Here we’ve provided a glossary of financial, economic, and investing terminologies. Don’t see a specific term you’re looking for? email us at firstname.lastname@example.org
Animal Spirits: A term derived from psychology and behavioral economics. It essentially means the emotions investors feel when they make decisions. On a mass scale these feelings can drive markets in the short term.
Bear Market: The technical definition of a Bear Market is a market decline of 20% or more over a given period of time. During Bear Markets investors are pessimistic about the future. Typically Bear Markets are correlated with recessions. The term Bear Market comes from how bears attack their prey, by knocking them down first.
Behavioural Finance: The study of how investor behaviour is influenced by emotional biases and cognitive limitations. The goal of behavioural finance is to assist investors overcome these biases and limitations in the hopes of making better financial decisions. Once a blind spot has been identified, it may be possible to compensate the bias or correct the cognitive error in order to improve decision making.
Bull Market: A period of time in which indices or individual securities are rising. On the contrary to a Bear Market, the technical definition is an increase of 20% on a given index or group of assets over an unspecified time frame. Similar to a Bear Market, a Bull Market can last months or potentially years.
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Front End Load: A type of commission charged on a mutual fund at the time of purchase. These are not continuous fees as with a Management Expense Ratio, but are charged every time the fund is purchased. They are typically a percentage of the value of the purchase ranging 3-5%.
Gross Domestic Product: Total market value of finished goods
and services produced in a country over a certain time period, usually a year but occasionally defined quarterly. GDP can be calculated using three methods: the expenditure approach, the income approach, or the output approach. The most common measure is the expenditure approach calculated as C + I + G +NX = GDP. C is consumer spending, I is investment, G is government spending, and NX is net exports.
Inflation: The rate at which the price of a basket of consumer goods and services increases. The basket of goods and services will be a typical set of goods and services necessary for daily living. Expressed as a percentage usually using the previous year as a base, although sometimes it may be shown on a month over month basis.
Lagging Indicator: An economic statistic that moves weeks or months after other changes in the economic cycle have taken place. For the most part they are not used to assess the future state of an economy. They are used to confirm trends or potentially used as buy or sell signals. Examples include GDP or CPI.
Margin: Using leverage for investing purposes. Brokers will lend a certain percentage on a particular security. The margin is the amount expressed as a percentage the broker is willing to lend. Typically the less volatile a security is, the more the broker is willing to lend.
Net Asset Value: This is a pooled asset term (mutual fund). Total market value of assets minus its total liabilities. The unit price of a pooled fund is calculated based on the NAV of the fund and the number of outstanding units. The NAV of a unit is the NAV of the fund divided by the total number of units in the fund.
Option: This investment product falls under the derivatives category. The value is based on an underlying stock. Owning an option gives the holder the right but no obligation to buy or sell the underlying stock. There are two types of options: Calls and Puts. Each option will have a predetermined buy or sell price known as the strike price. Options can be used for hedging or speculation and because they use leverage wins/losses are amplified.
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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.
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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
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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.
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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.
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.
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.