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Financial Glossary – I

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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.