists think today, also became immensely rich.
Rightsizing – adjusting the size of a company, usually its workforce, so that it is better able to make a profit in the current conditions of the marketplace. Rightsizing nearly always means reducing the workforce – making employees redundant, but it could in theory mean taking on more staff. Hence, its meaning is similar to downsizing.
Risk – refers to the likelihood or threat of damage, injury, loss, liability or any other undesirable occurrence resulting from internal or external vulnerabilities. There are many types of business risks, including interest rate risk, capital risk, settlement risk, liquidity risk, operations risk, political risk, country risk, sovereign risk, default risk, delivery risk, economic risk, exchange rate risk, reinvestment risk, refinancing risk, and underwriting risk.
Risk Analysis – the process of determining, analyzing and defining the risk of danger to individuals, companies, governments and even the whole economy, posed by potential human-caused and natural adverse events. It is the systematic study of the uncertainties and risks we encounter in business, and many other areas.
Risk Assets – assets that carry an element of risk, such as stocks, currencies, property, commodities, high-yield bonds, and other financial products that fluctuate in price.
Risk Averse – not wanting to take risks. A risk averse investor prefers secure investment, such as bonds or savings accounts, even if the returns are relatively low. The opposite is a risk loving investor.
Risk-Free Rate – the theoretical rate of return that an investment that carries no risk yields over a given period. An example of a risk-free investment is government stock, such as US Treasury bonds. An investment with a risk-free rate has a guaranteed rate of return – the expected return and actual return are always the same. Risky investments are compared with risk-free ones to determine several aspects of a business, including the cost of capital.
Risk Management – the process of identifying, quantifying and managing the risks that a company, organization or any entity might face. As a business activities’ outcomes are unpredictable, they have some element of risk. These risks include operational failures, strategic failures, market disruptions, financial failures, regulatory violations, environmental disasters, etc.
Risk Neutral – describes people who are totally insensitive to risk. A risk neutral investor is only interested in the possible return, and ignores the potential risks or losses completely. Risk neutral contrasts with risk averse, which describes a person who prefers certainty.
Risk Premium – the difference between the expected return on a high-risk investment and a risk-free one. For example, if a US Treasury bond (risk-free) yields 3% per year, while a company-issued corporate bond (higher risk) yields 6%, the risk premium is 3%. Investors say that a greater expected return – risk premium – is required for higher-risk investments, otherwise they are unwilling to bear the risk.
Risk-Seeking – or risk-loving, describes a person who loves risky investments. The term might also refer to an individual who is willing to give up his or her secure job to set up a company. Risk-seeking is the opposite of risk-averse. People who have nothing to lose tend to be more risk-seeking than those in secure, well-paying jobs.
S&P 500 – also known as the Standard & Poor’s 500, is a stock market index that includes the 500 largest companies (in terms of total market capitalization) listed on the New York Stock Exchange or NASDAQ.
Safe Harbor – a provision in a regulation, law, contract or agreement that affords protection from penality, oversight or liability under certain circumstances, or if a number of specified conditions are met. The term may also refer to a strategy that a buisness that is being targetted for a takeover might use to fend off the predatory company – it acquires a heavily-regulated firm, thus discouraging the acquiring company from going ahead with the hostile takeover.
Salary – money that is given as payment from an employer that an employee has worked for. Salaries are expressed monthly or annually and are paid every month. Unlike wages, salaries are fixed and do not vary if the employee worked overtime.
Satisficing – accepting what is good enough rather than trying to get the best option possible. The satisficer tends to be happier with his or her decision, compared to the maximizer (the one who strives for the best possible option). When having to make several decisions at the same time, satisficing is usually a more effective strategy – sometimes it is the only realistic one. The term is a portmanteau of Satisfying and Sufficing.
Savings – the amount of money left over after our consumer spending is subtracted from our disposable income. The portion of our disposable income that we do not spend on consumer goods. Money we put aside for a rainy day, a future project, or an expected future expense, such as college fees or retirement. The term can also mean to economize, as in: “Tremendous savings can be made if you shop around before purchasing a new car.”
Savings Account – also known as a deposit account, is a bank account that provides principal security and a moderate interest rate. There are several types of ‘savings accounts’ today which are really ‘checking accounts’.
Say’s Law – states that aggregate production (supply) automatically creates an equal quantity of aggregate demand. In other words, to boost an economy and get demand to increase, you first need to boost supply. Say’s law, also called the law of markets or Say’s law of markets, was introduced in 1803 by French economist Jean-Baptiste Say (1767-1832). John Keynes rejected Say’s law after observing what happened during the Great Depression of the 1930s. Keynes insisted that you need to boost demand first if you want economic growth during an economic downturn.
Scalability – a measure of how rapidly or slowly a system, company, or any entity can adapt to greater demand. If demand for a product or system grows, and a company can respond rapidly by increasing production, it has good scalability, especially if costs increase at a much slower rate. Software products have fantastic scalability – the first unit is extremely expensive to create, but subsequent copies are incredibly cheap to produce.
Scarcity – regarded as the fundamental economic problem that arises from the fact that resources are finite but human wants are not; they are infinite. It is a relative concept rather than an absolute one. For example, water is less scarce in the tropical rainforests of Latin America than in Chile’s Atacama desert. Determining how to make best use of scarce resources is what most economists focus on.
Scenario Analysis – a method of predicting what a company, portfolio, economy or any entity might be like in the future if certain potential events occur. We use scenario analysis to analyze and predict possible future events by considering alternative potential outcomes, known as alternative worlds.
Search Costs – the cost of seeking and finding what you want. When you buy something, the economic cost involved is more than just its price. You spend time and money gathering data, going to different market places to compare features, offers and prices. Search costs form an important part of consumers’ decision-making.
Seasonally Adjusted – refers to a statistical technique to take out the effects of seasonal influences operating on a series. Sales of many products, unemployment trends and construction activity, for example, rise or fall every summer and increase or decline each winter. In order to determine whether real growth or contraction has occurred, you need to seasonally adjust the figures.
Secondary Market – a market where existing financial instruments, such as stocks and bonds are traded. Investors sell to other investors in secondary markets, as opposed to primary markets, where companies and governments sell to investors. Also known as the aftermarket.
Secondary Mortgage Market – is the buying and selling of ongoing home loans (mortgages), which are usually bundled together and traded as MBS (mortgage-backed securities).
Second-Best Theory – an economics concept that if a requirement for achieving a desirable situation cannot be met, focusing on the requirements that can be satisfied may not necessarily be the second-best option – it could do more harm than good. You should not assume that the other components have not changed when one of them is not ‘good’, the theory states. It is also known as the Theory of the Second Best.
Secured Loan – this is a type of loan where the borrower puts up an asset, such as a car or real estate property, as security (collateral). If he or she defaults the lender can seize the asset and recover all or some of the money lent by selling it.
Securities – securities are financial instruments, contracts that are given a value and then traded (such as bonds), i.e. any evidence of ownership or debt that has been assigned a value and may be traded.
Securitization – involves bundling up several different loans into a bond-like investment and selling those bonds to capital market investors. Banks and other lending institutions can move debts and risk off their balance sheets and get cash. Securitization involves a process of taking illiquid assets and converting them into a security through financial engineering.
Seed Capital – money invested in a business or project during its very early stage – the idea or conceptual stage. This type of funding typically involves a family member or close friend. Also known as seed funding or seed money.
Seigniorage – the profit the government makes by printing bank notes and producing new coins. You can calculated seigniorage by subtracting the cost of making and distributing money from its market value. If it costs the government $0.05 to produce a one-dollar bill, the seigniorage is 95 cents. Paper and electronic money have a significantly higher seigniorage than metal coins, which are more expensive to create.
Seller’s Market – when demand exceeds supply and sellers have the upper hand. Prices are higher (than in a buyer’s market), and goods & services are sold more rapidly.
Seniority – in the workplace it is about whether an employee is ranked higher or lower than another worker. If you have seniority over another person, it means you outrank them. Seniority may be determined by the number of years the person has been working for his or her employer, or how effective they are at their job – their work performance. When a company goes bankrupt, debts are paid off according to seniority – ‘senior’ debts are paid off first.
Sequencing – when a country’s economy is in trouble, in order to get financial help and expertise from organizations such as the IMF (International Monetary Fund), it will have to implement a series of economic reforms. Sequencing refers to the order in which they need to be introduced for the malfunctioning economy to recover and thrive. Just introducing the correct set of reforms in any order does not work, many economists say – sequencing really matters.
Services – the non-physical part of the economy. The economy consists of goods and services. Goods are tangible things – you can handle or touch them – such as a car. Services are intangible things – you cannot handle them – such as car repairs. The vast majority of the rich countries’ economies consist of services today; this was not the case one hundred years ago.
Shadow Banking System – refers to the activities of non-deposit taking financial institutions such as hedge funds, monoline insurance firms, investment banks, and other unregulated entities. Shadow banks look like banks, behave like banks, and do the things that banks do, but below the regulator’s radar.
Shadow Economy – also known as the informal sector, is part of the economy where all work and business is done ‘below the radar’, i.e. none of it is registered, taxes on income and profits are not paid, and state rules and regulations are ignored. The shadow economy exists in every single country in the world, and ranges as a proportion of GDP from 7% in the United States to 94% in Uganda. People operate within the shadow economy either deliberately, because they want to evade taxes and regulations, or because they have no choice – they would not survive otherwise.
Shadow Price – the real price of a project, good or service for which there is no market price, the price is hard to estimate, or whose price does not properly reflect the real sacrifice made. Also known as shadow pricing, it involves estimating how much it would cost to continue using a resource, comparing that cost to the expected benefit it would bring, and then deciding whether to go ahead or not. If the expected benefit exceeds the cost, the project, plan or strategy should be approved.
Share – a unit of account for financial instruments, such as the stock market, limited partnerships, and investment trusts.
Share Capital – a company’s capital that came from investors who have bought shares. The calculation uses the nominal share price. The term can also refer to a company’s share structure.
Shareholder – a person, government, institution or any entity that owns one or more shares in a company. Shareholders are the owners of the company. Also known as a stockholder.
Shareholder Rebellion – when a company’s shareholders to not agree with decisions made by its Board of Directors and challenge them. Sometimes the aim might be to get rid of current Board members.
Shares Outstanding – all the shares that a company has issued or authorized, and are owned by investors and company officials. Also known as issued shares, outstanding stock or outstanding shares.
Shareholder Value – many say that this is senior management’s top priority. Shareholder value, also referred to as the shareholder value model or shareholder value maximization, is a business term that implies that how well a company and its senior management have performed depends on how much richer the shareholders have become. If the value of the business’ shares increased significantly, there has been effective shareholder value maximization.
Sharpe Ratio – a way of measuring the real return on an investment, fund or portfolio after adjusting for risk. The Sharpe ratio is extremely useful when investors want to compare two or more investment options, because market volatility is factored out – thus flattening out the returns as if the risk were the same for all investment opportunities. Investors and potential investors use the Sharpe ratio – which is also called the Sharpe Index, reward-to-variability ratio, and Sharpe measure – as a rough guide to whether an investment’s, fund’s or portfolio’s expected rewards justify the risk.
Shelf Company – a company that has been legally established, but has no activity. The owner set it up with the aim of doing business at a later date or selling it. Also known as ready-made company, aged company, blank check company, or shelf corporation. (in this context the words ‘corporation’ and ‘company’ are interchangeable).
Shell Company – a company without any current business activity or significant assets. While many are set up for legitimate purposes, they are popular among money launderers, funders of terrorist activities, and tax avoiders. Also known as a shell corporation, front company, or personal investment company.
Short Position – the sale of a borrowed security, currency, or commodity.
Short-Termism – in business and finance, the term refers to an approach that focuses on short-term results instead of long-term objectives. Business leaders and policymakers who are doing things that make their company or country better off now and in the short run, but worse of in the end, suffer from short-termism.
Signaling – when you do not have all the information regarding a product, you have to interpret the market signals, such as buying-selling behaviors of insiders, or announcements made by company CEOs regarding dividend payouts, etc. If a company announces that this year’s dividend payout will be 28% higher than last year, the signals picked up by the market players is that the business is doing well and probably has a promising future. When looking at the resume (CV) of a job applicant, the employer will be interested in that person’s education credentials more as a productivity signal rather than the specific details of each course.
Silver – silver is a precious metal often bought as an investment or store of value. Find out what drives the price of silver and its risks (such as extreme price volatility).
Single Market – a group of nations that trade with each other without imposing import taxes, thus creating one large market. Examples include the European Union and the North American Free Trade Agreement. Some single markets aim for total economic union.
Sino-Foreign Cooperative Joint Venture – a joint venture agreement between a Chinese and foreign company. This type of joint venture gives the foreign company more flexibility than a SJV.
Sino-Foreign Equity Joint Venture (SJV) – a limited liability company which has the status of a Chinese legal person.
Sister Company – two companies with the same parent company are sister companies, they are both subsidiaries of the same company.
Smart Money – can mean: 1. Investments by experts who can spot or foretell market trends. 2. The collective force of big money that can shift markets. 3. Venture capital where the investors also put in their own time and provide know how and advice. 4. Where the good bets are going (gambling). It is the opposite of dumb money or stupid money.
Social Capital – the value of human networks. The term refers to the collective value of all human networks and the tendency that arises from these networks for people to trust each other and do things together.
Social Commerce – a type of e-commerce that utilizes online social networks to drive the purchase and sale of products and services. Social commerce uses online communities, ratings, F-commerce, social advertising, shares, and stores inside the social networking website to buy and sell goods and services.
Social Currency – the economic value of each individual’s or entity’s relationships, both in real life and online. Companies have become aware of social currency and are actively weaving their brands into social networking sites, blogs, forums and other environments in order to create social currency for them, i.e. get people to include their brands when they interact with each other.
Social Media – the collective of online communications channels in which people, companies and organizations create and share content in blogs and social networking sites. The apps (applications) and websites are dedicated to forums, social bookmarking, social networking, product and service reviews, social curation, virtual worlds, wikis and other kinds of social media.
Socialism: a term with many meanings, ranging from pure communism to a free-market system with a minimum safety net for vulnerable people. In socialism, unlike communism, private property is allowed. However, socialists support more government intervention than capitalists do.
Socially Responsible Investing – investing money into businesses that conform to a set of ethical, moral and/or environmental standards. The socially responsible investor may refuse to invest in companies that sell tobacco products, weapons, or those that are high polluters. Also known as sustainable investing, socially conscious investing, green investing, ethical investing or SRI.
Soft Loan – a loan in which the interest rate is either very low or zero. Sometimes the borrower is given longer-than-normal repayment periods as well as interest holidays. Also known as concessional funding or soft financing. The World Bank provides soft loans to developing nations for worthwhile projects.
Soft Brexit – leaving the European Union but keeping some of its features, including free access to the EU market, the customs union, and passporting rights. However, in order to have these benefits the country would have to sign up to the free movement of people. The opposite of a Soft Brexit is a Hard Brexit, in which total border control is regained, but unfettered access to the EU market is lost, as are passporting rights.
Soft Currency – also called a weak currency, is one that people trust less than a hard currency. A soft currency loses its purchasing power over time in relation to hard currencies. Business people prefer to carry out international transactions with hard rather than soft currencies. A soft currency is the least popular for central banks as far as holding foreign exchange reserves are concerned. Developing nations tend to have soft currencies, while the advanced economies have hard currencies.
Software – all the programs – instructions and codes – within a computer that make it possible to use it. The physical parts of a technical device are called the hardware. Software refers to the programs that perform specific tasks. Without software, none of our technical equipment would work.
Solvency – a business’, person’s or entity’s ability to meet long-term financial obligations. Solvency equals total assets divided by total liabilities. If the result is greater than 1, the company is solvent, if it is less than 1 it is insolvent. Liquidity and solvency have different meanings – the article explains the meaning of each term.
Specialization – the opposite of diversification, refers to companies selling off divisions not closely related to their core activities, so that they can focus resources in specialized areas and thus become more streamlined and profitable. Workforce specialization, also called the ‘division of labor’, means individual people specializing in what they are good at, and working in just those areas. Specialization may refer to individuals, studies, careers, companies, organizations, communities, regions and even whole nations.
Speculation – an investment in which the investor wants to make a quick profit. Speculation involves placing money in short-term investments that carry high risk. However, they also provide the opportunity to make great gains rapidly. The person involved in speculation is called an investor.
Speculative Investment – an investment where all that matters, as far as the purchaser is concerned, is the short-term profit that can be made when it is sold. Traders in speculative investments are known as speculators. They are not interested in the annual income or dividends an investment may provide, but just its price fluctuation and making a profit.
Sponsor – as a verb it means to pay for part or all of the costs involved in staging an artistic or sporting event in return for advertising. The person, company or entity that does this is called a sponsor. To sponsor may also mean to pledge to donate money to somebody in a charitable endeavor, such as offering to contribute a certain amount for each mile run in a marathon. A company that pays for the broadcasting of a TV program such as a soap opera is its official sponsor.
Spot Market – a public financial market where commodities and financial instruments are traded for immediate delivery, or two to three days at the most. Also called the physical market or cash market.
Spot Price – the market price at which something is bought and sold for payment and delivery now. The spot price contrasts with the futures price or forward price, which is the price at which an asset – a commodity, security or currency – can be purchased or sold for delivery at a future date.
Spread – the difference between the prices of one item or interest rate on different days, or two items or interest rates on the same date. The term can be used for insurance underwriting, share trading, bond values, or virtually any type of security or commodity.
Stability – something that most central banks and governments across the world strive for. An economically stable economy is one that experiences small changes in GDP growth rates, and long-term low inflation. For economic stability to exist in a country, it needs a stable political system, usually a free market economy, good levels of infrastructure, technological development, and human capital.
Stagflation – an economy is in a stagflation rut when GDP growth is either very slow or absent, unemployment is too high, prices are rising too fast, and demand is weak. Policymakers have a serious problem when stagflation strikes, because anything they do to bring down inflation is likely to slow down economic growth even further, kill demand, and exacerbate the unemployment problem – and any measures taken to address slow GDP growth, unemployment, or demand will push up inflation.
Stakeholder – anyone (or group of people) who have an interest in a company or organization are considered to be stakeholders.
Standby Credit – funds made available to lower income nations that find themselves with temporary balance of payments problems, or experience unforeseen catastrophes, such as floods or earthquakes. An example is the IMF Standby Credit Facility.
Statistical Significance – refers to how reliable a statistic is. If something is statistically significant, it means that the finding is reliable and is highly unlikely to be the result of chance or happenstance. In the world of statistics, ‘significant’ does not mean ‘important’, it means ‘reliable’ or ‘unlikely to be due to chance’.
Statistics – has two meanings. In singular form it is the subject – e.g. statistics, economics, mathematics, biology, etc. In the plural form it refers to the numbers – e.g. statistics are pointing to an accelerating incidence of obesity across the country.
Statistician – a person who gathers, analyzes, interprets and presents numerical, quantitative data – statistics. They might work in a wide range of fields and sectors, including transportation, finance, government, education, forensics, astronomy, market research and many more. They need to be good at mathematics, dealing with people, and making presentations.
Sterilized Intervention – the buying of foreign currency by a country’s central bank to influence the value of the domestic currency, without changing the money supply. When the central bank purchases or sells some of its foreign currency reserves, the country’s money supply may be affected. This effect can be ‘sterilized’ if the government buys or sells the equivalent amount of securities, such as Treasury bonds.
Sticky Prices – prices that do not respond rapidly to changes in demand, supply, production or delivery costs. Sticky prices are the opposite of flexible prices. The price of a dollar in currency exchange markets is flexible – it changes by the minute. The prices of hotel rooms, on the other hand, take several months to respond to changes in the market’s environment – hotel rooms have sticky prices.
Stock Index – a computed average of a sample of share prices, representing either a particular sector, market, the whole economy, a country, or a geographical area. Examples include the S&P 500 and FTSE 100. Also called a stock market index or a share index.
Stock Market – refers to the whole market where shares (stocks, equity) are bought and sold. The stock market includes what occurs in stock exchanges, as well as over-the-counter transactions.
Stocks – in finance, the term refers to company shares, hence the term ‘stocks and shares’ and the ‘stock market’. Stocks in a warehouse means goods stored for future orders or deliveries – a reserve of products for future use. Government stocks, in British English, refers to one of the bonds sold by the government to finance its budget deficit – government bonds. The expression on the stocks, which comes from shipbuilders, means ‘under construction’.
Stock Split – an increase in the total number of a company’s shares outstanding, accompanied by a proportionate decline in the value of each share. Dilution does not occur in a stock split. Also known as a share split or stock divide.
Stock Swap – when a corporation offers a certain number of its shares for each share of another company. Often occurs during an acquisition. In most cases, some cash is also included in the transaction. Also known as a stock-for-stock, share-for-share exchange, or share exchange.
Stress Testing – a series of simulated scenarios that banks, other financial institutions, investment portfolios, and even whole economies are exposed to, to determine how well they might fare against economic shocks. Ever since the 2007/8 global financial crisis and Great Recession that followed, financial institutions across the world have had to undergo stress testing, to determine their ability to deal with a simulated economic crisis.
Structural Unemployment – unemployment that is not caused by the cyclical changes in the economic cycle – such as declining demand – but rather from changes in the structure of the economy itself. Technological advancements, such as artificial intelligence and robotics, i.e. automation, can reduce the size of a company’s workforce. The workers who are laid off do not have the skills that employers are looking for, such as robot operators – so there is a mismatch between the available unemployed workforce and what companies are looking for.
Subprime Mortgage – a type of mortgage that is made out to borrowers who have a very low credit rating.
Subsidiary – a company that is at least 50% owned by a parent company or holding company. The holding company has a controlling interest. The subsidiary can be any type of commercial enterprise, such as a limited liability company, a corporation, or a state-owned business.
Subsidy – money the government gives directly to companies, farmers, organizations, individuals and other entities to encourage production, increase exports, promote research, prevent companies from going bankrupt, reduce joblessness, or make the price of a food, product, service or utility more affordable. There are many types of subsidies.
Substitute Goods – often referred to as simply Substitutes, are two or more products that can replace each other; they can be used by consumers for the same purpose. Examples include Coke and Pepsi, Crest and Colgate (toothpaste), or MacDonald’s or Burger King hamburgers. When the price of one rises, demand for the other goes up – the two products have a positive cross-elasticity of demand.
Sunk Costs – money that has already been spent which you will never get back; it is not recoverable. If a company spends money on research and development, advertising, or building a new plant, that expenditure has gone – it is not possible to claw back the money. Rather than continue funding a project which probably won’t help the company make money, senior management should cut their losses – accept the expenditure as a sunk cost – and focus on other things.
Supply and Demand – the most fundamental concept in economics is supply and demand, it plays a huge role in determining the prices of goods and services in a market economy.
Supply-Side Policies – the term describes economic policies aimed at influencing output and employment through their impact on the supply-side of the economy. This contrasts with Keynesian economics, which focuses on demand-side policies – boosting demand. In the 1980s, US President Ronald Reagan and UK Prime Minister Margaret Thatcher pursued supply-side policies.
Surety Bond – an agreement between three parties – Principal, Surety and Obligee. The Surety is an insurance company that provides a financial guarantee to the Obligee (usually the government) that the Principal (business owner) will fulfill all their obligations. Essentially, a surety bond is a risk transfer mechanism. Evidence of a contract of suretyship dates back to 2750 BC.
Sustainable Growth – the term may be used for a company or a whole economy, and refers to its ability to grow consistently without hitting problems or creating problems for the future. Sustainable growth is also used when talking about the environment – specifically, economic growth over the long term without using up all the non-renewable resources, polluting the planet, or contributing to global warming.
SWIFT Code (BIC Code) – a SWIFT code contains 11 characters. It is a form of bank identification which helps facilitate international wire transfers.
Syndicated Loan – also known as a syndicated bank facility, is a loan where a number of banks and/or financial institutions form a group (syndicate) and lend money to one borrower, usually a corporation, government or large project.
Systemic Risk – risk that could affect the whole economy, usually because a company that is ‘too big to fail’ collapses. Companies that are ‘too big to fail’ are typically major banks – if a major bank collapses, other banks that it owes money to will have problems, people get to hear about it and clusters of bank runs ensue…,etc. Governments will generally bail out a troubled large financial institution because of the systemic risk. Opponents say they shouldn’t, because knowing that they will be rescued encourages behaviors that increase systemic risk.
Systems Management – an IT term that refers to the centralized management of a company’s or any entity’s information technology. This ‘umbrella term’ comprises several tasks required to monitor and manage IT systems. Virtually every type of organization, such as charities, schools, universities, religious organizations, healthcare services and trade unions have personnel specialized in systems management.
Takeover – also called an acquisition, is when one company acquires the majority or controlling interest in another company, in most cases through the purchase of its shares. Put simply, when one firm buys another firm. There are many types: friendly, hostile, reverse and backflip takeovers. The purchasing company is known as the acquirer or bidder, while the company being bought is called the target. As a noun it is one word – takeover – but as a verb it consists of two words – to take over.
Tangible Assets – these are assets we can touch because they have a physical form, unlike intangible assets. Examples of tangible assets include land, buildings, equipment, cash, and inventory.
Tariffs – duties or taxes that are levied on imported products. The purpose is either to protect domestic suppliers and jobs at home, or raise revenue for the government. Tariffs and quotas are two weapons that countries can use to improve their balance of trade and protect domestic producers.
Tax – an amount of money that has to be paid to the government based on a person’s income, a company’s profit, how much a dead person bequeathed, or the cost of goods or services bought. Tax is compulsory. If you deliberately cheat the tax authorities and don’t pay, you could be facing a fine or even jail time.
Tax Avoidance – everything we do to reduce our tax bill, that is, everything we lawfully do. Tax avoidance, unlike tax evasion, is legal. If I want to avoid tax, I need to find an accountant who specializes in taxes, and ask him or her to advise me on how to reduce my tax bill.
Tax Evasion – illegal methods used to not pay tax. Examples of tax evasion include circumventing or frustrating tax laws, deliberately understating taxable income, willful non-payment of taxes that are due, and hiding your money.
Tax Haven – also known as a secrecy jurisdiction, is a country, territory, or part of a country that offers very favorable tax rates and other conditions, especially to foreigners who deposit their money there. Tax havens are commonly used by tax avoiders and tax evaders, who place their money there legally or illegally (respectively).
Telecommunications – communicating at a distance. Also known as telecom, today the term usually means communicating over long distances using hi-tech equipment, such as satellites, fiber optics, mobile phones, laptops, the Internet, TV or radio broadcasting, and telegraphs. It all started off many thousands of years ago with smoke signals and beating drums.
Telecommuting – also called teleworking, means working away from the office, remotely, which in the majority of cases means working from home. The person engaged in telecommuting is called a telecommuter or teleworker. Telecommuting has become much more common since the Internet emerged at the end of the last century.
Telemarketing: refers to contacting potential customers, usually by phone, in order to get them to buy something, pay for a service, contribute to a charity, reveal their preferred party in the next elections, provide feedback, make an appointment, receive a free sample, or to take part in a survey. Telemarketing can be business-to-business (B2B) or business-to-consumer (B2C). The term may also refer to using fax or the Internet for marketing purposes.
Teleworking – also called ‘telecommuting’, means working remotely. This could be working at home, in a cafe, in a designated work center, on a train, etc. A person who teleworks is a teleworker or telecommuter. Teleworking is becoming progressively more popular in most parts of the world. It offers several advantages to both the employer and employee.
Third Way – an ideology that is at the center of the political-economic spectrum. The Third Way is neither socialism nor capitalism, it is eclectic – it takes from both left-wing and right-wing approaches, combining the two into a middle way. The Third Way was initially promoted by US President Bill Clinton and British Prime Minister Tony Blair in the 1990s, and then the German, Italian, Dutch and other European leaders. Today, the Third Way is rarely mentioned – some say its outlook is bleak.
Threshold – the point at which something changes or begins to belong to a particular class. Tax-free threshold is the amount of income for which no income tax is payable. Your pain threshold is the level at which pain starts to be felt. People with a low fear threshold get scared easily.
Tier 1 Capital – this is a bank’s core capital. As opposed to Tier 2 capital, it is considered to be more reliable.
Tier 2 Capital – an element used to measure a bank’s total capital base. This form of capital is considered to be riskier than Tier 1 capital.
Time Value of Money – the concept that money has a higher value today than at any future date, because it can grow with time. Also called present discounted value.
Total Return – the actual rate of return of an investment, calculated by including interest, dividends, capital gains, and distributions realized over a specific period. It is the total return on an investment or portfolio of investments that takes into account both the capital appreciation on the portfolio as well as the income received on it.
Toxic Assets – financial assets whose value has declined significantly, will probably continue falling, and for which there is no longer a functioning market.
Toxic Debts – debts that are not likely to be paid back to borrowers. Essentially toxic debts are a class of assets that were once of value (or were believed to hold value) but are now worthless or have almost completely declined in value.
Trade – the activity of purchasing, selling (exchanging) goods or services within a country or between nations. Trade may also refer to the volume of activity within a business enterprise, industry, etc. A trade may be a particular skilled job, especially a manual one. It also means to buy-sell shares, bonds and other financial instruments on a stock exchange.
Trade Area – also known as a market area, is the area in which a company does business; its commercial territory. The trade area of a shopping center, wholesaler, or department store is the geographical area where sales are made. Trade areas tend to be smaller for cheap, everyday goods, such as groceries and gasoline, and larger for more expensive items, such as furniture. In other words, we are willing to travel further to buy expensive dining room furniture than to fill our cars with fuel.
Trade Credit – an arrangement whereby customers can pay for goods or services received at a later date, generally 30, 60 or 90 days later. For many businesses, it is a useful way of improving cash flow.
Trade Deficit – also known as a trade gap, it is defined as being a negative commercial balance. It occurs when a nation imports more products than it exports.
Trade Surplus – a positive measurement of a country’s balance of trade. Specifically it refers to a positive balance of trades – when a country exports more than it imports.
Trademark – spelled as such in the USA, ‘trade-mark’ in Canada, and ‘trade mark’ in the rest of the English-speaking world, is a symbol or sign used to distinguish a company’s goods or services from those of other businesses. The trademark is legally registered or established by long-term use as representing a product or company.
Transaction Costs – costs incurred by purchasers and sellers during trading, apart from the price of the good that is changing hands. Transaction costs may refer to an underwriter’s fee, lawyer’s fee, broker’s fee, or other financial intermediary charges. When deciding whether your company should make something or buy it, transaction costs are a critical factor.
Transition Economy – a country that is changing from being a communist state to having a free-market economy. The nation’s economy is moving from one where the state planned everything to a capitalist or mixed-economy system – where market forces determine what happens. Examples include Russia, China, Vietnam, Ukraine, Poland, Laos, Cambodia, Hungary, Romania, and the Czech Republic.
Transparency – in business, the term refers to the extent to which investors, shareholders and other stakeholders have ready access to a firm’s or market’s data, such as price levels, market depth, financial reports, and other planned actions. In government, transparency refers to how much data a nation’s government shares with its people.
Treasury Bills – these are short-term maturity promissory notes that national governments issue to raise funds or regulate the money supply through open-market operations. Time to maturity may range from a few days to fifty-two weeks. They contrast with treasury notes and treasury bonds, whose time to maturity range from 1 to 10 years and more than ten years respectively.
Trough – in economics and statistics, it is the point in the business cycle between the final part of a recession and the beginning of accelerating GDP growth. In a graph, the trough is the bottom of the ‘V’ shape, where the falling and rising lines meet. In non-business English ‘trough’ has many meanings, including the narrow, open container that animals eat/drink from; a long, narrow container used for growing plants; the lowest part of two waves in a sea or lake; a long hollow in the Earth’s surface; a channel that water flows through; and in medicine, the lowest concentration of a drug in a human’s bloodstream.
Trust – the firm belief in the truth, reliability, or ability of something or somebody, is one of the most important ingredients for a successful business. Without trust, our world today would be a very different place – significantly poorer and more backward. A trust may refer to an arrangement in which one person – the trustor – gives control of his or her estate/property to a trustee for the benefit of a third party – the beneficiary.
Ultra-Short Bond Fund – a type of bond fund that solely invests in fixed-income instruments that have very short-term maturities of no longer than a year.
Unemployment – occurs when people don’t have jobs and are seeking work. The unemployment rate is calculated by dividing the total number of unemployed by the number of people in the labor force. Unemployment can also mean unemployment benefit.
Underlying Asset – a security (such as a stock) on which a derivative is based – determining its price.
Underground Economy – the part of the economy that the authorities know nothing about. People who work in the underground economy, also called the black economy, the informal sector, and the shadow economy, do not declare their income – they pay no tax on what they earn; this is illegal.
Underwriting – the process of determining whether a customer is eligible to receive capital from corporations and governments that issue securities.
Unsecured Loan – a loan with no security (collateral) or guarantor tied to it. The lender risks losing all its money if the borrower defaults. Also known as unsecured debt.
Usury – the act of loaning money at exorbitant interest rates. The term may be used as a moral condemnation of the act, or to inform about an illegally high interest rate. Originally, hundreds of years ago in the English language, ‘usury’ just meant lending money and charging interest, regardless of whether it was exorbitant or reasonable. Some countries have legislation to protect borrowers from abusive lenders.
Utility – in economics the word refers to how much pleasure or satisfaction we derive when we consume a product or service, or experience an event. In business, a utility company generates, transmits and/or distributes utilities – electricity, gas or water. Utility may mean a computer program that improves the efficiency of an IT system. In patent law, the utility of a product refers to how useful it is – if an invention is not useful, it is virtually impossible to get it patented.
Value at Risk (VaR) – a widely used risk measure of the risk of loss on a specific portfolio of financial assets over a specific period. It did not emerge as a distinct concept until after the 1987 stock market crash.
Valuation – an estimate of how much something, such as a business, antique, property, financial asset, or work of art is worth. Examples of financial assets include commercial enterprises, patents, trademark, stocks and options. Banks will not approve a mortgage unless a valuation of the property is carried out.
Value Chain – all the activities a company is involved in from buying raw materials to delivering the finished product or service to customers. Value chain also includes after sales service and/or after sales repairs. All the activities are interlinked, and if analyzed carefully and tweaked properly, can give the company and its products an advantage over its competitors in the marketplace.
Value Investing – a system of making money by purchasing securities for less than they are worth. Value investing emerged after the publication in 1934 of ‘Security Analysis’, written by Benjamin Graham and David Dodd.
Variable Costs – relate to the costs that go up and down according to levels of production. When production is increased variable costs rise, when production declines variable costs go down – unlike fixed costs, which rarely change from month-to-month. Examples of variable costs include labor and materials used for production, while rent, insurance premiums and utilities are examples of fixed costs.
Variable-Rate Mortgage – a home loan whose interest rate can change, usually as a result of fluctuations in the base rate. In the United States, the term adjustable-rate mortgage (ARM) is more common.
Veblen Goods: – luxury items whose prices do not follow the normal microeconomic laws of supply and demand. When the price of a Veblen good rises, demand for it increases. Examples of Veblen goods are luxury yachts, designer handbags, diamonds, expensive Swiss watches, certain vintage wines, and ultra-expensive cars. People buy Veblen goods either because they think their quality is superior, or they want to show off – they are status symbols.
Velocity of Circulation – also known as the velocity of money, refers to how much money is in circulation within an economy over a given period, i.e. how fast it is moving. Velocity of circulation is the driver of prices, rather than the amount of money in an economy. Economists use this measure to determine how healthy an economy is, and whether inflation is expected to rise.
Venture Capital (VC) – financial capital provided by investors to small businesses that are believed to have long-term potential. It is a type of private equity. Venture capitalists typically see thousands of proposals and just back a couple of dozen.
Vertical Equity – the principle that better-off people should contribute more in taxes to the government than others, and that middle class individuals should pay more than working class people, etc. Proponents say this system is fairer and reduces inequality in societies. Those against it say it discriminates against hard workers and rewards people who work less. In most countries there is a vertical equity income tax system.
Vertical Integration – refers to a company that merges with another one in the same business but in a different stage of the supply chain. For example, if Company A, a fashion retail chain, mergers with Company B, a manufacturer of clothes, that is vertical integration. It can be achieved by either merging, acquiring other companies, or setting the whole thing up internally. There are three types of vertical integration – backward, forward or balanced integration.
Vertical Market – this is a niche market, with buyers and sellers that make similar products and have virtually identical needs. Often, the term refers to a subcategory of an industry or sector. For example, a maker of artificial limbs operates in a subcategory of medical devices.
Visible Trade – the importing and exporting of goods, tangible products, merchandise, things you can see and touch such as smartphones, automobiles, ships, coal, coffee, oil, etc. Visible trade contrasts with invisible trade, which refers to services, such as tourism, royalties and licence fees, software, consultancy, advertising, etc.
Volatility – a measurement of the fluctuations of the price of a security. It is essentially an analysis of the changes in the value of a security. It is one of the most key measures in quantifying risk. In business/finance the term can also refer to fluctuations in currencies, markets, property prices, etc.
Volcker Rule – a federal regulation that prohibits banks from engaging in certain types of speculative investment activities. It was proposed by former United States Federal Reserve Chairman Paul Volcker following the 2007-2008 financial crisis. He wanted to stop commercial banks gambling with depositors’ money in the markets.
Voucher – the term has several meanings: 1. A small printed piece of paper or plastic that entitles the holder to either a discount or free product or service. 2. In the US, a scholarship to a private school. 3. In accounting, an internal document used in the accounts payable department. 4. A credential – a piece of evidence, proof, or authorization in writing. Although there is technically a difference in meaning between voucher and coupon, today the two terms are commonly used interchangeably.
Vulture Investor – a person or organization that specializes in purchasing assets and financial instruments belonging to companies or people in trouble.
Wage – in business, a wage is the money that an employer pays an employee for work done. Wages are calculated on an hourly, daily, weekly or monthly basis, as opposed to salaries, which are calculated monthly or annually. Sometimes wages are linked to production, i.e. piece rate. The article also briefly explains some other non-business meanings of the term.
Wage Theft – the illegal practice of withholding wages from an employee. It also includes not paying themovertime when they work extra hours, and other violations of workers’ rights.
Weightless Economy – part of our economy with abstract products; things that have commercial value but we cannot touch because they have no mass. Information, ideas, knowledge and services make up the weightless economy. During the industrial revolution, nearly all innovation involved heavy physical products, such as locomotives, textile machinery, etc. Today, most economic growth occurs within the weightless economy.
Welfare – this word has several meanings. 1. Government assistance in the form of money for vulnerable, poor or disadvantaged people. 2. The availability of resources and conditions needed to keep a human mentally and physically healthy, secure and comfortable. 3. Economic surplus. 4. Welfare Economics is a branch of economics that uses microeconomic techniques.
West Texas Intermediate (WTI) – a trading classification of crude oil and one of the most commonly used benchmarks in oil prices, alongside Brent Crude.
Working Capital – a measurement of how much operating liquidity an entity has. It is a measure of a firm’s liquidity, efficiency and overall health.
World Bank – a financial institution managed by the United Nations that offers loans to poor and emerging economies for capital projects. Formed after WWII, its initial aim was to finance the reconstruction of Europe and Japan.
No terms beginning with the letter X are in our database.
Yield – the amount of money that an investment generates in cash in percentage terms. For example, with a company’s shares it is the annual dividend as a percentage of the share price.
Yield Curve – often called the “term structure of interest rates”, the yield curve is a curve that plots the yields or interest rates for debt contracts, according to their maturity dates.
Yield Spread Strategy – a method of taking advantage of the yield spread of a specific bond.
Z bond – a bond that accrues interest added to its principal balance. It is also known as an accrual bond.
Zero-Coupon Bond – also known as a discount bond, is a bond bought at a price lower than its par value, with the par value repaid when it reaches maturity. This type of bond does not disperse an annual interest payment.
Zero-Sum Game – a game or business situation where there is one winner and one loser; the winner’s total minus the loser’s total loss equals zero – hence the term ‘zero-sum’. An example could be an arm-wresting contest or game of poker. The opposite is a non-zero sum game. Most business transactions are not zero-sum games, for the simple reason that nobody would enter a zero-sum deal.
Zombie Bank – a financial institution that is worth less than nothing, but continues operating, mainly because of government support.
Zombie Company – a business that is heavily in debt and is only able to pay the interest on its loans, i.e. it cannot reduce the principle. The term includes companies that were bailed out and would not have survived without help. Also called a zombie firm or living dead.
Zoning – local government by-laws that define how certain parts of the city may be used, specifically land use. Some areas are residential, while others are destined for agriculture, industry or commerce. The aim of zoning is to make communities as safe as possible, and ensure that growth occurs in an orderly way.
Our aim is to eventually have the most comprehensive and clearly understandable pool of financial/business definitions for our Financial Glossary.
If you come across a term that we have not covered then please let us know by contacting us and we will consider adding the term.