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.
Interest Rate: This can be considered as the price of early consumption. It can also be thought of as the compensation to a lender from a borrower for the risk of loaning their capital to the borrower. The compensation is a conduit for economic activity. Interest rates are typically expressed annually and are affected by many factors (the money supply, credit worthiness of borrower, opportunity costs of capital).
Junk Bond: A company bond that has been given a low rating or is considered below investment grade by credit rating agencies. Junk bonds offer elevated expected returns to compensate for the higher risk. The increased returns can come in the form of higher coupon rates or deeper discounts to face value.
Keynesian Economics: A branch of macroeconomic theory that states active government intervention in the market is the only method of ensuring economic growth and prosperity. Keynesian economics is considered a demand side theory centered on changes in the economy during the short term. Based on the work of British economist John Maynard Keynes beginning during the Second World War.
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.
Management Expense Ratio: MERs are a fee attached to managed investment solutions such as a mutual fund, segregated fund, or ETF. Expressed as an annual percentage of the value of fund holdings it encompasses costs such as administrative, research, taxes, and providing legal documents. MERs vary depending on the type of fund and risk level. Fees range from 0.05% – 3%. If you purchase a fund for $10,000 and the MER is 2% you pay $200 annually for the fund.
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.
Market Capitalization: This is the number of shares outstanding for a company multiplied by the current stock price. Market cap can be used as a value indicator. Typically a company’s size is referred to by market capitalization. A public company’s market cap is the primary determinant for value. If the current price of a business is $30 and there are 10,000 outstanding shares the market cap is $300,000. Because market capitalization is based on price the value can fluctuate frequently.
Monopoly: When an organization has little to no competition. Due to a lack of alternatives the business is able to produce it’s product or service and affect pricing power. This often leads the firm to create less of it’s product or service and charge a higher price than what would occur in an equilibrium (supply meets demand) market. Three things must be true for a monopoly to exist: they are the single seller of their service or product, the have the ability to change their price whenever they feel like, and the makes up all or a significant amount of the industry. Examples of authorities preventing monopolies can be seen in telecommunications and technology.
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.
NASDAQ: National Association of Securities Dealers Automated Quotations. An American stock exchange with more than 3,700 stocks listed. The exchange first launched in 1971 and has since become the preferred exchange for technology companies. The NASDAQ is a smooth intermediary between large cap companies and investors.
Opportunity Cost: A microeconomic theory that highlights the price of an alternative choice. The cost can come in many forms including financial, utility, or other goods and services. One example would be buying a property. You can live in the property or rent it our. The financial cost of living in the property would be the rent you could earn. If you buy a new TV for $1,000, well now you don’t have the money to spend on a couch. The opportunity cost in this case would be the couch.
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.
Overnight Rate: This is the interest rate that financial intermediaries lend and borrow amongst themselves at the end of the day. This is the rate that is being adjusted when central banks such as the Bank of Canada move interest rates up or down. Other terms are the policy rate or the benchmark rate. When one financial institution has a capital requirement deficit due to withdrawals, over lending, etc., it will borrow funds at the overnight rate from an institution with a surplus. The overnight rate affects all other rates such as GICs, mortgage rates, and savings deposits.
Price to Earnings: Used as an indicator of the value of a stock. Known as a value ratio that gives investors an idea of how much they are paying for a company’s earnings. It measures either forward or trailing price relative to the company’s earnings per share. To calculate a company’s P/E ratio you take it’s price and divide by its earnings per share. A high P/E ratio may be justified because a company is expected to increase its earnings per share or it may indicate simply that the company is overpriced..