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Financial Glossary

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.

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).

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.

Agreement Corporation – a type of bank that is allowed to operate in international business – in agreement to the terms of the Edge Act.

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.

Asset – anything tangible or intangible that has a positive economic value that can be converted to cash (such as property or stocks).

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 organisations.

B2B – stands for Business-to-Business. It is a business model in which the seller only sells to other companies rather than individual consumers. When it sells to individual consumers, we call it B2C, i.e., business-to-consumer.

B2C – stands for Business-to-Consumer. In this business model, sellers sell directly to individual consumers rather than companies. When the seller targets other companies, we call it B2B, i.e., business-to-business.

B2G – stands for business-to-government. It refers to companies providing services or selling goods to the government, government agencies, or the public sector. Defense contractors, for example, are mainly involved in B2G activities.

Balance Sheet – shows the financial status of a person, company or organisation 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.

 

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.

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.

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 Appreciation – an increase in the market value of an asset. This occurs when the market price for an asset is higher than what the investor originally paid for.

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.

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.

Certificate of Origin (CO) – a document with information about a product’s origin, i.e., where it was made. It also has information on its destination. The document helps countries determine whether they must levy a tariff on the product.

CFD in Derivative Trading – CFD (Contract For Difference) is an extremely popular type of derivative trading. Traders can speculate on rising and declining prices and make money. If their predictions are wrong, they can also lose money.

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.

Cryptocurrency – a type of digital money, i.e., it exists only electronically. It is an online currency that is encrypted. The encryption makes it secure, cryptocurrency creators claim. It operates without a central bank, unlike traditional currencies.

Cryptocurrency Exchange – an exchange where people can trade (buy and sell) cryptocurrencies. People trade them using fiat currencies, other cryptocurrencies, or other digital assets. Most cryptocurrency exchanges work 24/7. We also call them digital currency exchanges (DCEs).

Cryptocurrency Mining – the validation of cryptocurrency transactions, i.e., transactions using digital money. Some people refer to it as cryptomining. ‘Miners‘ carry out cryptomining. The process adds transactions to the blockchain and releases new currency. When miners have successfully completed the process, they receive a reward in the form of new currency units.

Cyprocurrency Wallet – a digital wallet or virtual wallet for cryptocurrencies. It is a software program that stores public and private keys. By using the keys, owners can use cryptocurrency to pay for things. They can also use the keys to receive payment. The cryptocurrency wallet allows owners to monitor their balance.

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.

Depression – when a recession continues for more than 3 years, it becomes a depression. During the depression, GDP contracts by at least ten percent. A depression is longer than a recession. However, recessions and depressions have the same starting dates. We also refer to it as an ‘economic depression.’

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.

Devaluation – when the government forces its domestic currency to decline in value compared to other currencies there is a devaluation. This can only happen to currencies on a fixed exchange rate. Free-floating currencies such as the dollar and pound depreciate and appreciate, they do not devalue.

Digital Currency – a type of currency that only exists electronically. It is not available in physical form, unlike banknotes and coins. In other words, digital currency is intangible. We can use digital money to buy products and services.

Digital Wallet – a system that stores a person’s payment information securely. We also call it an E-wallet or electronic wallet. The wallet stores the user’s cards digitally for payments. Payments are made online through an electronic device such as a smartphone, tablet, or computer.

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.

Earning Power – a business’ ability to generate profit. We can also use the term for a person, i.e., their ability to generate income. Investors calculate companies’ earning power before deciding where to place their money. We calculate earning power by dividing operating income by total assets.

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.

Easement – the right to do something with or on another person’s land. For example, if my land is completely landlocked, I need to drive over my neighbor’s land to get to the road. If I have permission to do this, I have an ‘easement.’ There are many types of easements.

Easy Monetary Policy – a central bank policy of low interest rates. When economic growth is sluggish, central banks may reduce interest rates to boost economic growth. When interest rates decline, people and companies borrow more. They subsequently spend more, which helps GDP growth.

EBITDA – an acronym for earnings before interest, taxes, depreciation, and amortization, i.e. Revenue minus Expenses (excl. interest, taxes, depreciation and amortization).

Echo Bubble – a small bubble that follows a major bubble. When there is a stock market crash, we say that the bubble has burst. Sometimes, there is a premature recovery. Investors get excited and markets rise. However, it is short-lived. That second bubble also bursts, and markets fall again. We call that second bubble an echo bubble. We can use the term for the economy too.

Eclectic Paradigm – a business approach that determines whether it is good for a company to engage in foreign direct investment. The paradigm looks at three potential advantages: ownership, location, and internalization.

E-Commerce – a business model that focuses on doing commercial transactions online, i.e., on the Internet. E-commerce stands for Electronic Commerce.

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.

Factor Income – the income that the factors of production provide. Land, for example, provides rent, while labor provides wages. The other two factors of production, capital and enterprise, provide interest and profit respectively.

Factoring – a type of financing in which a ‘factor’ buys a company’s invoices, i.e., its accounts receivables. The factor pays the seller between 70% and 85% of the invoice value immediately and collects the money due from the buyer. The factor charges a fee, which is a percentage of the invoice’s value, for the service. Factoring is useful for companies that need working capital. Factoring (UK: factorizing), in algebra, means finding a number’s factors.

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.

Financial Adviser – a person who provides clients with advice on how to manage their finances. They also suggest investment options, such as stocks and shares, bonds, and other financial instruments.

Financial Analysis – an assessment of a project, company, or any entity regarding its stability, viability, solvency, and profitability. Before making a major business decision or investing in a project, it is common to carry out a financial analysis.

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 Assistance – any type of monetary aid or help. Subsidies, tax allowances, and cost-sharing arrangements are examples of financial assistance. Welfare payments, bailouts, and loans are also forms of financial assistance.

Financial Attributes – factors of a company that show us how healthy it is financially. The parameters suggest how well or badly the business is faring and whether it is in good shape.

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 Commitment – 1. A pledge to pay a certain amount of money on a specific future date. 2. To assume financial responsibility for something on a specific future date. 3. To regularly pay somebody or something over a specific period. We can use the term for short-, medium-, and long-term commitments.

Financial Incentive – a monetary benefit to encourage people to do something or behave in a certain way. Financial incentives include rewards, commissions, bonuses, profit sharing schemes, stock options, and tax benefits. Specifically, financial incentives encourage actions or behaviors that would not have occurred otherwise.

Financial Instrument – a monetary contract between two entities. We can create, trade, modify, and settle financial instruments. They may be evidence of ownership or contractual rights to receive cash. Derivatives are financial instruments, as are securities.

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).

FMEA (Failure Mode and Effects Analysis) – a step-by-step approach to detecting the potential failures in a process, system, service, or product. We can use the term in the physical or abstract sense. The approach looks at each failure and their individual knock-on effects. We then view all of them together to get an idea of what the overall consequences are or might be.

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.

Futures Market – a market where people buy and sell futures contracts and commodities. There are many across the world. The largest is the Chicago Mercantile Exchange (CME). We also call it a Futures Exchange.

Gilts – bonds that the British government issues. They are the equivalent of American Treasury securities. We also call them gilt-edged securities. When the British government needs to borrow money, the Bank of England issues gilts.

Gilt-Edged Securities – bonds that either governments or very solid, reliable, top-quality companies issue. They issue them to raise money, i.e., borrow money. In the UK and Commonwealth, the term usually refers to government bonds, unless otherwise stipulated.

Global Economy – the term either refers to the total size of the economy of the world, or the way countries’ economies have become interdependent. In other words, we use the term when talking about global GDP or how what happens in one country affects many others. Hence the phrase “We live in a global economy.”

Global Financial Crisis – a financial crisis or economic meltdown that affects the whole world, rather than just one country. Typically, banks stop lending, businesses go bust, and consumer spending declines significantly. Many banks cannot cope and the taxpayer has to bail them out. Global financial crises often precede recessions.

Global Fund – a mutual fund (UK: unit trust) that invests all over the world, including the investor’s home country. An International Fund, on the other hand, invests globally but not in the investor’s home country. The Global Fund to Fight AIDS, TB and Malaria, which Microsoft billionaire Bill Gates founded, it also known as The Global Fund.

Global Investment Performance Standards (GIPS) – guidelines and regulations for investment firms. Investment firms in thirty-seven countries across the world adhere to the GIPS standards. Hence, investors have access to reliable performance data.

Globalisation – the process by which companies and organisations start operating across borders and develop influence internationally. The term also refers to the transmission of values, ideas, and meanings across the world (cultural globalisation).

Global Marketing – the effective planning, producing, placing and promoting of goods and services in the worldwide market. Ever since the arrival of the Internet and e-commerce, global marketing has become crucial for many companies. Today, even small businesses are selling globally.

Going concern – a company that is currently active and is profitable. In other words, it is thriving. ‘Going concern’ is a term that accountants use. They expect the company to be active and doing well at least for the next twelve months. A going concern has not gone bankrupt or sold off its assets (liquidated its assets).

Grey Market – (British: Grey Market) a market in which the distribution channels are unauthorised. In the securities market, the term may refer to trading before the official trading of a new stock begins. In marketing, a market dominated by consumers aged 60+ years.

Great Depression – the most severe economic downturn to hit the USA and the world in modern history. Over a three-year period, global GDP shrank by 15%. Unemployment in the US reached 20% of its population (15 million).

Great Recession – the longest period of economic decline since the Great Depression of the 1930s for many countries. From 2007/8 to the end of 2009, many countries experienced negative GDP growth.

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.

Hyperinflation – inflation of at least fifty per cent per month. When a country experiences hyperinflation, its currency declines dramatically in value and people’s purchasing power falls drastically. The main causes are economic recession while the government prints more money, or war.

Implicit Cost – an opportunity cost that the accountant did not report as a distinct, separate expense. Any cost that results from an asset rather than renting or selling it. In other words, what the company has to forego by choosing not to sell or rent that asset. We also call it implied cost, notional cost, or imputed cost.

Implicit Interest Rate – a loan or lease agreement where there is interest added but the interest rate is not mentioned. The interest rate, although not mentioned, is ‘implied’ or ‘implicit.’ There is a mathematical calculation that determines what the interest rate is.

Import Credit – a loan facility that a bank in the importer’s home country offers the importer. Import credit is useful for importers if their suppliers do not offer credit terms. It contrasts with export credit.

Import Duty – tax on imported goods or services. Imports are goods and services that come from another country. Customs duty and import tariff mean the same as import duty.

Import Quota – a limit that a government places on the quantities of a specific product or service that can enter a country from abroad. In other words, an import limit targeting a particular product or service. This may be to protect domestic suppliers, in retaliation for something the other country did, or part of an international coordinated strategy.

Import Ratio – the ratio between one month’s worth of imports and the average total foreign exchange reserve held in the central bank. Most countries should have enough reserves to pay for three months’ worth of imports. Emerging countries, especially, should have a good ratio, because they pay for their imports and debt repayments in hard currencies. The term may also refer to the ratio between total imports and gross domestic product (GDP).

Import Relief – measures the government takes to help domestic companies compete with foreign imports. Measures include restricting imports, providing subsidies and low-interest loans. Sometimes, the domestic producer gets special tax concessions.

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.

Import Substitution Industrialisation (ISI) – an economic policy theory that advocates replacing imports with products made locally. The economic or trade theory was popular among some developing nations during the 20th century. Very few countries pursue ISI today.