Financial Term of the Week
A repository of financial terms, posted/updated weekly.
Term of the Week - March 24, 2024
Value-Added Product
A value-added product is a saleable commodity that has been enhanced with additional qualities that make it worth a higher price than the raw materials used to make it. It may be made more convenient, more attractive, more palatable, or easier to use than its raw ingredients. Adding value explains why businesses are able to sell their goods or services for more than they cost to produce. In marketing, the added value is a succinct message to the consumer about the characteristics that make a product worth more than its raw ingredients and, just as importantly, why it is preferable to similar products from competitors.
Term of the Week - March 17, 2024
SWOT Analysis
SWOT analysis is a strategic planning technique that provides assessment tools. Identifying core strengths, weaknesses, opportunities, and threats leads to fact-based analysis, fresh perspectives, and new ideas. A SWOT analysis pulls information internal sources (strengths of weaknesses of the specific company) as well as external forces that may have uncontrollable impacts to decisions (opportunities and threats). SWOT analysis works best when diverse groups or voices within an organization are free to provide realistic data points rather than prescribed messaging. Findings of a SWOT analysis are often synthesized to support a single objective or decision that a company is facing.
Term of the Week - March 10, 2024
Solvency Ratio
A solvency ratio examines a firm’s ability to meet its long-term debts and obligations. The main solvency ratios include the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio. Solvency ratios are often used by prospective lenders when evaluating a company’s creditworthiness as well as by potential bond investors. Solvency ratios and liquidity ratios both measure a company’s financial health but solvency ratios have a longer-term outlook than liquidity ratios. Like other financial ratios, solvency ratios often hold most value when compared over time or against other companies.
Term of the Week - March 3, 2024
Social Responsibility
Social responsibility means that besides maximizing shareholder value, businesses should operate in a way that benefits society. Socially responsible companies should adopt policies that promote the well-being of society and the environment while lessening negative impacts on them. Companies can act responsibly in many ways, such as by promoting volunteering, making changes that benefit the environment, engaging in ethical labor practices, and engaging in charitable giving. Consumers are more actively looking to buy goods and services from socially responsible companies, hence impacting their profitability.
Term of the Week - February 25, 2024
Return on Investment (ROI)
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed. ROI is expressed as a percentage and is calculated by dividing an investment’s net profit (or loss) by its initial cost or outlay. ROI can be used to make apples-to-apples comparisons and rank investments in different projects or assets. ROI does not take into account the holding period or passage of time, and so it can miss opportunity costs of investing elsewhere. Whether or not something delivers a good ROI should be compared relative to other available opportunities.
Term of the Week - February 18, 2024
Net Profit Margin
Net profit margin measures how much net income is generated as a percentage of revenues received. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit. Net profit margin helps investors assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead costs are under control. Net profit margin is one of the most important indicators of a company’s overall financial health.
Term of the Week - February 11, 2024
401(k) Plan
A 401(k) plan is a company-sponsored retirement account to which employees can contribute income, while employers may match contributions. There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they’re taxed. With a traditional 401(k), employee contributions are pre-tax, meaning they reduce taxable income, but withdrawals are taxed. Employee contributions to Roth 401(k)s are made with after-tax income: There’s no tax deduction in the contribution year, but withdrawals are tax-free. Employer contributions can be made to both traditional and Roth 401(k) plans.
Term of the Week - February 4, 2024
Zero-Sum Game
A zero-sum game is a situation where, if one party loses, the other party wins, and the net change in wealth is zero. Zero-sum games can include just two players or millions of participants. In financial markets, futures and options are considered zero-sum games because the contracts represent agreements between two parties and, if one investor loses, then the wealth is transferred to another investor. Most transactions are non-zero-sum games because the end result can be beneficial to both parties.
Term of the Week - January 28, 2024
Liquidity Ratios
Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio. Common liquidity ratios include the quick ratio, current ratio, and days sales outstanding. Liquidity ratios determine a company’s ability to cover short-term obligations and cash flows, while solvency ratios are concerned with a longer-term ability to pay ongoing debts.
Term of the Week - January 21, 2024
Gini Index
The Gini index is a measure of the distribution of income across a population. Developed by Italian statistician Corrado Gini in 1912, it often serves as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population. A higher Gini index indicates greater inequality, with high-income individuals receiving much larger percentages of the population’s total income. The co-efficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values greater than 1 are theoretically possible due to negative income or wealth. Global inequality, as measured by the Gini index, has steadily increased over the past few centuries and spiked during the COVID-19 pandemic.
Term of the Week - January 14, 2024
Money Market Account (MMA)
The term money market account (MMA) refers to an interest-bearing account at a bank or credit union. Sometimes referred to as money market deposit accounts (MMDA), money market accounts have some features that are not found in other types of accounts. Most money market accounts pay a higher interest rate than regular (passbook) savings accounts and often include check-writing and debit card privileges. They may also come with restrictions that make them less flexible than a regular checking account. They are important for calculating tangible net worth.
Term of the Week - January 7, 2024
Value Chain
A value chain is a step-by-step business model for transforming a product or service from idea to reality. The chain identifies each step in the process at which value is added, including the sourcing, manufacturing, and marketing stages of its production. Value chains help increase a business’s efficiency so the business can deliver the most value for the least possible cost. The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable. The value-chain theory analyzes a firm’s five primary activities and four support activities.
Term of the Week - December 31, 2023
Unsecured Loans
An unsecured loan is supported only by the borrower’s creditworthiness, rather than by any collateral, such as property or other assets. Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval. Credit cards, student loans, and personal loans are examples of unsecured loans. If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court. Lenders can decide whether or not to approve an unsecured loan based on a borrower’s creditworthiness, but laws protect borrowers from discriminatory lending practices.
Term of the Week - December 24, 2023
Homestead Exemption
A homestead exemption reduces homeowners’ state property tax obligations. The exemption can help protect a home from creditors in the event of a spouse dying or a homeowner declaring bankruptcy. The provision provides surviving qualifying spouses with ongoing property tax relief in certain states. The exemption only applies to one’s primary residence. Most states have homestead exemptions but the rules and protection limits vary.
Term of the Week - December 17, 2023
Underwriting
Underwriting is the process through which an individual or institution takes on financial risk for a fee. Underwriters assess the degree of risk of insurers’ business. Underwriting helps to set fair borrowing rates for loans, establish appropriate premiums, and create a market for securities by accurately pricing investment risk. Underwriting ensures that a company filing for an IPO will raise the capital needed and provide the underwriters with a premium or profit for their services. Investors benefit from the vetting process of underwriting grants by helping them make informed investment decisions.
Term of the Week - December 10, 2023
Zero-Sum Game
A zero-sum game is a situation where, if one party loses, the other party wins, and the net change in wealth is zero. Zero-sum games can include just two players or millions of participants. In financial markets, futures and options are considered zero-sum games because the contracts represent agreements between two parties and, if one investor loses, then the wealth is transferred to another investor. Most transactions are non-zero-sum games because the end result can be beneficial to both parties.
Term of the Week - December 3, 2023
Fiscal Policy
Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions. These include aggregate demand for goods and services, employment, inflation, and economic growth. During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to cool down the economy. Fiscal policy is often contrasted with monetary policy, which is enacted by central bankers and not elected government officials. Fiscal policy is largely based on ideas from British economist John Maynard Keynes. Keynes argued that governments could stabilize the business cycle and regulate economic output rather than let markets right themselves alone. An expansionary fiscal policy lowers tax rates or increases spending to increase aggregate demand and fuel economic growth. A contractionary fiscal policy raises rates or cuts spending to prevent or reduce inflation.
Term of the Week - November 26, 2023
Comparative Advantage
Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. There are downsides to focusing only on a country’s comparative advantages, which can exploit the country’s labor and natural resources. Absolute advantage refers to the uncontested superiority of a country to produce a particular good better.
Term of the Week - November 19, 2023
Unicorn
Unicorn is the term used in the venture capital industry to describe a startup company with a value of over $1 billion. The term was first coined by venture capitalist Aileen Lee in 2013. Unicorns are very rare and require innovation. Because of their sheer size, unicorn investors tend to be private investors or venture capitalists, which means they are out of the reach of retail investors. Although it isn’t necessary, many unicorns work their way to going public. Some popular unicorns include SpaceX, Robinhood, and Instacart. There are more than 1,000 unicorn companies around the world, as of March 2022. The term unicorn can also be used by human resources managers to describe their ideal candidates, who may be overqualified for a certain position.
Term of the Week - November 12, 2023
Inventory Turnover
Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory. The inventory turnover ratio can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing. It is one of the efficiency ratios measuring how effectively a company uses its assets. Inventory turnover measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during the period. Inventory turnover ratios are only useful for comparing similar companies, and are particularly important for retailers. A relatively low inventory turnover ratio may be a sign of weak sales or excess inventory, while a higher ratio signals strong sales but may also indicate inadequate inventory stocking. Accounting policies, rapid changes in costs, and seasonal factors may distort inventory turnover comparisons.
Term of the Week - November 5, 2023
Operating Leverage
Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage. Operating leverage is used to calculate a company’s break-even point and help set appropriate selling prices to cover all costs and generate a profit. Companies with high operating leverage must cover a larger amount of fixed costs each month regardless of whether they sell any units of product. Low-operating-leverage companies may have high costs that vary directly with their sales but have lower fixed costs to cover each month.
Term of the Week - October 29, 2023
Demonetization
Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change in national currency. The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with a new currency. Demonetization has been used as a tool to stabilize the currency and fight inflation, facilitate trade and access to markets, and push informal economic activity into more transparency and away from black and gray markets. A famous example of demonetization occurred in 2016 when India demonetized 86% of its nation’s currency.
Term of the Week - October 22, 2023
Deferred Compensation
Deferred compensation is an addition to an employee’s regular compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out. There are many forms of deferred compensation, including retirement plans, pension plans, and stock-option plans. Deferred compensation plans are an incentive that employers use to hold onto key employees. Deferred compensation can be structured as either qualified or non-qualified under federal regulations. Some deferred compensation is made available only to top executives. A risk of deferred compensation in a non-qualified plan is that the employee can lose the money if the company goes bankrupt.
Term of the Week - October 15, 2023
Online Banking
Online banking allows you to conduct financial transactions via the Internet. Online banking is also known as Internet banking or web banking. Online banking offers customers almost every service traditionally available through a local branch including deposits, transfers, and online bill payments. Virtually every banking institution has some form of online banking you can access through a computer or app.
Term of the Week - October 8, 2023
Transaction
A transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money. The term is also commonly used in corporate accounting. In business bookkeeping, this plain definition can get tricky. A transaction may be recorded by a company earlier or later depending on whether it uses accrual accounting or cash accounting.
Term of the Week - September 24, 2023
Regression
Regression is a statistical method used in finance, investing, and other disciplines that attempts to determine the strength and character of the relationship between one dependent variable (usually denoted by Y) and a series of other variables (known as independent variables). Also called simple regression or ordinary least squares (OLS), linear regression is the most common form of this technique. Linear regression establishes the linear relationship between two variables based on a line of best fit. Linear regression is thus graphically depicted using a straight line with the slope defining how the change in one variable impacts a change in the other. The y-intercept of a linear regression relationship represents the value of one variable when the value of the other is zero. Non-linear regression models also exist, but are far more complex.
Term of the Week - September 10, 2023
Quota
A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Countries sometimes impose quotas on specific products to reduce imports and increase domestic production. In theory, quotas boost domestic production by restricting foreign competition. Government programs that implement quotas are often referred to as protectionism policies. Additionally, governments can enact these policies if they have concerns over the quality or safety of products arriving from other countries.
Term of the Week - August 27, 2023
Partnership
A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called “silent partner,” in which one party is not involved in the day-to-day operations of the business.
Term of the Week - August 13, 2023
Outsourcing
Outsourcing is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.
Term of the Week - July 23, 2023
Overhead
Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. It is important for budgeting purposes but also for determining how much a company must charge for its products or services to make a profit. In short, overhead is any expense incurred to support the business while not being directly related to a specific product or service.
Term of the Week - July 9, 2023
Overdraft
An overdraft occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it’s an extension of credit from the financial institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. Basically, an overdraft means that the bank allows customers to borrow a set amount of money. There is interest on the loan, and there is typically a fee per overdraft. At many banks, an overdraft fee can run upwards of $35.
Term of the Week - June 25, 2023
Operating Income
Operating income is an accounting figure that measures the amount of profit realized from a business’s operations after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). Operating income—also called income from operations—takes a company’s gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business’s operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
Term of the Week - June 11, 2023
Marketing
Marketing refers to activities a company undertakes to promote the buying or selling of a product or service. Marketing includes advertising, selling, and delivering products to consumers or other businesses. Some marketing is done by affiliates on behalf of a company. Professionals who work in a corporation’s marketing and promotion departments seek to get the attention of key potential audiences through advertising. Promotions are targeted to certain audiences and may involve celebrity endorsements, catchy phrases or slogans, memorable packaging or graphic designs, and overall media exposure.
Term of the Week - May 28, 2023
Margin
In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. An investor can create credit risk if they borrow cash from the broker to buy financial instruments, borrow financial instruments to sell them short, or enter into a derivative contract.
Term of the Week - May 14, 2023
Joint-Stock Company
A joint-stock company is a business owned by its investors, with each investor owning a share of the company based on the amount that they’ve invested. It is a predecessor to the modern-day corporation and other types of registered companies in the U.S. Joint-stock companies were created to finance endeavors that were too expensive for an individual or even a government to fund. The owners of a joint-stock company expected to share in its profits. Today, U.S. companies are not organized as joint-stock companies. While one could describe a business with shareholders using the term “joint stock company,” there is no such registration option. Instead, businesses are organized as, for example, a corporation, a partnership, or a limited liability company (LLC).
Term of the Week - April 30, 2023
Insurance Premium
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
Term of the Week - April 16, 2023
Fiduciary
A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests. A fiduciary may be responsible for the general well-being of another (e.g., a child’s legal guardian), but the task often involves finances—for example, managing the assets of another person or a group of people. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility.
Term of the Week - April 9, 2023
Tariff
Most countries are limited by their natural resources and ability to produce certain goods and services. They trade with other countries to get what their population needs and demands. However, trade isn’t always conducted in an amenable manner between trading partners. Policies, geopolitics, competition, and many other factors can make trading partners unhappy. One of the ways governments deal with trading partners they disagree with is through tariffs. A tariff is a tax imposed by one country on the goods and services imported from another country to influence it, raise revenues, or protect competitive advantages. Governments impose tariffs to raise revenue, protect domestic industries, or exert political leverage over another country. Tariffs often result in unwanted side effects, such as higher consumer prices. Tariffs have a long and contentious history, and the debate over whether they represent good or bad policy still rages.
Term of the Week - April 2, 2023
FANG Stocks
The term “FANG” refers to the stocks of four popular American technology companies: Meta, Amazon, Netflix, and Alphabet. Since 2017, Apple has also been included, making the acronym FAANG. Each of the FANG companies has shown extraordinary growth in recent years, reflected in both their revenues and their net profits. However, these stocks can also be quite volatile when tech stocks take a beating. Although their business models vary, they each share the use of advanced technologies to acquire and retain users.
Term of the Week - March 26, 2023
Price Elasticity of Demand
Price elasticity of demand is a measurement of the change in the consumption of a product in relation to a change in its price. Expressed mathematically, it is: Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price. Economists use price elasticity to understand how supply and demand for a product change when its price changes. Like demand, supply also has an elasticity, known as price elasticity of supply. Price elasticity of supply refers to the relationship between change in supply and change in price. It’s calculated by dividing the percentage change in quantity supplied by the percentage change in price. Together, the two elasticities combine to determine what goods are produced at what prices.
Term of the Week - March 12, 2023
Earnest Money
Earnest money is essentially a deposit a buyer makes on a home they want to purchase. A contract is written up during the exchange of the earnest money that outlines the conditions for refunding the amount. Earnest money deposits can be anywhere from 1–10% of the sales price, depending mostly on market interest. Should a buyer break the terms of the contract, they may be at risk of losing their earnest money deposit. However, there are a number of potentially agreed-upon contingencies that may protect the buyer from backing out of a deal but still keeping all of their earnest money.
Term of the Week - March 5, 2023
Acid-Test Ratio
The acid-test, or quick ratio, compares a company’s most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The acid-test ratio disregards current assets that are difficult to liquidate quickly such as inventory. The acid-test ratio may not give a reliable picture of a firm’s financial condition if the company has accounts receivable that take longer than usual to collect or current liabilities that are due but have no immediate payment needed.
Term of the Week - February 26, 2023
Acquisition
An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process. We mostly hear about acquisitions of large well-known companies because these huge and significant deals tend to dominate the news. In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies.
Term of the Week - February 19, 2023
EBITA
Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors. EBITA removes the taxes owed, the interest on company debt, and the effects of amortization, which is the accounting practice of writing off the cost of an intangible asset over a period of years, from the earnings equation. It is helpful for the comparison of one company to another in the same line of business. In some cases, it also can provide a more accurate view of the company’s real performance over time. Another similar measure adds depreciation to this list of factors. That is earnings before interest, taxes, depreciation, and amortization (EBITDA).
Term of the Week - February 12, 2023
Asset Management
Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value. Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many work independently while others work for an investment bank or other financial institution. The goal of asset management is to maximize the value of an investment portfolio over time while maintaining an acceptable level of risk. Asset management as a service is offered by financial institutions catering to high-net-worth individuals, government entities, corporations, and institutional investors like colleges and pension funds. Asset managers have fiduciary responsibilities. They make decisions on behalf of their clients and are required to do so in good faith.
Term of the Week - February 5, 2023
Unemployment Rate
The unemployment rate is the percentage of the labor force without a job (the unemployment rate is the proportion of the labor force that is not currently employed but could be). It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy grows at a healthy rate and jobs are relatively plentiful, it can be expected to fall. There are six different ways the unemployment rate is calculated by the Bureau of Labor Statistics using different criteria. The most comprehensive statistic reported is called the U-6 rate, but the most widely used and cited is the U-3 rate. The U-3 unemployment rate for January 2023 was 3.4%. U.S. unemployment data is released on the first Friday of every month.
Term of the Week - January 29, 2023
Commodity
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. A commodity thus usually refers to a raw material used to manufacture finished goods. A product, on the other hand, is the finished good sold to consumers. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options. Hard commodities refer to energy and metals products while soft commodities are often agricultural goods. Owning commodities in a broader portfolio is encouraged as a hedge against inflation.
Term of the Week - January 22, 2023
Bond
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Bonds are units of corporate debt issued by companies and securitized as tradeable assets. A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common. Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa. Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.
Term of the Week - January 15, 2023
Mutual Fund
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. Mutual funds give small or individual investors access to diversified, professionally managed portfolios. Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek. Mutual funds charge annual fees, expense ratios, or commissions, which may affect their overall returns. Employer-sponsored retirement plans commonly invest in mutual funds.
Term of the Week - January 8, 2023
Exchange-Traded Fund (ETF)
An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes. ETFs can contain all types of investments, including stocks, commodities, or bonds; some offer U.S.-only holdings, while others are international. ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
Term of the Week - January 1, 2023
Capital
Capital is a broad term that can describe anything that confers value or benefit to its owners, such as a factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual. While money itself may be construed as capital, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth. Business capital may derive from the operations of the business or be raised from debt or equity financing.
Term of the Week - December 25, 2022
Yield
“Yield” refers to the earnings generated and realized on an investment over a particular period of time. It’s expressed as a percentage based on the invested amount, current market value, or face value of the security. Yield includes the interest earned or dividends received from holding a particular security. Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as known or anticipated.
Term of the Week - December 18, 2022
Compound Interest
Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods. “Interest on interest,” or the power of compound interest, is believed to have originated in 17th-century Italy. It will make a sum grow faster than simple interest, which is calculated only on the principal amount. Compounding multiplies money at an accelerated rate and the greater the number of compounding periods, the greater the compound interest will be.
Term of the Week - December 11, 2022
Insurance
Most people have some kind of insurance: for their car, their house, or even their life. Yet most of us don’t stop to think too much about what insurance is or how it works. Put simply, insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or their property, or from liability for damage or injury caused to a third party.
Term of the Week - December 4, 2022
Job Market
The job market is the market in which employers search for employees and employees search for jobs. The job market is not a physical place as much as a concept demonstrating the competition and interplay between different labor forces. It is also known as the labor market. The job market can grow or shrink depending on the demand for labor and the available supply of workers within the overall economy. Other factors which impact the market are the needs of a specific industry, the need for a particular education level or skill set, and required job functions. The job market is a significant component of any economy and is directly tied in with the demand for goods and services.
Term of the Week - November 27, 2022
Valuation
Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business’s management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.
Term of the Week - November 20, 2022
Rate of Return
A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.
Term of the Week - November 13, 2022
Overdraft
An overdraft occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it’s an extension of credit from the financial institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. Basically, an overdraft means that the bank allows customers to borrow a set amount of money. There is interest on the loan, and there is typically a fee per overdraft. At many banks, an overdraft fee can run upwards of $35.
Term of the Week - November 6, 2022
Opportunity Cost
Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision making.
Term of the Week - October 30, 2022
Rule of 72
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. Alternatively, it can compute the annual rate of compounded return from an investment given how many years it will take to double the investment. While calculators and spreadsheet programs like Microsoft Excel have functions to accurately calculate the precise time required to double the invested money, the Rule of 72 comes in handy for mental calculations to quickly gauge an approximate value. For this reason, the Rule of 72 is often taught to beginning investors as it is easy to comprehend and calculate. The Security and Exchange Commission also cites the Rule of 72 in grade-level financial literacy resources.
Term of the Week - October 23, 2022
Gross Domestic Product (GDP)
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in real terms, so the data is adjusted for price changes and is, therefore, net of inflation.
Term of the Week - October 16, 2022
Fiat Money
Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
Term of the Week - October 9, 2022
Macroeconomics
Macroeconomics is a branch of economics that studies how an overall economy—the markets, businesses, consumers, and governments—behave. Macroeconomics examines economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment. Some of the key questions addressed by macroeconomics include: What causes unemployment? What causes inflation? What creates or stimulates economic growth? Macroeconomics attempts to measure how well an economy is performing, understand what forces drive it, and project how performance can improve.
Term of the Week - October 2, 2022
Net Worth
Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position. Sometimes called net wealth, one’s net worth is used in the financial world to qualify certain individuals for particular investment strategies or financial products such as hedge funds, structured products, or other complex or alternative investments.
Term of the Week - September 25, 2022
Law of Supply and Demand
The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affect its supply and demand. As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows. Levels of supply and demand for varying prices can be plotted on a graph as curves. The intersection of these curves marks the equilibrium, or market-clearing price at which demand equals supply, and represents the process of price discovery in the marketplace.
Term of the Week - September 18, 2022
Debt
Debt is something, usually money, borrowed by one party from another. Debt is used by many corporations and individuals to make large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
Term of the Week - September 11, 2022
Budget
The term budget refers to an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for any entity that wants to spend money, including governments and businesses, along with people and households at any income level. To manage your monthly expenses, prepare for life’s unpredictable events, and be able to afford big-ticket items without going into debt, budgeting is important. Keeping track of how much you earn and spend doesn’t have to be drudgery, doesn’t require you to be good at math, and doesn’t mean you can’t buy the things you want. It just means that you’ll know where your money goes, and you’ll have greater control over your finances.
Term of the Week - September 4, 2022
Debit Cards
A debit card is a payment card that deducts money directly from a consumer’s checking account when it is used. Also called “check cards” or “bank cards,” they can be used to buy goods or services; or to get cash from an automated teller machine or a merchant who’ll let you add an extra amount onto a purchase.
Term of the Week - August 28, 2022
Credit Cards
A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. Credit cards impose the condition that cardholders pay back the borrowed money, plus any applicable interest, as well as any additional agreed-upon charges, either in full by the billing date or over time. In addition to the standard credit line, the credit card issuer may also grant a separate cash line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that can be accessed through bank tellers, ATMs, or credit card convenience checks. Such cash advances typically have different terms, such as no grace period and higher interest rates, compared with those transactions that access the main credit line. Issuers customarily preset borrowing limits based on an individual’s credit rating. A vast majority of businesses let the customer make purchases with credit cards, which remain one of today’s most popular payment methodologies for buying consumer goods and services.
Term of the Week - August 21, 2022
Checking Account
A checking account is a deposit account held at a financial institution that allows withdrawals and deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid and can be accessed using checks, automated teller machines (ATMs), and electronic debits, among other methods. A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both. A checking account is beneficial for anyone who wants to make frequent withdrawals or transactions from a bank account. Setting up a checking account is generally very easy: You can apply online, or visit a bank branch, and get a checking account within an hour.
Term of the Week - August 14, 2022
Savings Account
A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs. Savings accounts have some limitations on how often you can withdraw funds, but generally offer exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply sweeping surplus cash you don’t need in your checking account so it can earn more interest.
Term of the Week - August 7, 2022
Affordable Care Act
The Affordable Care Act (ACA) is the comprehensive health care reform signed into law by President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act and commonly referred to as “Obamacare,” the law includes a list of health care policies intended to expand access to health insurance to millions of uninsured Americans. The act expanded Medicaid eligibility, created health insurance exchanges, mandated that Americans purchase or otherwise obtain health insurance, and prohibited insurance companies from denying coverage due to pre-existing conditions.
