Financial Glossary – Business Terms and Definitions
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.
ABA Routing Number – a unique, nine-digit number that is present on a check or deposit slip in the USA. ABA stands for the American Bankers Association. The number identifies the bank or financial institution that issued the check.
Abatement – in the world of finance, business and law, the term refers to either the elimination or reduction of something, usually something undesirable such as a fine, payment, or harmful substance. Property tax abatement, for example, is the temporary elimination or reduction of property taxes – usually introduced in an attempt to boost the real estate and construction sectors, and/or the whole economy. Noise abatement is a procedure – often done at airports – to reduce noise levels.
Abbrochment – or abbroachment, occurs when a business entity or individual monopolizes a market by buying products wholesale (in bulk) before they come to market, with the aim of selling them at much higher prices in the retail market. To abbroach is to hoard a product until you are the only one to supply it, and sell it at a higher-than-normal price.
ABC Agreement – a contract between a brokerage firm and one of its employees regarding the New York Stock Exchange’s (NYSE’s) membership. It is called an ABC Agreement because it includes three possible options for the employee should he or she leave the firm one day. The options include transferring the membership to another employee, selling it to another employee (proceeds go to the firm), or keeping the membership as long as the leaving employee is willing to purchase a new one for an employee chosen by the firm.
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/received, 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.
A Fortiori Analysis – a way of dealing with doubt and uncertainty that strengthens the case for a preferred choice. If I prefer Option A, I should go through the pros of Option B – and even give additional weight to each of Option B’s advantages. If Option A still seems like the better solution, I will be more certain that my choice was the right one.
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.
A Posteriori – one of the two ways of gaining knowledge – the other way is a priori. A posteriori knowledge is the same as ’empirical knowledge’, i.e. knowledge we gain through experience – observing things as they happen or listening to others’ experiences. A priori knowledge is through pure logic, ideas, or analyzing concepts, and not through experiences.
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.
Average Selling Price (ASP) – the average price that companies sell something for or customer pay for it. The ASP typically covers a specific period. A good’s ASP can vary, depending on its life cycle and what type of product it is.