Financial Lexicon: A-F
A
Accounts Payable:
-
amounts owing to creditors of goods and services.
-
found in the Liabilities section on the Balance Sheet of corporate financial statements.
-
personal financial statements can also have this record, for things such as credit card balances owing.
Accounts Receivable:
-
amounts earned as revenue (or income) but not yet paid.
-
found in the Assets section on the Balance Sheet of corporate financial statements.
-
personal financial statements can also have this record, for things such as money owed by friends.
Arbitrage:
-
striking a deal and profiting from a difference in price of an asset between two markets.
-
involves buying the asset at a lower price in one market and then simultaneously selling that same asset on a different market at a higher price, before the divergence in price vanishes.
-
while frowned upon by many, it has a vital role to play to ensure market forces price assets correctly across different markets and around the globe.
Ask:
-
price a potential seller is asking for and is prepared to accept for a security or asset.
Asset:
-
any resource of monetary value owned by a person, corporation or institution.
-
can be real (i.e. touchable) or nonmaterial (i.e. unable to physically touch) that is owned to produce a positive economic value to the owner.
-
appears on the left side of a balance sheet.
B
Back-Loaded Fund
-
mutual fund that does not charge a commission to purchase but follows a schedule of fees charged to sell the mutual fund.
-
schedule of fees usually follows a time decay model, meaning less is paid in commission the longer the mutual fund is held; normally after seven years, the fee is reduced to zero.
-
also known as deferred sales charge (DSC) funds.
-
see also Front-Load Fund and No-Load Fund.
Balance Sheet:
-
financial statement that summarizes a person's, corporation's or institution's assets and liabilities at a specific point in time.
-
also presents the net worth or owner equity at that same particular point in time.
-
name stems from fact that two sides of an equation must balance -- assets on one (left) side versus liabilities and owner equity (or net worth) on the other (right) side.
Bid:
-
price a potential buyer is prepared to pay for a security or asset.
Blue Chip:
-
a stock of high investment quality.
-
usually a company that is well-established and that holds high public regard of being stable.
-
deemed by many to be great to hold due to strong performance in up markets while holding value in down markets.
Bond:
-
IOU whereby the issuing company or government is borrowing money from the investor with the promise to pay a set rate of interest at set intervals until maturity, at which time the principal amount invested is also returned to the investor.
-
does not grant ownership privileges (ex. voting power) in the corporation.
-
has higher ranking over stocks in corporate capital structure.
C
Carry Trade:
-
practice of borrowing money in low interest markets and investing the borrowed funds for profit in markets where returns are higher.
-
positive carry results when invested returns are higher than cost of borrowing, while negative carry occurs when borrowing costs are higher than invested returns.
Call Option:
-
contract that gives the holder the right, but not obligation, to buy a specific quantity of an asset at a specified price by a specific date.
-
must either be traded or exercised by the expiry date; otherwise, it expires worthless.
-
typically viewed as "insurance policy" against the increase in price of an asset that may need to be purchased in the future.
Certificate of Deposit:
-
guaranteed investment issued by an American bank or financial institution.
-
locked-in deposit earning interest for specified period of time, during which the investment cannot be withdrawn, in most cases.
-
can be locked-in for as little as one month up to as much as 5 years, with longer lock-in periods paying higher interest rates.
-
more popularly referred to by its acronym - CD.
Common Stock:
-
share of ownership of a public corporation.
-
generally bestows holder with ability to vote on all important business matters.
-
may pay dividends, depending on the success and/or business strategy of the company.
Compound Interest:
-
earning or paying "interest on interest".
-
calculation based on both initial principal as well as accrued interest from earlier periods of time.
-
makes growth of investment or liability accumulate faster.
Coupon:
-
interest rate on a debt instrument.
-
annual percent of face value that issuer promises to lender until maturity.
-
evolves from the small detachable segment of a paper certificate, which entitled the holder to the interest payment on the due date.
Correction:
-
decline of 10% or more in the price of a security or index, after a sustained upward trend.
-
to be expected over long periods of time as no price can continue to rising without end.
Credit:
-
lender's agreement to lend funds, based on analysis and estimate that the debt will eventually be repaid in full and with interest.
-
examples of bank credits are loan, lines of credit, and mortgages.
Creditor:
-
person or institution that lends money to others, with the intention of receiving the money back, with interest, in the future.
-
Personal: people who loan money to family and friends.
-
Real: financial institutions (banks, credit unions) who use contracts to establish legal terms of the loan, such as interest rates, duration and sometimes collateral/security.
Credit Bureau:
-
agency that gathers data and information about a consumer's borrowing and bill payment history.
-
compiles a credit score (see below) based on the consumer's history and experience profile.
-
Equifax and TransUnion are primary providers of such services.
Credit Score:
-
numeric index ranking an individual's creditworthiness and capacity to repay credit obligations.
-
factors that contribute to an individual's overall score include, though not exhaustive:
-
amount of time credit history accumulating
-
promptness in paying bills
-
amount of credit available to individual
-
amount of credit actually used
-
history of bankruptcy and other negative events
-
-
scores range from 500 to 850, with any score over 720 generally viewed a "good credit" while a score under 600 pointing to a higher credit risk individual.
D
Derivative:
-
financial contract whose value is derived from another financial asset (eg. stock, commodity, currency).
-
often used to protect those assets against significant change in value.
-
can be either exchange-traded (ex. futures) or over-the-counter (ex. forwards).
Dividend:
-
portion of a company's income paid out to the company owners (shareholders).
-
normally paid from money available after all other financial obligations are met and usually only in situations where company management does not see a better internal investment opportunity to grow the company.
-
usually paid quarterly, with the amount decided by the company's board of directors.
E
Equity Value:
-
in terms of home ownership, equals the current fair market value (usually determined through appraisal) minus any other outstanding mortgage amounts owing.
Exchange-Traded:
-
process of listing and trading financial assets on the floor of an organized exchange (ex. TSX).
-
price is determined in real time during business hours, based on such factors as supply/demand and liquidity, among others.
-
regulation brings more transparency, simplicity and liquidity when compared to over-the-counter method of listing and trading financial assets.
Expense:
-
cost of operating a company, incurred to generate revenue.
-
examples may include wages, office supplies, and advertising costs.
-
found on a company's income statement.
F
Face Value:
-
value of a debt instrument as it appears on the face of the certificate.
-
amount payable to the holder at the time of redemption/maturity.
-
used to calculate the annual dollar value of the interest payable, as per terms of the debt instrument.
Front-Load Fund:
-
sales fee charged for the purchase of a mutual fund, levied by the broker at time of sale.
-
normally range from 0% to 5%, at discretion of broker.
-
see also Back-Load Fund and No-Load Fund.
Future Value:
-
applying assumed rate of growth to estimate the value of a current asset in the future.
-
tool in assisting investors make responsible investment decisions based on assessed future needs.
-
complexity and accuracy of calculation depends on various internal (ex. rate of growth) and external (ex. inflation) influences.