Quantitative Easing: In this process the central bank of a country is trying to stimulate the economy by increasing the amount of money in circulation. QE is used during scenarios when it is difficult to lower interest rates any more because they are near or at zero already. The central bank essentially prints new money and uses it to purchase fixed interest securities from companies, usually banks. The intention is to encourage banks to increase their lending, which should eventually reduce interest rates that consumers pay, therefore jumpstarting spending.
Quick Ratio: Also known as the acid test, its a more strict measure of a company’s liquidity compared to the current ratio. The quick ratio lets you know if the company will be able to meet its immediate financial obligations, meaning does it have sufficient assets to pay its current debts. Calculated as current assets less inventory divided by current liabilities. By excluding inventory, the ratio focuses on the company’s more liquid assets.
Return on Investment: A ratio that divides an individual’s net profit or loss by the cost of the investment. Because it is expressed as a percentage it can be used to compare different investment opportunities. ROI compares how much a person paid for an investments verses how much the person earned. Imagine you invested $10,000 in ABC stock. The stock rises to $12,000. Your ROI would be 20%. One limitation to ROI is it does not take into consideration duration. Two investment may produce similar ROIs but one may do it in a shorter time period.
Return on Equity: This is a ratio used to determine a firm’s profitability shown as a percentage representing the amount earned on a firm’s common shares. It is calculated by taking company earnings and dividing by shareholders’ equity over a given period. It is used to tell shareholders how effectively their money is being used by the company. If the profit is $1 million dollars and equity interest is $20 million then the ROE is 5%. The difference between ROI and ROE is ROI is used to calculate an individual’s opportunity where ROE is used to determine how effectively a company is using shareholder capital.
Securities and Exchange Commission: The SEC is the overarching regulatory body for the United States. They oversee corporate actions, ensure fair capital markets, and legitimate securities are being traded. The SEC dates back to October of 1936 as a result of the Commonwealth Act 83. The organization is designed to give investors confidence that corporations’ actions are regulated and available securities are acceptable. If these goals turn out to not be true then they will enact appropriate penalties.
Share buyback: A company’s repurchase of its own shares. Typically increases the market price of the remaining shares because each remaining share now represents a larger claim on earnings and assets.
Standard & Poor’s 500 Index: This is an index weighted by market capitalization. Created in 1957 by the market and data company Standard and Poor’s, it is designed to be a sample representation of the American economy. The index is comprised of 500 of the largest companies by market cap mainly trading on the NYSE and the NASDAQ. Being an index, the S&P 500 serves as a benchmark for related securities and does not facilitate securities trades.
Time Weighted Return: Unlike Money Weighted Return, TWR does not consider the size or timing of contributions. In essence it calculates the return an investment brings in over certain time periods that are geometrically connected. This type of return is best used to compare different performances of fund managers because they don’t control the flow of deposits or withdrawals from participants. TWR can best be thought of the return of a manger’s advice.
Toronto Stock Exchange: The TSX is an exchange based on Toronto dating back to the mid 1800’s. Like any other exchange it is a place where companies can list their shares to be traded in the secondary market. The TSX is the biggest exchange in Canada and third in North America by market capitalization. Currently the TSX has more than 1,500 businesses listed with roughly 70% of the market cap attributed to Financial and Energy companies.
Traditional Finance: The study of optimal investor behaviour. Traditional finance is based on the idea that the market is perfectly efficient. Traditional Finance assumes that market participants are rational, risk adverse, and seek to maximize their own utility.
Underweight: A smaller exposure to a specific asset or asset class relative to other assets. It may also reference a lower holding compared to a benchmark against which a portfolio is measured.
Underwriting: There are a few different definitions of underwriting. In the stock world it is the process which one or multiple investment dealers determine the risk and price of a certain security. Typically the investment dealer first buys or underwrite the securities of the issuing entity and then sells them in the market. This ensures that the issuers of the security can raise necessary capital while earning the underwriters a premium in return for the service.
Venture Capital: An investment in a company that is typically in the early stages of development with either product or business model. For the most part venture capital is consider a very risky investment however can be quite lucrative if they work out. A venture capitalist will raise funds from a pool of investors to invest in these types of businesses.
Vertical Integration: This is the process of a company controlling multiple areas of the supply chain for it’s product or service. Areas include distribution, manufacturing, and materials. Vertical integration is used to manage costs and quality of whatever the firm sells. Successful integration can help create economic moats to prevent competitors from gaining market share. An example might be a grocery store that owns farmland and a trucking company. The farm can grow the produce and the trucks can delivery the produce to the store for sale.
Warrant: A certificate allowing the holder the option to buy a company’s stock at a predetermined price within a specified time frame. Warrants are generally issued when the company is distributing a new issue of shares as a way to entice investors to buy the new shares.
X-Efficiency: Producing goods and servicing at the lowest cost possible. In a competitive market, businesses are required to be as efficient as possible to ensure strong profits and continued growth. This is not enough to ensure maximum economic efficiency, because the quantity of output produced may not be ideal. For example, a monopoly or duopoly can be an X-efficient producer, but in order to maximize its profits it may produce a different quantity of output than there would be in a surplus-maximizing market with perfect competition.
Yield Curve: The yield curve is a graph of bonds, the majority of the time referring to government bonds, with interest rates on the Y axis and maturity terms on the X axis. In a normal sloping yield curve shorter term maturities will have lower interest rates and longer terms will have higher rates. This will give a slope upwards from left to right. This is because investors want to be compensated for the additional risk of holding a bond for a longer period. Historically, a downward-sloping (or inverted) yield curve has been an indicator of recession in the future.
Zero Coupon Bond: This bond pays no interest to the holder. It is purchased at a discount to it’s face value. The return is generated when it matures at face value when the specified time is up.