Financial Literacy Terms Dictionary

Through the help of the Junior Achievement Communications Committee members, we have put together a dictionary of common financial literacy terms that many people do not know the defintion of. JA encourages feedback and suggested terms to add to this list, so that it becomes a constantly updated resource. Any reader who has a question on a definition or would like to add a word to the list is encouraged to send their comment or request to Erin Burry. The dictionary will be updated once each month for the next twelve months to address these comments and suggestions.

 

401(k)Plan: A 401(k) plan is an arrangement that allows an employee to choose between taking his or her full paycheck or contributing a small portion of it to a 401(k) account. The amount paid into the account usually is not taxable to the employee until it is withdrawn. Employees usually withdraw their money in their retirement years when they are required to pay little or no income taxes. A 401(k) plan, therefore, is a type of retirement plan. It is known as a qualified plan, which means that it is governed by the Employee Retirement Income Security Act that was passed by the U.S. Congress in 1974. The term, 401(k), refers to the section of tax regulations in the U.S. Internal Revenue Code. Since it began in 1978, the 401(k) plan has grown to be the most popular type of employer-sponsored retirement plan in America. Millions of workers depend on the money that they have saved in this plan to provide for their retirement years. Also see Tax.

Accounts Receivable: Accounts receivable refers to the outstanding bills (invoices) a company has sent to its customers or the money the company is owed from its clients. They are the amounts of money that a company has a right to collect, because it sold goods or services on credit to a customer. Accounts receivable are considered assets. Also see Accounts Payable, Assets.

Accounts Payable: Accounts payable are amounts of money a company owes, because it purchased goods or services on credit from a supplier or vendor. Accounts payable are liabilities. Also see Accounts Receivable, Liabilities.

Adam Smith: Adam Smith was an 18th century Scottish philosopher considered to be the father of modern economics. He was the author of several books on free markets and economics, the most famous of which was "Wealth of Nations." He was a major proponent of laissez-faire economic policies. Laissez faire is a French term, and it means "Let (people) do (as they choose.") It describes point of view that opposes regulation or interference by the government and the tendency of free markets to regulate themselves by means of competition, supply and demand. Among many other ideas, Adam Smith also was the creator of the concept now known as Gross Domestic Product. Also see Gross Domestic Product.

Analyst: An analyst is a person whose job is to research, interpret, consider and give an opinion on the financial condition of a business, asset, project or budget. This helps to determine if its performance and success shows that it is a good investment. Much of a financial analyst's job involves gathering data from publications and other sources, creating financial plans, writing reports or making presentations. Analysts are heavily involved when companies merge with or buy other companies. Typically, analysts determine whether a company is stable, solvent (meaning its balance sheet is good), liquid (it has enough money to cover its expenses) or profitable enough to recommend it as a good investment. Analysts also recommend what company's stock to buy or avoid.Financial analysts carry a great degree of responsibility. The results of their analyses frequently assist in making major decisions, and a mistake or an overlooked piece of information could mean making the wrong decisions. This could have far-reaching effects on their clients' investment strategies or even a company's ability to stay in business. Also see Investment, Liquid, Solvency, Stock.

Annuity: The word, annuity, comes from the word, annual, which means yearly. An annuity is a contract with a financial organization (usually an insurance company) or government agency that is designed to accept, invest and grow funds for an individual. Then at a later point in time, usually after retirement, the financial organization pays out a stream of payments to the individual usually on a yearly basis, but possibly on some other regular agreed upon periods of time. These payments are guaranteed for a certain number of years or the lifetime of one or more individuals, depending upon how the annuity was written. All annuities are tax deferred, which means that the earnings from these investment accounts are not taxed, until they are withdrawn at a certain age. However, if a person withdraws his or her money before the agreed upon age, not only will tax be due, but a penalty, as well. Also see Earnings, Insurance, Tax.

APR: The abbreviation APR stands for annual percentage rate. This is the percentage in interest that a borrower pays a lender (usually a bank or mortgage company) or that a financial company pays an investor within a period of a year. It is the actual yearly cost of funds over the life of a loan or investment. A lower APR translates to lower monthly payments. Also see Borrower, Investor, Loan, Mortgage.

Asset: An asset is a valuable thing, person, quality or resource. It has economic worth to an individual, company or country that owns or controls it with the expectation that it will provide a future financial benefit. Money in a bank savings account would be an asset to both a person and a business. Machinery and equipment would be an asset to an industrial company. Jet airplanes would be considered assets to an airline company. Our nation's military would be considered an asset of the United States. Also see Savings Account.

Balance Sheet: A balance sheet is a financial document that summarizes the assets, liabilities, capital and shareholders ownership (called equity) of a business or other organization at a particular point in time. It provides details and comparisons of the income and expenses over the preceding period, which usually is quarterly (one-quarter of a year or three months time). The items provided in a balance sheet give investors and owners an idea as to what the company owns and owes. Also see Asset, Capital, Equity, Liability, Shareholders.

Balanced Budget: In financial planning for a business or government, a balanced budget refers to one in which revenues or income are equal to expenses. So, there is neither a budget deficit nor a budget surplus. The accounts balance. Sometimes though, particularly in government, a balanced budget refers to one that has no deficit, but could possibly have a surplus. Also see Deficit, Surplus.

Bankruptcy: Bankruptcy is a general term for a legal procedure that helps a person or business that does not have enough assets to pay their debts. The process helps the debtor (the person or business that owes the money) to get rid of their debts and repay the money they owe others (creditors). Debtors themselves can file to the federal court for voluntary bankruptcy, or it can be forced by court order (involuntary), because a creditor has filed a petition with the court.There are various types of bankruptcy proceedings. One type, called Chapter 13 or reorganization, allows a portion of person's debt to be wiped out. In exchange the remainder of the debt is agreed upon by both the creditor and the debtor to be paid over an agreed upon period of time (usually three to five years). Chapter 13 provides the debtor with a fresh start. Chapter 11 is very similar, but it is used primarily by businesses. Chapter 7 (sometimes called straight bankruptcy) is the most drastic type, whereby all of a person's or company's assets are liquidated and distributed to all its creditors. In this case, a business has failed and is forced to close. Also see Asset, Creditor, Debt.

Bear Market: A bear market is a condition in which stock prices fall more than 20 percent from their highest price over the previous 52-weeks (one year). A bear market indicates widespread pessimism among investors, which causes stock prices to fall even further. Investors typically lose some value of the stocks they own as pessimism and stock selling increases. When stock market investors
begin to sell their stocks, they are said to be bearish. Also see Bull Market, Dow Jones Industrial Average, NASDAQ, S&P 500, Stock.

Beat Forecast:This is a term used to describe a situation in which the level or amount of something (a company's quarterly or annual profit, for example) is better than expected.In business and financial investment industries, analysts study the performance of companies and predict (forecast) how likely they will be profitable and successful in the coming month or year. If a company does better than expected, it beat the forecast. Anyone who reads the financial newspapers or watches financial news on television also may have heard or read the term, beat the street, which really just means to beat Wall Street earnings forecasts. Wall Street in New York City and places nearby is where a great deal many analysts are located. So, if a company beat forecasts, it beat the street. Also see Analyst, Wall Street.

Big Bank: A big bank is considered to be one of the largest banks in the country ranked by assets. The term, Big Four, is often used to describe these banks. As of 2017, J.P. Morgan Chase, Wells Fargo, Bank of America and Citibank are the Big Four in the United States. Pittsburgh-based PNC Bank is ranked number six on the list with approximately $137 billion in assets under management and $266 billion of assets under administration. PNC Bank operates nearly 2,500 branches, along with 9,000 ATM machines, in 17 states and the District of Columbia.

Board of Directors: A board of directors is a group of individuals that are elected by stockholders to govern an incorporated company and to act as their representatives in major company matters. A board of directors establishes corporate management policies and assists in making decisions on major company issues. Members of the board usually are elected at the company's annual general meeting. Also see Corporate Governance, Stockholders.

Bond: A written and signed contract in which an investor loans money to a company or government (U.S., state or city). When companies or governments need to raise money to finance a variety of projects (like new highways), they may issue bonds directly to investors, instead of obtaining loans from a bank. The organizations that issue bonds also may use the money to maintain ongoing operations or to refinance other existing debts.The companies or governments that sell the bonds are known as the issuers. Buyers of the bonds are debtors, debt holders or creditors of the issuer.These businesses or governments borrow the funds at an agreed upon rate of interest for a specific period of time. They promise to pay back a certain sum of money with interest on a certain date or upon the fulfillment of a specified condition or completion of a certain project. Also see Creditor, Debtor, Interest, Investor, Junk Bond, Refinance.

Borrower: The financial definition of a borrower is a person that has applied for and received a loan of money from a lender. Most often these lenders are banks, savings and loan associations, credit unions and mortgage companies.The individual initiating the request signs a promissory note (a legally binding contract) promising to pay the lender back during a specified timeframe for the entire loan amount, plus any additional fees and interest. Most borrowers borrow at interest, meaning they pay back not only the principle (original loan amount), but in addition an agreed upon percentage of the total. Typically a borrower will make monthly payments of principle and interest until the loan is paid.The interest that the lending companies collect is one of the ways they make a profit. Lenders often compete by promoting how low their rates of interest are.The borrower is legally responsible for repayment of the loan and is subject to any penalties for not repaying the loan back. Also see Credit Union, Interest, Lender, Loan, Savings and Loan.

Bottom Line:The bottom line refers to a company's net earnings, net income or other indicators of how profitable or unprofitable it is. The reference to the bottom describes the location of the number on a company's income statement or financial report. Most companies aim to improve their bottom lines through two simultaneous methods: growing revenues or cutting costs.The term, bottom line, also has been adopted to refer to any final, determining consideration in an important decision. Also see Profit, Revenue.

Bread Winner: A breadwinner is a term assigned to a person who earns an income that is the primary means of support for a unit of people, such as a family, and those that depend on the bread winner's income to live. Also see Income.

Brexit: Brexit is an abbreviation for British exit, which refers to the June 23, 2016 historic and world-changing vote by British citizens to exit the European Union. The vote stunned many countries' currencies, and it caused the British pound to fall to its lowest value in decades. Also see Currency, European Union, Pound

Budget: A budget is a written plan for using money, and itemizes estimated costs, revenues and resources required over a specified period of time. It reflects desired financial goals and outcomes for that period. Budgets can be written quarterly (every three months or quarter of a year), or they can be developed annually. Frequently, companies will use both annual and quarterly budgets as tools in managing their businesses. Often a budget also serves as a plan of action for achieving the desired revenues and keeping expenses low. It also serves as way to measure performance and to manage problems along the way. Also see Expenses, Revenues.

Bull Market: A bull market is a condition in which stock prices are rising or are expected to rise. The term, bull market, most often is used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies and commodities. When stock market investors
begin to buy stocks, they are said to be bullish, and in such times, they have faith that the upward trend will continue for a long period of time. Typically during these times, the country's economy is strong and employment levels are high. Also see Commodity, Currency, Stock.

Capital: Capital often has several meanings when being described in different contexts. One context defines capital as wealth in the form of money or other assets owned by a person, organization or nation, and this wealth typically is used to invest in a business to generate income. An alternative definition of capital is money used to purchase the means of production, such as industrial machines and any other large, expensive production equipment that are needed to manufacture goods, mostly in factories. In this context, it is sometimes referred to as capital equipment. Also see Capitalization.

Capitalization: Like the term, capital, capitalization can be defined in different contexts. In finance, capitalization is the sum of a corporation's stock, along with its long-term debt and retained earnings. Capitalization also refers to the number of outstanding shares of stock multiplied by the stocks' price per share.The rankings of the largest corporations are determined by their capitalizations. In the beginning of 2017, Facebook was listed as the largest company in the world with a capitalization of $354.9 billion. This figure is achieved by multiplying their average stock price of $134.16 by approximately 2.6 billion shares of outstanding stock.In the accounting field, capitalization is when the costs to acquire an asset are expensed or written off over the life of that asset, rather than in the period it was incurred.

Cash Flow:In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance. Otherwise, it is called negative. Cash flow is important, because it is the net amount of cash and liquid assets moving into and out of a business. Negative cash flow indicates that a company's liquid assets are decreasing, which is not a good situation for any business. Net cash flow is different from net income. Net income includes accounts receivable and other items for which payment has not actually been received. Net cash flow usually indicates that customers who owe money already have paid. Also see Accounts Receivable.

CEO: A chief executive officer (CEO) is the highest-ranking executive in a company, and that person's primary responsibilities include making major corporate decisions, managing the overall operations and resources of a company and acting as the main point of communication between the board of directors and the business's operations.

CFO: A chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company. The CFO's duties include tracking cash flow and financial planning as well as analyzing the company's financial strengths and weaknesses and proposing corrective actions. Also see Cash Flow.

Checking Account: A checking account is a bank account that pays little or no interest, but from which the customer can withdraw money when he or she desires by writing checks. Checking accounts are very liquid and money in these accounts can be accessed using checks, automated teller machines and electronic debit cards, among other methods.Checking accounts also sometimes are called demand accounts or transactional accounts. Also see Interest, Liquid, Savings Account.

Collateral: Collateral is something pledged as security for repayment of a loan and which will be forfeited (given up) in the event of a default (failure to pay). Collateral can be property, such as a house or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize (take control of) the collateral to get back his or her losses. In the case of a mortgage loan, if a borrower fails to make necessary payments, the lending institution (bank) can take the property to cover the remainder of the loan. Since collateral offers some security to the lender, loans that are secured by collateral typically have lower interest rates than unsecured (no collateral) loans. A lender's claim to a borrower's collateral is called a lien. Also see Interest, Lien, Loan, Mortgage.

Commodity: A commodity is a basic raw material or agricultural product that has basically the same characteristics and is interchangeable with other commodities of the same type. The quality of a given commodity may differ slightly, but it is essentially the same across all producers who market that product. For example, in the commodity product category of bananas, there is very little difference in the product no matter who produces them. Therefore, most commodity producers will compete by attempting to keep their prices as low as possible. Other examples of commodities include raw cotton, coffee, fuels, chemicals, coal, aluminum and other metals, and they always are bought or traded in bulk on a commodity exchange. A commodity exchange is similar to a stock exchange, but for bulk commodity products.  

Compounding: Simply stated, compounding is the process whereby a person or organization can earn interest on previously earned interest. So, interest that was previously calculated is included in the calculation of future interest.For example, suppose a $10,000 investment in a company earns 20 percent the first year. The total investment is then worth $12,000. Next, assume that in the second year, the investment earns another 20 percent. In year two, the total balance of $12,000 would be multiplied by 20 percent, ending with a value of $14,400, instead of $14,000. The extra $400 of growth is due to compounding. The process would continue for each new year or time period. Other names for compounding are compound interest and the time value of money. Also see Interest, Investment.

Corporate Governance: Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. It involves balancing the interests of a company's many stakeholders, such as shareholders, management, employees, customers, suppliers, financiers, government and the community.Usually established and overseen by a board of directors, good corporate governance ensures accountability, fairness, proper supervision, control, transparency and the honest flow of information in all a company's relationships. It also provides the framework for reaching a company's goals, and it involves practically every company activity. Also see Board of Directors.

Corporate Rate: A corporate rate is a discounted (lower) rate that companies often negotiate with travel industry services, like car rental, airlines and hotels.The income that the travel service providers lose by offering a discount is more than made up, because company employees who travel on business will use them more frequently. A corporate rate also is known as a commercial rate.

Credit: Credit is a contractual agreement in which a borrower receives money or something of value and agrees to repay the lender at some date in the future, usually with interest. Credit also refers to an accounting entry on a company's balance sheet that either decreases assets or increases liabilities. Conversely, a credit on a company's income statement is a record of a sum of money already received and it increases net income.The opposite of credit is debit. Also see Balance Sheet, Debit, Income, Interest, Value.

Credit Card: A credit card is a standard-size plastic token with a magnetic stripe or embedded microchip that holds a machine-readable code. Credit cards are issued by financial companies (usually banks) that give the holder the convenience of purchasing items or services without cash or check.The banks that issue the cards then charge interest, usually beginning one month after a purchase is made. So to avoid interest charges, cardholders normally must pay the banks back within 30 days of their purchases. Borrowing limits are set according to the individual person's credit rating. Credit cards have become essential with the growing popularity of buying goods and services online. Also see Credit Rating, Interest.

Credit History: A credit history is a record of a borrower's responsible payment behavior that reflects his or her ability to repay a loan or debt. A credit history is compiled from a number of sources, including banks, credit card companies, collection agencies and governments. A person's credit history consists of information, such as the number and types of credit accounts a person has, how long each account has been open, the amounts owed, the amount of available credit used, whether bills are paid on time and the number of recent credit inquiries. It also contains information regarding whether a person has any bankruptcies, liens, judgments or collections. Credit history is a critical factor used in a person's credit rating. Also see Bankruptcy, Credit Report, Credit Rating, Debt, Lien, Loan.

Credit Report: A credit report is a detailed report of a person's credit history. Credit bureaus collect information and create credit reports based on that information, and lenders use the reports along with other details to determine a loan applicants' credit worthiness (ability to repay a loan in a timely manner).In the United States, there are three major credit reporting bureaus: Equifax, Experian and TransUnion. Each of these reporting companies collects information about borrowers' personal details and their bill-paying habits to create a unique credit report. Although most of the information among the three reporting bureaus is similar, there are often small differences between the three reports. Also see Credit History, Credit rating.

Credit Rating: A credit rating is a numerical evaluation (also known as an assessment) of the creditworthiness of a borrower. It can be assigned to any person, company or government that wants to borrow money. Credit assessment and evaluation for companies and governments is generally done by a credit rating agency, such as Dun & Bradstreet, Standard & Poor's, Moody's or Fitch. These types of agencies research credit history, the present financial condition, the likely future income of a borrower and the ability to repay a loan in a timely manner. They collect, store, analyze, summarize and sell such information, usually to the borrower that is seeking a credit rating for itself. Credit ratings (also sometimes called credit scores) are used by lending companies as a way of deciding the creditworthiness of a borrower for a new loan. Each lender sets its own guidelines for what they consider a good credit score, but in general scores fall along the following lines:

  •  300-629: Bad credit
  • 630-689: Fair credit (also called average credit)
  • 690-719: Good credit
  • 720 and up: Excellent credit

Also see Credit, Credit History, Credit Report, Loan.

Credit Union: A credit union is a type of financial organization (like a bank) that is created, owned and operated by its members. Members pool their funds in the bank in order to be able to loan money to each other. As soon as a person deposits money into a credit union account, he or she becomes a partial owner, and that person gets to share in the credit union's profits.Profits also can be used to fund projects and services that will benefit the community and the interests of its members. In this case, the goal is to better the community, not to make a profit, which means that credit unions are considered not-for-profit organizations. Credit union members also have a vote in electing its board of directors. Credit unions offer many banking services, such as consumer and commercial loans (usually at lower interest rates than traditional banks), mortgages, savings accounts (usually at higher interest rates), credit cards and other banking services. Credit unions range in size from small, volunteer operations to large companies with thousands of members. They can be formed by large corporations as a benefit for their employees. Originally, credit union membership was limited to people who shared a common bond, including working in the same industry or living in the same community. In the recent past, credit unions have loosened their restrictions on membership, which dismayed traditional banks, who have to pay corporate income tax on their profits. Credit unions, as non-profit organizations, do not have to pay that tax. Also see Board of Directors, Interest, Loan, Mortgage, Profit.

Creditor:  A creditor is a person, organization (like a company or business) to whom money is owed. A creditor extends credit by loaning money that is expected to be repaid in the future. A business that provides products or services to another company or individual and does not demand payment immediately also is considered a creditor. Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors. Real creditors, such as banks or finance companies, have legal contracts with the borrower, which sometimes grants the creditor the right to claim or seize any of the borrower's assets (for example, a car) if he or she fails to pay back the loan. Creditors make money by charging interest on the loans they offer their clients. Also see Asset, Loan.

Currency: Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within a population. It is used as a medium of exchange for goods and services.The history of currency in the America first started with furs for trade. Gold and silver nuggets and gold dust followed, but they became too heavy and cumbersome to carry wherever it was required. So various governments began issuing their own paper bills and coins that represented different specified values redeemable in gold or silver. After the Civil War, the states were united under one federal government, and one type of paper currency (the dollar) was issued throughout the land. Still, the paper dollar was redeemable for an equal value amount of gold. Citizens had confidence in the value of the dollar, because they knew they could redeem it for gold if they chose. In 1971, President Nixon announced that the U.S. dollar would no longer be tied to the gold standard, so a person could not redeem his or her dollar for an equal amount in gold. This meant that the dollar would be worth a dollar, only because everyone in the country believed or had confidence that it would be. Today, in addition to metal coins and paper bills, modern U.S. currency also includes checks drawn from bank accounts, money orders, travelers' checks and electronic transfers or digital cash, like BitCoins. The currency of the United States has come a long way from trading furs to electronic signals from a computer.

Debit: A debit is an accounting entry on a company's balance sheet that results in either an increase in assets or a decrease in liabilities. In fundamental accounting, debits are balanced by credits, which act to offset each other. For instance, if a firm were to take a loan to purchase equipment, one would debit its assets section of the balance sheet and credit the liabilities, depending on the nature of the loan. Debit is the opposite of credit. Also see Balance Sheet, Credit, Liability.

Debit Card: A debit card is a standard-size plastic token with a magnetic stripe or embedded microchip that holds a machine-readable code. But unlike a credit card, a debit card deducts money directly from a person's checking account to pay for a purchase. Debit cards eliminate the need to carry cash or physical checks to make purchases. In addition, debit cards (also called check cards) offer the convenience of credit cards and many of the same consumer protections when issued by a major payment processing company, like Visa or MasterCard. Unlike credit cards, they do not allow the user to go into debt, except perhaps for small negative balances that might happen if the account holder has signed up for overdraft coverage. Most of the time, however, if there are not enough available funds in a person's account, the purchase transaction is not completed. In addition, debit cards usually have daily purchase limits, which means it may not be possible to make an especially large purchase with it. Also see Credit Card

Debt: Debt is an amount of money borrowed by one party from another. It is a duty or obligation to pay back money, deliver goods or provide a service as described in an agreement. Debt is used by many corporations and individuals as a method of making 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. One who owes a debt is called a debtor. Also see Debtor.

Debtor: A debtor is a person or company that owes money or has been paid by someone to deliver goods or services that have not yet been delivered. In addition, someone who voluntarily declares bankruptcy also legally is considered a debtor. Also see Bankruptcy, Creditor.

Deferred: A loan arrangement in which the borrower is allowed to start making payments at some specified time in the future. Deferred payments are often used in retail businesses where a person buys and receives an item with a commitment to begin making payments at a future date.

Deficit: A deficit is the excess amount of expenses over income or liabilities over assets. Deficit is the opposite of surplus and is mostly associated with a shortfall or loss. The term, deficit, is generally preceded by another term to refer to a specific situation (for example, budget deficit.) Deficit is the opposite of surplus. Also see Asset, Budget, Liability, Surplus.

Deflation: Deflation is a shrinking in the supply of money or currency within an economy, and therefore the opposite of inflation. In times of deflation, the purchasing power of people's money is higher than they otherwise would have been. This situation illustrates Adam Smith's theory of supply and demand. Generally, if the supply of something (in this case currency) is low and demand is high, the corresponding value (of the currency) also will be high. Price deflation is similar but a little bit different. This specifically refers to a general decrease in prices for retail and other goods. The two terms are often mistaken for each other and used interchangeably. In effect, deflation causes the prices of capital, labor, goods and services to be lower than if the money supply did not shrink. While price deflation is often a side effect of money or currency deflation, this is not always the case. Also see Adam Smith, Capital, Currency, Inflation, Value.

Deposit: A deposit is a transfer or placement of funds into an account at a financial institution (like a bank) to increase the credit balance of the account. Deposit also refers to funds that are given in advance as a down payment with the intention to complete the full payment of a purchase at a later date.

Depreciation: Depreciation is an accounting method of dividing the cost of a tangible capital asset or fixed asset (like a piece of expensive machinery needed to make a product) over the asset's estimated useful life. It allows a company to spread a large expense (purchase price of the machinery) in equal amounts over a period of several years. For example, if a company buys a piece of machinery for $50,000, it can either write off (deduct it as an expense) the cost of the equipment in year one, or it can write the value of the equipment off over its useful life, which results in a $5,000 expense deduction each year for 10 years. Depreciation also reflects reduction in the value of an asset (in this case machinery), due to wear and tear or it becoming obsolete. Also see Asset, Expense.

Deregulation: Deregulation is the revision, reduction or elimination of government laws and regulations that hinder free competition in the supply of goods and services. Most proponents of deregulation allow market forces to drive the economy. Deregulation, however, doesn't mean any control or laissez faire.The financial industry historically has been one of the most heavily regulated industries in the United States. Also see Adam Smith.

Dividend: A dividend is a share of the after-tax profit of a company, which is distributed to its shareholders. Smaller companies typically distribute dividends at the end of the year, however larger, publicly held companies usually distribute it every quarter (three months.) The amount and timing of the dividend is decided by the board of directors, which also determines whether it is paid out of current earnings or the past earnings kept as a reserve. Shareholders of preferred stock receive dividends at a fixed rate and are paid first. Holders of ordinary shares are entitled to receive any amount of dividend, based on the level of profit and whether the company needs to reserve some cash for expansion or other purposes. Dividends can be issued as cash payments, as shares of a company's stock or other property. Also see Board of Directors, Profit, Shareholders, Stock.

Dow Jones Industrial Average: The Dow Jones Industrial Average (sometimes referred to as the Dow) is an index of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ exchange. Invented in 1896 by Wall Street Journal editor Charles Dow and his partner, statistician Edward Jones, the Dow is one of the oldest, single most-watched indices in the world. Companies represented on the Dow include General Electric, the Walt Disney Company, Exxon Mobil Corporation, Microsoft and many more. The Dow Jones Industrial Average was designed to serve as a gauge or indicator of the strength of the broader U.S. economy by averaging the stock prices of its listed companies. When the index launched, it included just 12 companies that were almost purely industrial in nature. The first version included railroads, cotton, gas, sugar, tobacco and oil. General Electric is the only one of the original Dow components that is still a part of the index today. As the economy changes over time, so does the composition of the index. The Dow typically makes changes when a company experiences financial distress and becomes less representative of the economy, or when a broader economic shift occurs and a change needs to be made to reflect it. About 20 of the Dow's 30 component companies are industrial and consumer goods manufacturers. The others represent industries, such as financial services, entertainment and information technology. The starting point for the Dow Jones Industrial Average in 1896 was 40.94, a far cry from the 20,000-point average reached in 2017. When the TV network commentators report that the market is up (or down), they are generally referring to the Dow Jones Industrial Average. Also see Stock.

Earnings: The basic definition of earnings is money obtained in return for labor or services. However an alternative and somewhat more specific term for earnings is net income, which is what a business arrives at after all expenses and taxes are deducted. Earnings are famously reported as the bottom line, since it usually is the on last line of a company's income statement. Earnings essentially are the amount of profit that a company produces during a specific period, which is usually defined as a quarter (three months) or a year. Every quarter, analysts wait for the earnings of the companies they follow to be released. Earnings are studied by analysts, because they represent a direct indication of a company's performance. Also see Analyst, Bottom Line.

EBITDA: EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Essentially, it's a way to evaluate a company's performance and earnings potential without having to factor in financing obligations, accounting methods or taxes. Simply stated EBITDA is the total (gross) income generated by the sale of a company's goods and services, minus the direct cost to produce those goods and services (like raw materials and wages paid). The cost of interest on loans, the costs of aging equipment (depreciation) and taxes are not figured into EBITDA. Once these items are figured in, a company arrives at its bottom line net income, also called earnings. Also see Bottom Line, Depreciation, Earnings, Net Income.

Economy: An economy is the sum total of wealth and resources, along with the entire network of producers, distributors and consumers of goods and services in a local, regional or national community. The economy applies to everyone from individuals to corporations and governments. The economy of a particular region or country is governed by its culture, laws, history and geography, among other factors, and it evolves due to necessity. For this reason, no two economies are the same. The strength of an economy often is expressed by how large its gross domestic product is. Also see Gross Domestic Product.

Equity: The term, equity, has many subtly different meanings when used in different contexts. In general, equity is a person's ownership in any asset after all debts (liabilities) associated with that asset are paid. A popular use for the term refers to the value of the shares of stock or other ownership rights issued by a company. This may be in a private company (not publicly traded), in which case it is called private equity. So, in terms of investment strategies, equities refer to stocks. In the context of real estate, the amount of equity is the difference between the current fair market value of a property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage and any other debts. When a business goes bankrupt, the amount of money remaining (if any) after the business repays its creditors is often called ownership equity. Another example of owner's equity is when a car or house has no outstanding debt and can be easily sold, because there is no debt standing between the owner and the sale. Also see Bankruptcy, Debt, Investment, Liability, Mortgage, Stock.

ETF: An ETF is an Exchange-Traded Fund, and these types of investments have been around since 1993. You can think of an ETF as a form of index fund, much like the Dow Jones Industrial Average is an index. An ETF also can track commodities (like gold or precious metals), bonds or any manner of other assets or securities that may be listed on an index. Shareholders do not directly own or have any direct claim to the underlying stocks that make up an ETF. Rather they indirectly own these assets, because they own shares in the fund itself. ETF shareholders are entitled to a proportion of the fund's profits, such as dividends.  Unlike any other type of indexed fund (or mutual fund), an ETF can easily be bought, sold or transferred in much the same way as shares of stock on a stock exchange. Also see Asset, Bond, Commodity, Dividends, Dow Jones Industrial Average, Index.

Euro: The euro is the single European currency that replaced the national currencies of most of the European Union (EU) member countries. The euro was introduced by the EU to the financial community in 1999 and physical euro coins and paper notes were introduced in 2002. Euros are printed and managed by the European System of Central Banks. Britain's people voted to leave the European Union, which will take place in the near future. Currently, 19 of the 28 EU member countries use the euro. These countries create what is called the Eurozone, a region where the euro serves as a common national currency for all of the separate nations.The euro is abbreviated by the symbol EUR, and the symbol, €, is used in a way similar to the U.S. dollar sign ($). Also see Currency, European Union.

European Union: Created in 1958, the European Union (EU) is a unique economic and political union between 28 European countries that together cover much of the continent. The primary purpose of the EU was to foster economic cooperation. It was believed that countries that trade with one another become economically interdependent and so more likely to avoid conflict and war. When it began, it was called the European Economic Community, and it had only six member countries. Today, member countries include:

  • Austria
  • Belgium
  • Bulgaria
  • Croatia
  • Republic of Cyprus
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • France
  • Germany
  • Greece
  • Hungary
  • Ireland
  • Italy
  • Latvia
  • Lithuania
  • Luxembourg
  • Malta
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Slovenia
  • Spain
  • Sweden
  • United Kingdom (Britain)

 

Britain's people voted to leave the European Union, which will take place in the near future. What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration. In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace, reconciliation, democracy and human rights in Europe. People can travel freely throughout most of the continent, and it has become much easier to live, work and travel abroad in Europe. Also see Brexit, Economy.

Expense: Money spent or the costs associated with an organization's efforts to generate revenue. Common business expenses include payments to suppliers, employee wages, factory leases (rent) and equipment depreciation. These expenses represent the cost of doing business, and they are allowed to be deducted from a company's gross income or sales, before taxes are calculated. The Internal Revenue Service has strict rules on which expenses businesses are allowed to claim as a deduction. Also see Depreciation, Internal Revenue Service.

Fannie Mae: The Federal National Mortgage Association (FNMA) is usually known as Fannie Mae as a short way to pronounce its initials. Established in 1938 during the Great Depression as part of the New Deal, Fannie Mae is a government-sponsored financial organization with a mission to increase the availability and affordability of homeownership for low-, moderate- and middle-income Americans. It buys loans from mortgage lenders, packages them together and sells them as a mortgage-backed security to investors on the open market. This market is called the secondary mortgage market. As a secondary mortgage market participant, Fannie Mae does not originate loans or provide mortgages to borrowers. Instead, it keeps funds flowing to mortgage lenders (like credit unions, local and national banks, savings and loans and other financial institutions.) Fannie Mae is a publicly traded company that operates under Congressional charter. With the collapse of the housing market in 2008, Fannie Mae was placed in federal receivership (a type of bankruptcy process) as a result of losing so much money due to homeowners defaulting on their mortgages. Also see Bankruptcy, Borrower, Credit Union, Great Depression, Mortgage.

FDIC: The Federal Deposit Insurance Corporation (FDIC) is the U.S. federal agency that provides insurance on funds deposited with banks and other similar financial companies. The FDIC insures deposits of up to $250,000 in the United States against a bank's failure, as long as the bank is a member of the FDIC. The FDIC was created by the Banking Act of 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices. It is wise for bank account holders to be certain that their bank is a member of the FDIC. Also see Deposit.

Federal Reserve: The Federal Reserve Bank (often called the Fed) is the central bank of the United States and the most powerful financial institution in the world. The Federal Reserve was established by the Federal Reserve Act, which was signed by President Woodrow Wilson in 1913 in response to the financial panic of 1907. Before that, the United States was the only major financial power without a central bank. The Fed has broad power to act to ensure financial safety and a stable monetary system, and it is the primary regulator of banks that are members of the Federal Reserve System. The Federal Reserve System is composed of a central governmental agency in Washington, DC, a board of governors and 12 regional Federal Reserve Banks in major cities throughout the United States, which includes a branch office in Pittsburgh. The Federal Reserve's duties can be divided into four general areas

  1. Conducting monetary policy,
  2. Regulating banking institutions and protecting the credit rights of consumers,
  3.  Maintaining the stability of the financial system, and
  4.  Providing financial services to the U.S. government.

The Fed acts as the lender of last resort to member banks that have no place else to borrow. It is a major force in the economy and banking. Also see Economy, Monetary Policy

Fee: A fee is a payment made to a professional person or to a business or public organization in exchange for advice or services. Banks and other businesses usually charge small fees for various services, such as requesting a deposit slip, a counter check or certain documents. Also see Checking Account, Deposit.

Fiduciary: Basically, a fiduciary is a person or organization that owes to another the duties of good faith, trust and acting ethically in the other's best financial interests. A fiduciary often manages the assets of another person or of a group of people, and he or she is expected to do so for the benefit of the other person or group, rather than for his or her own profit, and the fiduciary cannot benefit personally from their management of assets. Strict care is taken to ensure no conflict of interest arise between fiduciaries and the people they represent. A fiduciary owes the duty of loyalty, full disclosure, obedience, diligence and accurately accounting for all monies managed on behalf of a person or group. Laws demand that a fiduciary exercise the highest degree of care in maintaining and preserving a person's assets and rights, and they impose strict fines for failure to do so. Money managers, bankers, accountants, executors, financial advisors, board members and corporate officers all can be considered fiduciaries.  Also see Asset, Board of Directors, Financial Advisor.

Financial Advisor: A financial advisor is professional who helps individuals manage their finances by providing advice on money issues, such as investments, insurance, mortgages, college savings, estate planning, taxes and retirement. Some financial advisors are paid a flat fee for their advice, while others earn commissions from the investments they sell to their clients. Fee-only arrangements are widely considered to be better for the client. Professional organizations like the Financial Planning Association and the National Association of Personal Financial Advisors can help a person find an advisor. When choosing a financial advisor, it's important to ask if they have any licenses or official credentials. Certified Financial Planner® (CFP®), chartered financial analyst (CFA), chartered financial consultant (ChFC) and registered investment advisor (RIA) are good indicators of an advisor's qualifications. Also see Analyst, Fee, Insurance, Mortgage, Tax.

Financial Plan: A financial plan is a comprehensive and thorough evaluation of an investor's current and future financial picture by predicting future cash flows, assets and withdrawal plans. Most individuals work with the assistance of a financial advisor and use their current net worth, tax liabilities, asset allocation and future retirement needs in developing financial plans. These metrics are used along with a person's estimates of asset growth to determine if a person's financial goals can be met in the future. The financial plan helps to determine what steps need to be taken to ensure future success. While there is no single specific model for a financial plan, most licensed professionals include knowledge and considerations of the client's future life goals, their future income expectations and future expense levels. A good financial plan can alert an investor to changes that must be made to ensure a smooth transition through life's different financial phases, such as retirement. Financial plans also should be updated occasionally when financial changes occur. Also see Asset, Cash Flow, Expense, Financial Advisor, Investor, Liability, Tax.)

Financial Regulations: Financial regulation is a form of regulation or supervision, which subjects financial institutions (like banks) to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. The oversight also extends to money markets, brokers, advisors and other financial companies, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Named after sponsors U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank, the act was in response to the financial crisis of 2008. It spelled out numerous provisions in more than 2,300 pages that are being implemented over a period of several years and are intended to decrease various risks in the U.S. financial system. The act established a number of new government agencies given the task with overseeing various components of the act and various aspects of the banking system.

Fiscal: The term, fiscal, is often used relating to government revenue, especially taxes, public spending, debt and finance. A fiscal year is a period that a company or government uses for accounting purposes and preparing financial statements. A fiscal year may not be the same as a calendar year (which is January through December), and for tax purposes, the Internal Revenue Service allows companies to be either calendar-year taxpayers or fiscal-year taxpayers (starting in different month, instead of January.) Fiscal years also are commonly referred to when discussing budgets. Also see Debt, Revenue, Tax.

Fixed Rate: A fixed rate is an interest rate that does not change over the life of a loan or mortgage. A fixed interest rate is attractive to borrowers who do not want their interest rates to rise over the term of their loans. A fixed interest rate avoids the risk that comes with a variable interest rate. When interest rates at lending companies (banks and mortgage companies) are generally low, a homebuyer may choose to lock in (fix) his or her interest rate on a loan. The disadvantage is that interest rates may go even lower, yet the homebuyer's rate is fixed and can't be changed. Also see Mortgage, Variable Rate.

Fortune 500: The Fortune 500 is an annual list of the 500 most profitable U.S. industrial corporations, as ranked by revenues. The list is published each year by Fortune magazine, and it also includes data on the companies' assets, net earnings, earnings per share, number of employees and other information. The list includes both public and private companies, as long as the private companies make their revenue information public. More than 1,800 American companies have been featured on the Fortune 500 list, since it began publishing it in 1955. The list has changed dramatically over its history, as a result of mergers and acquisitions, shifts in production output and bankruptcies. The impact of a recession can also take multiple companies off the list. The Fortune 500 list can often be a telling sign of how strong the economy is or if there has been an economic recovery after poor performing years. Fortune 500 companies represent two-thirds of the U.S. Gross Domestic Product. To be a Fortune 500 company is widely considered to be a mark of prestige. Also see Asset, Bankruptcy, Earnings, Economy, Mergers, Recession, Revenue.

Free Cash Flow: Free cash flow is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. Capital expenditures (expenses) include but are not limited buildings or property and equipment. Free cash flow represents the cash that a company is able to generate after spending the money required to maintain or expand its operations. It is important, because it allows a company to pursue opportunities that enhance shareholder value. The excess cash can be used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. Also see Capital, Debt, Dividend, Expense, Shareholder.

Gainer: A gainer is something or someone that is in a better position or has more value at the end of a process. In the case of the stock market, a gainer refers to a particular stock or stocks that increased in value during a given trading period. Sometimes people also are referred to as gainers, if they invested in a given type or class of stock that has increased in value. Also see Stock.

Gross Domestic Product: Gross domestic product (often abbreviated as GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis, as well. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation's overall economic activity. The United States is the world's largest economy with a GDP of approximately $18.56 trillion, notably due to high average incomes, a large population, capital investment, moderate unemployment, high consumer spending, a relatively young population and technological innovation. China is ranked second. Also see Capital, Economy, Income, Investment, Unemployment Rate.

Generally Accepted Accounting Principles: Often abbreviated as GAAP, generally accepted accounting principles are a common set of rules, practices, standards and methods meant to provide both broad guidelines and detailed procedures for preparing, recording and reporting financial information. Generally accepted accounting principles provide objective standards for judging, comparing and presenting financial data. An auditor (a type of accountant) must certify that the provisions of GAAP have been followed in reporting an organization's financial data in order it to be accepted by investors, lenders, governments and tax authorities. Using GAAP improves the clarity and consistency of a company's financial statements, which makes it easier for investors to analyze and extract useful information. Also, GAAP facilitates the cross comparison of financial information across different companies. Also see Analyst, Investor, Lender, Tax.

Great Depression: The Great Depression was the greatest and longest economic recession of the 20th century. It lasted an entire decade (1930-40), and it had devastating worldwide impact. Though there is disagreement on its precise causes, it is generally believed to have begun on the Black Monday (October 28, 1929.) On that day, the Dow Jones Industrial Average fell by 13 percent, after the Federal Reserve raised interest rates to discourage stock speculation following the stock market boom of 1920s. Between October 29 and November 13, more than $30 billion disappeared from the U.S. economy. During the decade that the Great Depression lasted, some 9,000 banks declared bankruptcies and wiped out nine million savings accounts. More than 86,000 businesses closed their doors, and wages fell by an average of 60 percent. Unemployment went up to 25 percent resulting in 15 million jobless Americans. Gross Domestic Product was still below 1929 levels by the time the Japanese bombed Pearl Harbor. Despite government spending and new, never-attempted programs put in place by both Presidents Herbert Hoover and Franklin Delano Roosevelt, the Great Depression did not end in the United States until the after World War II. Economists and historians study the Great Depression as the most critical economic event of the 20th century. Also see Bankruptcy, Dow Jones Industrial Average, Economy, Federal Reserve, Gross Domestic Product, Recession, Stock Market, Unemployment Rate.

Great Recession: A recession generally is considered to consist of two successive quarters (six months) of negative economic growth. This happens from time to time, but the Great Recession was a, extended period of sharp economic downturn in the United States beginning in December 2007 and lasting through June of 2009. That period is not described as depression, since it was not as severe as the Great Depression in the 1930's. However, it is generally considered the largest downturn since then. The U.S. housing market decline and the loss of significant capital value is thought to be one of the causes of the Great Recession. Also see Capital, Great Depression, Value.

Home Equity Loan: A home equity loan is a type of loan in which the borrower uses the equity (the total of a person's ownership) of his or her home as collateral (a guarantee against default). Home equity loans are often used to finance major expenses, such as home repairs, medical bills or college education. A home-equity loan is a type of consumer debt. Basically, it is a mortgage that is issued by the lender (a bank or mortgage company) and provides tax-deductible interest payments for the borrower. Today, with a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns. Like any mortgage, if the loan is not paid off, the home could be repossessed and sold to satisfy the remaining debt. Also see Collateral, Debt, Equity, Interest, Lender, Mortgage.

Income: Like the term, equity, income has many subtly different meanings when used in different contexts. Generally for most people, income refers to the flow of cash or any compensation received from work (wages or salaries) earned from a job. It also can come from investments, pensions and Social Security, which are primary sources of income for retirees. In businesses, income can refer to a company's remaining revenues after all expenses and taxes have been paid. In this case, it is also known as earnings.Most forms of income can be taxed. Income from a job the Internal Revenue Service calls earned income. Income from other sources is called unearned income and include, but are not limited to:

  • Investments (like stocks and bonds)
  • Interest earned from bank accounts
  • Dividends paid from owning company stock
  • Business income
  • Pensions (retirement plan income)
  • Rental income
  • Farming and fishing income
  • Unemployment compensation,
  • Jury duty pay
  • Gambling income
  • Bartering (trading income)

Also see Dividends, Earnings, Interest, Revenue, Social Security.

Income Tax Rates: A tax rate is the percentage at which an individual or corporation is taxed. The tax rate is the tax imposed by the federal government and some states, based on an individual's taxable income or a corporation's earnings. By law, businesses and individuals must file an income tax return (for most people due by April 15) every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public. Most countries employ a progressive income tax system in which higher-income earners pay a higher tax rate compared to lower-income earners. The first income tax imposed in America was during the War of 1812. Its original purpose was to fund the repayment of a $100 million debt that was incurred through war-related expenses. After the war, the tax was repealed, but income tax became permanent during the early 20th century. In the United States, the Internal Revenue Service (IRS) collects taxes and enforces tax law. The IRS employs a complex set of rules and regulations regarding which income must be reported and which deductions and credits people may claim. The agency collects taxes on all forms of income, including wages and salaries (often called earned income), as well as commissions, investments, collected rent (called unearned income), in addition to business earnings. Also see Earnings, Income, Internal Revenue Service, Tax.

Index: An index is an indicator or measure of something, and in finance it typically refers to a statistical measure of change in a securities (stocks and bonds) market. In the case of the stock market, there are a number of indices (indices is the plural of index) that consist of an imaginary basket of stocks representing a particular market or a portion of it. The Dow Jones Industrials is an example of an index of 30 large industrial corporations. The NASDAQ and S&P (Standard & Poor's) indices also are good examples. Each index related to the stock and bond markets has its own method of calculating its value. In most cases, however, the up or down change of an index is more important than the actual numeric value representing the index. For example, let's say the Financial Times Stock Exchange (FTSE) 100 is at 6,670.40. That number tells investors the index is nearly seven times its base level of 1,000. However, to assess how the index has changed from the previous day, investors must look at the amount the index has fallen, often expressed as a percentage.This calculated figure serves as a benchmark for measuring changes in the price or quantity data over a period of time (month, quarter or year). There are indices for all manner of goods and services, including mortgage rates, bonds, commodities and consumer prices. Also see Bond, Commodity, Dow Jones Industrial Average, Mortgage.

Inflation: Inflation is a rapid increase in consumer good prices, measured by some broad index (such as the Consumer Price Index) over months or years. With inflation, there is a corresponding decrease in purchasing power of the currency. For example, if the inflation rate is two percent, then a pack of gum that costs $1.00 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the value of that money falls. Inflation has its worst effect on the fixed-wage earners, and it discourages people from saving money. Modern economic theory describes three types of inflation:

  1. Due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages. This called the wage-price spiral.
  2. Due to increasing consumer demand resulting from easier availability of credit
  3.  Caused by the growth in the money supply (due to printing of more currency by a government to cover its deficits.)

The Federal Reserve uses several different sources of data to determine if the inflation rate needs to be controlled, and it does this by raising basic interest rates. When the cost of borrowing money gets more expensive, fewer people and businesses will do it, and inflation will ease. The Federal Reserve clearly communicates long-term inflation goals in order to keep a steady long-term rate of inflation, which in turn maintains stable prices. Price stability or a relatively constant level of inflation, allows businesses to plan for the future, since they know what to expect. It also allows the Fed to promote maximum employment. Also see Credit, Currency, Federal Reserve, Index.

Insurance: Insurance is a contract (usually called a policy) in which an individual or organization receives financial protection or a guarantee of reimbursement or compensation against losses. An insurance company or government agency combines clients' risks to make payments (called premiums) more affordable for the insured person or organization. Insurance policies are used to guard against the risk of financial losses, both big and small, that may result from damage to the insured or his or her property or from liability for damage or injury caused to a third party. There are a multitude of different types of insurance policies available, and virtually any individual or businesses can find an insurance company willing to insure them for a price. The most common types of personal insurance policies are auto, health, homeowners and life insurance policies. Most individuals in the United States have at least one of these types of insurance. Businesses require special types of insurance policies that insure against specific types of risks that they face. A fast food restaurant, for example, needs a policy that covers damage or injury that occurs as a result of cooking with a deep fryer. Auto dealers do not encounter this type of risk, but they do require coverage for damage or injury that could occur during test drives. There are also insurance policies available for very specific needs, such as insurance for doctors against errors they commit when treating a patient (medical malpractice). Also see Liability.

Interest: Interest is the charge for the privilege of borrowing money, typically expressed as an annual percentage rate. At agreed upon intervals, a borrower pays back a portion of the loan amount plus interest, which is an agreed upon percentage of the outstanding, unpaid amount.There are two main types of interest that can be applied to loans: simple interest and compound interest. Simple interest is a set rate (never varies from payment to payment.) Compound interest is a specified percentage on the total unpaid amount (called a balance.) The more a borrower pays off the original loan amount, the less he or she will have to pay in interest as time goes on. Compound interest is the most common type. In the investment industry, interest also can refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage. Also see APR, Compounding, Stockholder.

Internal Revenue Service: The Internal Revenue Service (IRS) is a U.S. government agency responsible for the collection of taxes and enforcement of tax laws. Established in 1862 by President Abraham Lincoln, the agency operates under the authority of the United States Department of the Treasury. Its primary purpose includes the collection of individual income taxes and employment taxes, but it also handles corporate, gift, excise and estate taxes. Headquartered in Washington, D.C., the IRS has several processing centers through the country. In fiscal year 2014, the IRS processed nearly 147.5 million personal income tax returns and more than 2.2 million corporate income tax returns. These types of returns brought the federal government close to $2 trillion in revenue. Also see Income, Revenue, Tax.

Investor: An investor is any person who provides capital with the expectation of achieving a profit and growing his or her money. A wide variety of investment vehicles exist, including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold, silver, retirement plans, annuities and real estate. Investors typically perform a thorough analysis to determine favorable investment opportunities, and generally prefer to minimize risk while maximizing returns. For the average person, financial advisors often help in this research. Investors have varying risk tolerances, capital, styles, preferences and timeframes. For instance, some investors prefer very low-risk  (risk averse) investments that will lead to conservative gains, such as certificates of deposits and certain bond products. Other investors, however, are more inclined to take on additional risk in an attempt to make a larger profit. These investors might invest in currencies, emerging markets or stocks. Also see Annuity, Bond, Commodity, ETF, Financial Advisor, Profit, Risk Averse, Stock.

IRA: A traditional individual retirement account (IRA) allows people to put part of their income or paycheck into investments before it is taxed. These investments then can grow tax-deferred, meaning the profits on those investments (neither the capital gains or dividends) will be taxed, until it is withdrawn usually at retirement. So an individual retirement account is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs. There are traditional IRAs, Roth IRAs, Simple IRAs and SEP IRAs. IRAs can consist of a range of financial products, such as stocks, bonds or mutual funds. Traditional and Roth IRAs are established by individual taxpayers, while SEP and Simple IRAs are retirement plans established by small business owners and self-employed individuals. Also see, Bond, Capital, Dividend, Mutual Fund, Stock.

Junk Bond: Junk Bond is a nickname for a high-yield, high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover. Junk bonds are risky investments, but they have a high appeal, because they offer much higher yields than bonds with higher credit ratings. Junk bonds typically carry a credit rating of BB or lower by Standard & Poor's (S&P), or Ba or below by Moody's Investors Service. Both S&P and Moody's provide services as analysts. Investors demand that junk bonds pay higher yields as compensation for the risk of investing in them. If a junk bond manages to turn its financial performance around and has its credit rating upgraded, the investor may see a substantial profit. Also see Analyst, Bond, Capital, Credit Rating, Investor, Profit.

Liability: A liability is a company's financial debt or obligations that arise during the course of doing business. Liabilities are settled over time through the repayment of assets, like money, goods or services. Liabilities include loans, accounts payable, mortgages, deferred revenues and other expenses. Liabilities are a vital aspect of a company because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, if a supplier of soft drinks sells a case of soda to a restaurant, it does not demand payment when it delivers the goods. Rather, it sends a bill to the restaurant later in order to streamline the drop-off and make paying easier for the restaurant. The outstanding money that the restaurant owes to its soft drink supplier is considered a liability. In contrast, the soft drink supplier considers the money it is owed to be an asset. In accounting, liabilities also include wages payable, rent that is payable, taxes, trade debt and short- and long-term loans. Owners' equity is also termed a liability, because it is an obligation of the company to its owners. Also see Asset, Debt, Loan, Mortgage.

Lien: A lien is a legal right that guarantees an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize (take possession of) the asset that is the subject of the lien. Once acted upon, a lien becomes the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan or other contract. The property that is the subject of a lien cannot be sold by the owner without the consent of the lien holder. A mortgage agreement is a lien on the mortgaged property. For example, if a homeowner fails to keep up on his or her mortgage payments for a long period of time, the courts may award a lien to the bank that made the loan. This gives them the right to take possession of the home, sell it and take the money that was owed. Liens are not just placed on homes. Liens also are granted by the courts to satisfy a judgment against a losing defendant. All liens are for a limited period (which varies with the location), and they apply only to the asset or property that forms part of the contract. In other words, a bank cannot seize or repossess someone's car, because they stopped payment on their home mortgage. Also see Debtor, Mortgage.

Liquid Asset: A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself, because the asset can be sold quickly with little impact on its value. Investments are considered liquid assets because they can be easily liquidated. For example, shares of stock, bonds, money market funds, mutual funds and accounts receivable are considered liquid assets. These assets can be converted to cash in a short period of time in the event a financial emergency arises. Checking or savings accounts also are considered liquid, because it can be withdrawn easily to settle debts and liabilities. An example of a non-liquid (sometimes also called illiquid) asset real estate, because something like a house or office building can take months for a person or company to receive cash from the sale. Also see Bond, Checking Account, Debt, Investment, Liability, Savings Account.

Liquidate: In finance and economics, to liquidate is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. The company's operations are brought to an end, the business is dissolved and its assets are divided up among creditors and shareholders, according to a certain priority. Chapter 7 of the U.S. Bankruptcy Code governs liquidation proceedings. The liquidation process is initiated either by the shareholders (voluntary liquidation) or by the creditors after obtaining court's permission (compulsory liquidation.) Not all bankruptcies involve liquidation. Chapter 11, for example, involves rehabilitating the bankrupt company and restructuring its debts, thereby allowing it to continue operating until it can better repay its debts. You may notice that some retail businesses post large signs saying that they are holding a liquidation (or going out of business) sale, and all items must be sold in order to pay their creditors. Also see Asset, Bankruptcy, Creditor, Debt.

Loan: A loan is the act of giving money, property or other material goods from a lender to a borrower (either a person or organization) in exchange for future repayment of the principal amount, along with interest or other finance charges. Loans can come from individuals, corporations, financial institutions and governments. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount. The terms of a loan are agreed to by each party in the transaction, before any money or property changes hands. If the lender requires collateral, that is outlined in the loan documents. Most loans also have agreements about the maximum amount of interest to be charged, as well as the length of time before repayment is required. The interest and fees from loans are a primary source of revenue for many financial institutions, such as banks, as well as some retailers through the use of their own private credit cards. If the loan is repayable on the demand of the lender, it is called a demand loan. If it is repayable in equal monthly payments, it's called an installment loan. If the loan is repayable in lump sum on the loan's maturity (expiration) date, it is a time loan. Banks further classify their loans into other categories such as consumer, commercial, industrial loans, construction and mortgage loans and secured and unsecured loans. A common loan for most Americans is a mortgage. Also see Collateral, Credit, Interest, Mortgage.

Loan Shark: A loan shark is a person or organization that charges borrowers interest above an established legal rate. Depending on what state in which a person lives, lenders typically cannot charge more than 60 percent interest a year. A loan shark, then, would be someone who illegally charged interest over the state's legal limit, which could range up to, or even over 100 percent. For example, a loan shark would lend $10,000 to a person with the provision that they be repaid $20,000 within 30 days. A big word of caution is that loan sharks will often back their lending methods with threats of violence, bodily harm, damage to a person's property or reputation as a way to ensure the loans are repaid. People who find themselves involved with a loan shark should seek legal help.

Long: A long (or long position) is the buying of a security, such as a stock, commodity or currency with the expectation that the asset will rise in value over the long term. With a long position investment, the investor purchases the asset or commodity and owns it with the expectation the price is going to rise. He normally has no plan to sell the commodity in the near future. This contrasts with the short position investment, where an investor does not own the stock but borrows it with the expectation of selling it and then repurchasing it at a lower price. Generally, a time frame for investing in a long position is one in which an asset is held for at least seven to ten years. The measure of a long-term time frame can vary depending on the asset held or the investment objective. Also see Commodity, Investment, Short.

Loss: A loss is the removal of or decrease in the value of an asset or resource. A loss usually means that the value cannot be recovered, and it usually is not expected. In accounting, a loss is a cost that produces no benefit, or it can mean a decrease in value of an asset. The term also is used to describe a situation where expenditures (expenses) are more than income. In the insurance business, a loss can mean the decrease in the value of an insured property due to a catastrophe or damage, or it can mean the amount sought in an insurance claim or paid under an insurance contract. Also see Asset, Expense, Insurance, Value.

Macro: The term, macro, refers to anything that takes a wide overview on a large, broad scale. Macroeconomics, therefore, is concerned with major external and uncontrollable factors that influence an organization's decision-making and strategies and affect its performance. These factors include demographics (the study of people statistics), legal, political conditions, social conditions, technological changes and forces of nature. Other specific examples of competing in business with macro environment influences include types and locations of competitors, changes in interest rates, changes in cultural tastes, disastrous weather or government regulations. The opposite of macro is micro. Also see Micro.

Manufacturing: Manufacturing jobs generally are defined as those that create new finished goods and products, either directly from raw materials, components or parts. These jobs are usually in a factory, plant or mill, but they also can be in a home, as long as products, not services, are created. Large-scale manufacturing commonly uses fabricating machinery and equipment, however in its strictest definition, manufacturing also can be performed by hand.

Mergers and Acquisitions: Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. A company under consideration by another organization for a merger or acquisition is sometimes referred to as the target. Specifically, a merger means a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

Micro: The term, micro, refers to anything that takes an extremely narrow view or focus. Microeconomics, therefore, studies the implications of individual human action, rather than the environment at large (which is a macro view). More specifically, microeconomics shows how and why different goods have different values, how individuals make more efficient or more productive decisions, and how individuals best coordinate and cooperate with one another. Microeconomics also deals with what is likely to happen when individuals make certain choices or when the factors of production change. Individual actors are often broken down into microeconomic subgroups, such as buyers, sellers and business owners. These actors interact and influence decisions that affect the supply and demand, as well as the use and distribution of scarce resources. Generally, microeconomics is considered a more complete, advanced and settled science than macroeconomics. Also see Macro.

Minimum Wage: The minimum wage is the lowest legal payment per hour, below which an employer is not permitted to pay his or her employees. Workers may not be offered or accept a job below the minimum wage. In 2018, the federally mandated minimum wage rate in the United States is scheduled to reach $10.10 per hour. The minimum wage in America was established by the Fair Labor Standards Act of 1938. Even though the United States enforces a federal minimum wage, individual states and localities may also pass different minimum wage laws. As of 2016, minimum wage rates exceeded the federal rate in 29 of the 50 states, led by California and Massachusetts at $10 per hour. Minimum wage laws were first used in Australia and New Zealand in an attempt to raise the incomes of unskilled workers. Most modern developed economies and many underdeveloped economies enforce a national minimum wage. Examples of countries with no established minimum wage include Sweden, Denmark, Iceland, Norway, Switzerland and Singapore. In some countries, such as the U.S., the minimum wage is set by the federal government, while in others, such as the United Kingdom, it is set by the wage council of each industry.

Monetary Policy: Monetary policy is the macroeconomic policy established by a central bank (like the U.S. Federal Reserve). It involves management of money supply and setting interest rates, and it is the economic policy used by the government of a country to achieve macroeconomic objectives, like low inflation, consumption, growth and liquidity. Generally, there are two types of monetary policy, expansionary and contractionary. Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing, increase the ability of consumers to spend and stimulate economic growth. Often referred to as easy monetary policy, this description applies to many central banks, since the 2008 financial crisis (also known as the Great Recession), as interest rates have been low and in many cases near zero.  Contractionary monetary policy slows the rate of growth or decreases the money supply, in order to control inflation. While sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. In theory, central banks often are independent from politics and other policy makers. This is the case with the Federal Reserve and Congress, reflecting the separation of monetary policy (by the Fed) from fiscal policy (by Congress). The latter refers to taxes and government borrowing and spending. The Federal Reserve has what is commonly referred to as a dual mandate (two orders): to achieve maximum employment (in practice, around five percent unemployment) and stable prices (two to three percent inflation). In addition, it aims to keep long-term interest rates relatively low, and since 2009 it has served as a bank regulator. Its core role is to be the lender of last resort, providing smaller local banks with cash flow, in order to prevent the bank failures that plagued the U.S. economy before the Fed's establishment in 1913. In this role, the Federal Reserve lends to eligible banks at what is called the discount rate, which in turn influences the Federal funds rate (the rate at which banks lend to each other) and interest rates on everything from savings accounts to student loans and mortgages. Also see Cash Flow, Federal Reserve, Great Recession, Inflation, Interest, Macro, Mortgage.

Mortgage: A mortgage is a legal agreement by which a bank, mortgage company or other lender lends money to make large real estate (like a house) purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan in an agreed upon set of payments, plus interest, until he or she eventually owns the property free and clear.In a residential mortgage, a homebuyer pledges his or her house to the bank as collateral. The bank has a claim (lien) on the house, if the homebuyer should default (stop paying) on the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to pay off the mortgage debt. Also see Collateral, Debt, Interest, Lien, Loan.

Mortgage Rate: A mortgage rate is percentage interest rate charged by a mortgage lender on a loan to purchase a property, like a house. Mortgage rates are determined by the lender in most cases, and they can be either fixed rate or variable rate. With a fixed-rate mortgage, the borrower pays the same interest rate for the life of the loan. His or her monthly principal and interest payment never change from the first mortgage payment to the last. Most fixed-rate mortgages have a 15- or 30-year term. If market interest rates rise, the borrower's payment does not change. A fixed-rate mortgage is also called a traditional mortgage. With an adjustable-rate mortgage (also called an ARM), the interest rate is fixed for an initial term, but then it fluctuates with market interest rates. The initial interest rate is often a below-market rate, which can make a mortgage seem more affordable than it really is. If interest rates increase later, the borrower may not be able to afford the higher monthly payments. Interest rates also could decrease, making an ARM less expensive. In either case, the monthly payments are unpredictable after the initial term. Many homeowners got into financial trouble with these adjustable types of mortgages during the housing bubble years, which many believe was the spark that caused the Great Recession. Also see Great Recession, Interest, Principal.

Mutual Fund: Mutual fund is an investment program funded by shareholders and is professionally managed. It is made up of a pool of funds collected from many investors for the purpose of investing in securities, such as stocks, bonds and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment goals that are stated in its description (called a prospectus). One of the main advantages of mutual funds is they give small investors access to a wide variety of different professionally managed groups of equities, bonds and other securities. Each shareholder, therefore, participates equally in the gain or loss of the fund. Also see Bond, Capital, Equity, Investor, Security, Shareholder, Stock.

NAFTA: The North American Free Trade Agreement (NAFTA) is an agreement implemented in 1994 among the United States, Canada and Mexico designed to remove tariff (import fee and tax) barriers between the three countries. The three countries phased out numerous tariffs, but with a particular focus on those related to agriculture, textiles and automobiles. NAFTA's purpose is to encourage economic activity between the United States, Mexico and Canada. About one-fourth of U.S. imports come from Canada and Mexico, which are the United States' second- and third-largest suppliers of imported goods. These goods include crude oil, machinery, gold, vehicles, fresh produce, livestock and processed foods. In addition, about one-third of U.S. exports, particularly machinery, vehicle parts, mineral fuel, oil and plastics are destined for Canada and Mexico. President Clinton who signed the law that was developed under the George H. W. Bush administration, believed NAFTA would create 200,000 American jobs within two years and one million within five years, because exports played a major role in U.S. economic growth. They anticipated a dramatic increase in U.S. imports from Mexico under the lower tariffs. Critics, however, were concerned that NAFTA would move U.S. jobs to Mexico. While the United States, Canada and Mexico have all experienced economic growth, higher wages and increased trade with each other since the start of NAFTA, experts disagree on how much NAFTA contributed to these gains, if at all.

NASDAQ: The National Association of Securities Dealers Automated Quotations (NASDAQ) was created in 1971 to enable investors to trade securities on a computerized, speedy and transparent system. In 2007, it combined with the Scandinavian exchange group OMX to become the largest exchange company globally. Its computerized system powers one in 10 of the world's securities transactions. Headquartered in New York, NASDAQ operates in 26 markets. Its cutting-edge trading technology is used by 70 exchanges in 50 countries. Its computerized trading system was initially devised as an alternative to the older inefficient system, which had been the prevalent model for almost a century. The rapid evolution of technology has made the NASDAQ's electronic trading model the standard for markets worldwide. The term, Nasdaq, also is used to refer to the Nasdaq Composite index of more than 3,000 stocks listed on the Nasdaq exchange. It also is considered a benchmark index for U.S. technology stocks, including the world's foremost technology and biotech giants, such as Apple, Google, Microsoft, Oracle, Amazon and Intel. Also see Index, Investor, Security, Stock.

Net Income: Net income is a company's total earnings (or profit), and it is calculated by taking revenues and subtracting the costs of doing business, such as depreciation, interest, taxes and other expenses. This number appears on a company's income statement and is an important measure of how profitable the company is over a period of time. Net income is often referred to as the bottom line, since it is listed at the bottom of the income statement. Net income also refers to an individual's income after subtracting taxes and other deductions. Also see Bottom Line, Depreciation, Earnings, Income, Interest, Profit, Revenue.

Overbought: Having a stock over bought means that the technical indicators on the security do not justify its current high price. Analysts may recommend selling overbought securities, as they are due for a price correction (fall in price and value). Being overbought refers to a situation in which the high demand for a certain asset, stock or security pushes the price of that asset to levels that are not justified by basic data and scientific reasoning. Also see Analyst, Asset, Security, Stock, Under Bought, Value.

Pound: The pound is the basic standard unit of money for the United Kingdom, similar to the U.S. dollar, but with a different value. Historically, the pound also was the unit of currency for Scotland before the Act of Union in 1707, and before then it also was called pound scots. Ireland and Cyprus also used the pound as their basic currency unit, until they adopted the euro. The U.K. also adopted the euro, but with its recent Brexit referendum (popular vote), it is expected that they will return to the pound. The dollar value of a pound changes daily, but in March of 2017, the pound was worth approximately $1.22. Also see Brexit, Euro.

Principal: Principal is most commonly referred to the original amount borrowed or the amount still owed on a loan, separate from interest. By way of an example, if a borrower takes out a $50,000 loan, the principal is $50,000. However, if that person pays off $30,000, the remaining $20,000 left to repay also is called the principal. When making monthly payments on a loan, the amount of your payment goes first to cover the interest charges, and the remainder is applied to your principal. Paying down the principal of a loan is the only way to reduce the amount of interest that is owed each month. Also see Borrower, Interest, Loan.

Profit: Profit is a financial gain that is a result of the difference between the amount earned (revenue) and the amount spent in buying, operating or producing something. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business. Regardless of whether the business is a couple of kids running a lemonade stand or a publicly traded multinational company, consistently earning profit is every company's goal. As a result, much of business performance is based on profitability in its various forms. Some analysts are interested in top-line profitability (gross profit), whereas others are interested in profitability before expenses, such as taxes and interest (operating profit), and still others are only concerned with profitability after all expenses have been paid, like dividends (net profit). Each type of profit gives the analyst more information about the company's performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement. Also see Dividends, Interest, Revenue, Tax.

Public Offering: A public offering is an act of offering the stock (sometimes also called equity shares) of a particular company on a public stock exchange. Companies make public offerings in order to raise funds for business expansion and investment. Public offerings of company stocks in the U.S. must be registered with and approved by the Securities and Exchange Commission. Generally, any sale of securities to more than 35 people is deemed to be a public offering, and therefore requires the filing of registration paperwork with the appropriate regulatory authorities. The offering price is predetermined and established by the issuing company and any investment bankers (called underwriters) helping to manage the transaction. The term public offering is equally applicable to a company's initial (first) public offering, as well as any offerings that come later. Also see Security, Stock.

Real Estate: Real estate is property consisting of land or buildings. It also includes natural resources of the land, such as underground water and minerals, wild plant and animal life on the land, farmed crops and livestock (cows, horses, pigs, etc.). Real estate can be grouped into three broad categories based on its use, and they are residential, commercial and industrial. Examples of residential real estate include houses, condominiums and town homes, along with the land underneath them. Examples of commercial real estate are office buildings, warehouses and retail store buildings. Examples of industrial real estate are factories, mines and farms. Also see Retail.

Rebate: A rebate is a partial refund or return of a portion of a purchase price by a seller to a buyer who has paid too much money for tax, rent or consumer product. Rebates often are offered by retailers as sales promotions, usually on the purchase of a specified quantity or value of goods within a specified period. Unlike discounts (which are deducted in advance of payment), a rebate is given after the payment of full invoice amount. Also see Retail.

Recession: A generally accepted definition of a recession is two successive quarters (six months) of an economic decline in which trade and industrial activity are reduced and the gross domestic product falls. Employment levels, wages, income and retail sales also decline. Recession is a normal, although unpleasant, part of the business cycle, however one-time crisis events often can trigger the start of a recession. The global recession of 2007-2009 (also known as the Great Recession) brought a great amount of attention to the risky investment strategies used by large financial companies, along with the nature of the interconnected global economy. As a result of the widespread global recession, virtually all the world's developed and developing nations' economies suffered significant setbacks. Numerous government policies were implemented to help prevent a similar future financial crisis as a result. Typically, interest rates fall during recession, in order to stimulate the economy. Also see Great Recession, Income, Retail.

Refinance: To refinance means to finance (borrow to purchase something) again, typically with a new loan at a lower rate of interest. When a refinance occurs, a business or person revises a payment schedule for repaying debt. The old loan is paid off and replaced with a new loan offering different terms (different, possibly lower interest rate) or extended maturity date (scheduled date for making the last payment). The most common forms of refinancing are with mortgages, when a homeowner may switch from an adjustable rate mortgage to a fixed rate or vice versa. Companies or individuals refinancing loans may have to pay a penalty or fee, which may make the refinance less attractive. Yet refinancing sometime scan prevent bankruptcy for individuals and in business. Also see Bankruptcy, Interest, Loan, Mortgage, Fixed Rate, Variable Rate.

Retail: Retail sales deal with the sale of goods to the ultimate consumers, usually in small quantities, at the final price charged at stores or online. Retail sales are the official measure of broad consumer spending patterns, with respect to both consumer durables (goods that usually last more than three years) and consumer non-durables (that usually last less than three years). Retail jobs are those that are held by individuals who work at retail locations (stores), whether they are engaged in actually selling and ringing up customers or assisting in back room operations, such as stocking and moving merchandise. Shareholders in companies that own stores usually want to see the retail sales going up, because it usually translates into higher corporate earnings, profits and a higher likelihood that the company will pay dividends. Also see Dividend, Earnings, Profit.

Revenue: Revenue is the amount of money that a company actually receives from its business activities during a specific period of time. Also called gross income, it is the amount before any costs or expenses are deducted. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. Revenue also is known as the top line, because it is displayed first on a company's income (profit or loss) statement. Expenses are then deducted from revenue in order to obtain net income, or profit, which is usually found on the bottom line.  Also see Bottom Line, Expense, Net Income, Profit.

Risk
Asset: A risk asset is any asset that carries a degree of risk. Risk asset generally refers to assets that have a significant degree of price volatility (severe changes), such as equities, commodities, high-yield bonds, real estate and currencies. In the banking context, risk asset refers to an asset owned by a bank or financial institution the value of which may change suddenly, due to changes in interest rates, credit quality, repayment risk and other outside factors. Investors' desires for risk assets swings considerably over time. The period from 2003 to 2007 was one that favored assets that were very risky. Then heavy investor demand drove up prices of most assets associated with higher risk, including commodities, emerging markets, poorly rated mortgage-backed securities, as well as currencies of commodity exporters, such as Canada and Australia. The global recession of 2007 to 2009 (Great Recession) triggered massive aversion for risk assets. Also see Asset, Bond, Commodity, Currency, Equity, Great Recession, Risk Averse, Security.

Risk Averse: Being risk averse means an investor is not interested in or avoids taking unnecessary risks. An investor seeking a large return is likely to see more risk as necessary, but consequences of very risky investments may mean an investor could lose his or her entire investment. However, risk averse investors are ones who are satisfied with a small return and who are reluctant to get involved with investments that are too risky for them. Also see Investor.

ROI: Return on investment is abbreviated as ROI. It usually is expressed as a percentage and is typically used for making decisions when comparing a company's profitability or easily comparing the efficiency of a variety of other different investments. If an investment does not have a positive ROI, or if an investor has other opportunities available with a higher ROI, then this comparison can instruct him or her about which investments are preferable to others. The formula for determining return on investment is found by dividing net profit by cost of investment and multiplying by 100. For example, suppose Alex invested $1,000 in Slice Pizza Corp. in 2010 and sold his shares for a total of $1,200 a year later. To calculate the return on his investment, he would divide his profits of $200 ($1,200 - $1,000) by the investment cost ($1,000), for a quotient of 0.2. When multiplied by 100, the ROI is 20 percent. Alex now can compare his ROI with other pizza companies to determine if his was a better investment.

S&P 500: The Standard & Poor's 500, often abbreviated as the S&P 500 (or just the S&P), is an American stock market index based on the 500 largest cap (capitalization) companies having common stock listed on the New York Stock Exchange or NASDAQ. The S&P Dow Jones Indices (the plural of index) determine which companies' stocks are listed, and they are widely regarded to be an accurate gauge and leading indicator of the performance of all larger U.S. companies. Created in 1957, the S&P 500 is considered to be representative of the total stock market, because it includes a significant portion of its total value. In fact, more than 70 percent of all U.S. equity is tracked by the S&P 500. The 500 companies included in the S&P 500 are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. These experts consider various factors when determining the 500 stocks that are included in the index, including market size, liquidity and industry grouping. Other S&P indices include smaller cap companies with market values between $300 million and $2 billion, as well as an index of mid-cap companies. Also see Capitalization, Dow Jones Industrial Average, Index Nasdaq, Stock, Stock Market.

Savings Account: A savings account is a bank account that earns interest. Banks or other financial institutions may limit the number of withdrawals you can make from your savings account each month, and they may charge fees unless you maintain a certain average monthly balance in the account. Interest that is paid to the depositor is calculated on whatever balance remains in the account, and it does not have a maturity (ending) date. In most cases, banks do not provide checks with savings accounts. In contrast to savings accounts, checking accounts allow you to write checks and use electronic debit to access your funds, and checking accounts typically do not have limits on the number of withdrawals or transactions you may make each month. Savings accounts are generally for money that you don't intend to use for daily expenses. Also see Checking Account, Debit Card, Deposit, Interest.

Savings and Loan: A savings and loan association (sometimes abbreviated as S&L) is organized and functions in a very similar way to bank or credit union, with some slight limitations on the type of services it can offer. Like a bank, an S&L accepts savings and lends money to its members, mostly for home mortgage loans, but they may offer checking accounts and other services. Historically, the primary purpose of savings and loans was to allow members to deposit savings (to earn interest) and borrow money at rates that were slightly more competitive than commercial banks. The competitive difference in interest and loan rates came from the fact that an S&L was owned by its members, with no need to pass profits on to a third party. Savings and loan associations reached their heyday in the mid-1980s after being deregulated just a few years earlier. However, in response to the scandalous failures of a number of prominent S&Ls, the popularity of savings and loans began to dwindle by the early 1990s. In reaction to the growing insolvency (bankruptcies) of the savings and loan industry, the government reestablished stronger oversight and created the Office of Thrift Supervision in 1989. This regulatory office, a division of the U.S. Treasury Department, helps to ensure the safety and stability of member S&Ls. As part of the act that created this agency, savings and loan deposits came under the protection of the FDIC insurance and remain so today. Also see Bankruptcy, Deposit, FDIC, Interest, Loan, Profit, Savings Account, Solvency.

Security: Security has several slightly different meanings. A security often is referred to as an exchangeable, negotiable financial documentation that represents some type of financial value or a person's partial ownership in a publicly traded corporation. This is true when that person owns stock in the company. A share of stock is a security. When a person owns a bond issued by a governmental (like U.S. savings bonds) or a corporation, that person is said to own a security. Securities are typically divided into two categories: debts and equities. A debt security represents money that is borrowed and must be repaid, with terms that define the amount borrowed, interest rate and maturity or renewal date. Debt securities include government bonds, because the government is in debt to a person who holds the bond and must repay him or her. Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from a public company's profit. In the United States, the U.S. Securities and Exchange Commission other regulatory organizations regulate the public offer and sale of securities. A security also is referred to as a thing (usually money) deposited or pledged as a guarantee of repaying a loan. A security deposit is almost always forfeited in case of default. Also see Bond, Debt, Deposit, Equity, Interest, Stock, Shareholder.

Share Price: A share price is the price of a single share of stock in a company or similar asset. It is the highest amount someone is willing to pay for the stock, based on the current market price listed on a stock exchange (like the Dow Jones Industrial Average) Shares are units of ownership in a corporation that provides for an equal distribution of any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Most companies issue common shares (also called common stock). The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with certain rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.In contrast, preferred shares (also called preferred stocks) typically do not offer appreciation in value or voting rights in the corporation. However, the stock typically pays a regular dividend, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock. Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders. Nowadays, physical paper stock certificates and mutual fund shares have been replaced with electronic recording of those types of accounts. Also see Dividends, Dow Jones Industrial Average, Risk Asset, Stock.

Shareholder: A shareholder is any person, company or other organization (like a mutual fund) that owns at least one share of a company's stock and in whose name the share certificate is issued. Because shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock value. If the company does poorly, however, shareholders can lose money, because the price of its stock declines. Unlike the owners of sole proprietorships or partnerships, corporate shareholders are not personally liable for the company's debts and other financial obligations. This means that if the company goes under, its creditors cannot demand payment from shareholders like they could from the owners of private businesses. Also unlike other types of private businesses, companies with shareholders rely on a board of directors and executive management to run things on a day-to-day basis. A shareholder may also be referred to as a stockholder. It is legal for a company to have only one shareholder. Also see Creditor, Debt, Liability, Mutual Fund, Share Price, Stock.

Short: Selling short refers to selling securities (like stocks and bonds) that an investor does not own. This means that the investor must borrow securities to make delivery to a buyer. When an investor places a short sale trade, that individual must deliver the securities to the buyer on the trade settlement date. The goal of selling short is to profit from a price decline by buying the securities at a lower price after the sale. Selling short exposes the seller to unlimited risk, since the price of the shares that must be purchased also can increase, in which case the short seller would lose money.Also see Bond, Investor, Risk Asset, Share Price.

Social Security: Social Security is a United States federal program of social insurance and benefits, which was developed in 1935 as part of President Franklin D. Roosevelt's New Deal plan to lift the U.S. out of the Great Depression. The Social Security program benefits citizens providing retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits. Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars per year. It is funded usually by mandatory payroll contributions (typically five to eight percent of each paycheck) from both the employees and the employers, as well as from the government's tax revenue. Based on the year someone was born, retirement benefits may begin as early as age 62 and as late as age 70. The amount of income received is based on a person's average indexed monthly earnings during the 35 years in which he or she earned the most. Spouses also are eligible to receive Social Security benefits, even if they never or seldom worked. A divorced spouse can also receive benefits, if the marriage lasted 10 years or longer. Today, the program is funded through payroll taxes collected by employees and companies. Money is placed into the Social Security Trust Fund, and payments are managed by the government along with the Federal Reserve Board. Social Security has faced serious solvency issues for many decades. Today's payments are made from current payroll contributions by workers who may not have money available for them when they retire. Social Security reform, whether through legislation, tax law changes or privatization, has been a major political issue that draws strong opinions from different groups of people. Social Security faces the real threat of becoming insolvent because of factors, such as longer life expectancies, a large Baby Boomer population currently entering retirement, as well as inflation. Also see Federal Reserve, Great Depression, Inflation, Solvency.

Solvency: Solvency is the ability of a person or company to meet its long-term financial obligations. Conversely, insolvency is a situation where a company's liabilities (debts) exceed its ability to pay them. Solvency is essential to staying in business, because it indicates a company's ability to continue operations into the foreseeable future. To be considered solvent, the value of a person's or company's assets must be greater than the sum of its debt obligations. While a company also needs liquidity to thrive, liquidity should not be confused with solvency. A company can be illiquid (no liquidity) and still be solvent. Companies that are insolvent must often enter bankruptcy in order to either liquidate or restructure. Also see Asset, Bankruptcy, Debt, Liquid Asset.

Stakeholders: A person, group or organization that has an interest or concern in a business is called a stakeholder. Stakeholders can affect or be affected by a company's actions, objectives and policies. Some examples of key stakeholders include creditors, directors, employees, government, owners (shareholders), suppliers, unions and the community in which it operates. All are stakeholders. All are interested in that business, and all are affected by its success or failure. Stakeholders can be internal or external. Internal stakeholders are people who have a direct relationship, such as through employment, ownership or investment. Investors are a common type of internal stakeholder and are greatly affected by the outcome of a business. External stakeholders are those people who do not directly work for a company, but they are affected in some way by the actions and outcomes of that business. Suppliers, creditors and citizens' groups are all considered external stakeholders. An example of a negative impact on stakeholders is when a company needs to cut costs and plans a round of layoffs. Also see Board of Directors, Investor.

Stock: A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. The two main types of stock are common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but it has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders, they and have priority in the event that a company goes bankrupt and is liquidated. Stock is also known as share or equity, and they historically have outperformed most other investments over the long run. Also see Asset, Bankruptcy, Dividend, Earnings, Liquidate.

Stock Market: The stock market refers to the collection of stock trading (buying and selling) places, exchanges and systems where the issuing and trading of equities (stocks), bonds and other sorts of securities happen. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, because it provides companies with access to capital in exchange for giving investors a slice of ownership. The stock market can be split into two main sections: the primary market and the secondary market. The primary market is where new stock issues are first sold through initial public offerings (IPOs). Investment banks often help companies issue their stocks, and institutional investors (sometimes called brokerage houses) typically purchase most of these shares. All subsequent trading goes on in the secondary market, where participants include both institutional and individual investors. Stocks of larger companies are usually traded through exchanges, which bring together buyers and sellers in an organized manner. Exchanges are places where stocks are listed and traded. However, today most stock trades are performed electronically, and stock buyers and sellers do not physically have to be present at an exchange to trade. Even the stocks themselves are almost always held in electronic form, not as physical stock certificates. Such exchanges exist in major cities all over the world, including London and Tokyo. The two biggest stock exchanges in the United States are the New York Stock Exchange, which was founded in 1792, and the Nasdaq, founded in 1971. The New York Stock Exchange is located on Wall Street in New York City, and the term, Wall Street, is often used as synonym for the stock market. Stocks can be listed on either exchange if they meet the listing criteria, but in general technology firms tend to prefer to be listed on the Nasdaq. The NYSE is still the largest and arguably the most powerful stock exchange in the world. The Nasdaq has more companies listed, but the NYSE has a market capitalization (total value of all the offered stock) that is larger than Tokyo, London and the Nasdaq combined. Also see Bond, Capitalization, Equity, Investor, Nasdaq, Security, Stock, Wall Street.

Stockholders: An individual, group or organization that holds one or more shares in a company, and in whose name the share certificate is issued. A stockholder is also called a shareholder, and he or she is an owner of the company. Along with the stock ownership comes a right to claim a part of the corporation's assets and earnings, its declared dividends and the right to vote on certain company matters, including the board of directors. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10 percent of the company's assets. Also see Asset, Board of Directors, Dividend, Earnings, Shareholder, Stock.

Student Loan: A student loan is one that is offered to students that is used to pay off education-related expenses, such as college tuition, room and board at a university and textbooks. Many of these loans are offered to students at a lower interest rate. In general, students are not required to pay back these loans until the end of a grace period, which usually begins after they have completed their education. Also see Loan.

Surplus: A surplus is an amount of something left over when all requirements have been met. In business, a surplus is the amount of an asset or resource that is left over or more than what is used. The term, surplus, can be used to describe many excess assets, including income, profits, capital and goods. A surplus often occurs in a budget, when expenses are less than the income taken in. When discussing a business' inventory, a surplus occurs when fewer supplies are used than were actually needed. A surplus isn't always a positive outcome. In some cases, when a manufacturer anticipates a high demand for a product and makes more than it sells during that time period, it can have a surplus inventory. If an inventory surplus is too large, it can create a financial loss for that quarter or year. Even worse, if a surplus is of a perishable commodity, like oranges, it could result in a permanent loss as the inventory goes bad. It is an unusual situation when a government budget has a surplus where revenue exceeds expenditures. Also see Asset, Capital, Commodity, Income, Revenue, Trade Surplus.

Tax: A tax is money levied (collected) by a government from their citizens and businesses to fund public works, services and programs (like Social Security.) There are several very common types of taxes:

  • Income Tax is a percentage of person's or business' earnings. The U.S. federal government and most states and municipalities (cities and communities) levy an income tax.
  • Capital gains taxes are of particular importance for investors. Levied and enforced at the federal level, these are taxes on income that results from the sale of assets in which the sale price was higher than the purchasing price. These are taxed at both short-term and long-term rates. Short-term capital gains (on assets sold less than a year after they were acquired) are taxed at the owner's normal income rate, but long-term gains on assets held for more than a year are taxed at a lower rate, with the idea that lower taxes will encourage high levels of capital investment.
  • Sales Tax, which are taxes levied on certain goods and services. Most of Pennsylvania has a sales tax of six percent, but in Allegheny County the sales tax is seven percent, while in Philadelphia County the rate is eight percent.
  • Property Tax is based on the value of land and property assets and usually is collected by counties and school districts, but other municipalities throughout the country may collect this tax, as well.
  • Tariffs are taxes on imported goods imposed with the goal of strengthening businesses within the U.S. borders. The NAFTA agreement aimed at eliminating most tariffs.

Payment of taxes is mandatory, and tax evasion, the deliberate failure to pay one's full tax liabilities, is punishable by law. Most governments use an agency or department to collect taxes. The U.S. federal government uses the Internal Revenue Service to perform this function. Like many developed nations, the United States has a progressive tax system by which a higher percentage of tax revenues are collected from higher-income individuals or larger corporations, rather than from low-income individual earners.Tax regulations vary widely among nations and even states, so it is important for individuals and businesses to carefully study a new location's tax laws before earning income or doing business there. A tax rate is the percentage of an individual's taxable income or a corporation's earnings that is owed to the state, federal and in some cases, municipal governments. In certain municipalities, regional income taxes also are imposed, which increases the tax burden for those residents. Throughout United States history, tax policy, tax rates and tax cuts have been a consistent source of political debate. Also see Asset, Capital, Earnings, Internal Revenue Service, NAFTA, Social Security.

Top Line: The top line refers to the gross sales or revenue of a company. It is called the top line, because it the first line, located at the top of a company's income statement. It is most often reserved for the reporting of gross sales or revenue that reflects the value of goods, products or services sold to customers within the statement period. A company that increases its revenue is said to be growing its top line or generating top-line growth. Each line that is recorded under the top line is a record of expenses or losses that must be deducted from the gross earnings featured on the top line. Also see Bottom Line, Expense, Loss, Revenue, Value.

Trade Deficit: Trade deficit is an economic measure of trade (commerce) when the value of a country's imports is more than its exports. A trade deficit results a country's currency (money) flowing out to other foreign countries. Some economists believe that a trade deficit is not necessarily a bad situation, because it often corrects itself over time. However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the U.S. currency down, which makes it more costly to purchase imports. Also see Currency, Trade Surplus, Value.

Trade Surplus: A trade surplus is an economic measure of trade (commerce), where the value of a country's exports is more than its imports. A trade surplus represents a flowing in of currency from foreign countries, and it is the opposite of a trade deficit. Some economists believe that balancing international trade is an important economic factor for a country's economy. They believe that a favorable balance creates jobs and increases gross domestic product. Other analysts disagree on the impact, if any, a trade surplus has on the economy. In the United States, trade balances are reported monthly by the Bureau of Economic Analysis. Also see Currency, Gross Domestic Product, Trade Deficit, Value.

Trust: A trust is a fiduciary (legal financial) relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary (the receiver of the benefits).

The rules of a trust depend on the terms under which it was built on. The four main types of trusts are:

  1. Living trust which is created by the trustor while he or she is alive
  2. Testamentary trust which is established through a will and which comes into effect (created) when the trustor dies
  3. Revocable trust which can be modified or terminated by the trustor after its
  4. creation.
  5. Irrevocable trust which cannot be modified or terminated by the trustor after
  6. its creation. 

Also see Asset, Trustee.

Trustee: A trustee is a person or organization that holds and administers property or assets for the benefit of a third party (beneficiary). A trustee may be appointed for a wide variety of purposes, such as in the case of bankruptcy, for a charity, for a trust fund or for certain types of retirement plans or pensions. Trustees are trusted to make decisions in the beneficiary's best interests and often have a fiduciary (legal financial) responsibility to them. This means that they are required to put aside personal goals and initiatives to do what's best for the trust. A trustee is under an absolute obligation to act solely for the benefit of the trust's beneficiaries. A trustee, whether it is an individual person or a member of a board, is given control or powers of administration of the property or asset in trust with a legal obligation to manage it solely for the purposes specified. For example, if a trust is comprised of various real estate properties, it will be the duty of the trustee to oversee those pieces of land. Trustees are also required to financially manage and oversee accounts within a trust when it is made up of other investments, like equities in a brokerage account.

A trustee's duties generally include:

  1.  To become fully acquainted with the terms of the trust
  2.  To ensure that the trust property is legally controlled according to the terms of the trust,
  3. To act without charging any fee except where it is permitted by the terms of the trust
  4. To never allow his or her funds to be commingled (mixed in with) those of the trust
  5. To never enter into any personal transaction with the trust
  6. To never delegate his or her duties
  7. To act impartially and solely in the interest of all beneficiaries, and
  8. To manage the trust property in a sensible and businesslike manner. 

Also see Asset, Equity, Trust.

U.S. Department of the Treasury: The U.S. Department of the Treasury is a part of the executive branch of the federal government of the United States. It was established by an act of congress in 1789 to manage government revenue. The department is administered by the secretary of the treasury, who is a member of the president's cabinet. The Treasury is generally responsible for promoting economic growth and security and advising the President on financial issues. As such, it is responsible for issuing all treasury bonds, notes and bills. Among the government departments operating under the U.S. Treasury umbrella are the Internal Revenue Service, the U.S. Mint, the Bureau of the Public Debt, the Alcohol and Tobacco Tax Bureau and the Secret Service. The Secret Service has the responsibility for protecting the president and vice president. Specific key functions of the U.S. Treasury include printing bills (currency, money), postage, Federal Reserve notes, minting coins, collecting taxes, distributing money to Americans, enforcing tax laws, managing all government accounts and debts, obtaining loans when required to operate the federal government and overseeing U.S. banks in cooperation with the Federal Reserve. The Treasury is responsible for international currency (money) and financial policy, which includes monitoring foreign money exchange and taking action when necessary. It is also involved in improving national security through the identification and targeting of financial-based threats. The secretary of the Treasury is nominated by the president and must be confirmed by the U.S. Senate. Also see Bond, Currency, Debt, Federal Reserve, Internal Revenue Service, Loan, Tax.

Under Bought: Having a stock under bought means that the technical indicators on it show that it a higher value than most investors recognize. Although the stock is largely ignored, analysts may recommend buying this security, because its true value is or can be higher than its current price. Also see Analyst, Investor, Security, Stock.

Unemployment Benefits: Unemployment benefits involves money that substitutes for wages or salary, paid to recently unemployed workers, through no fault of their own (like layoffs or company bankruptcy), under a program administered by a government or labor union. To receive these benefits they must register as being unemployed and need to prove that they are currently seeking work. While the benefits sum is small, it allows the unemployed to continue to pay for necessary items, while searching for a new job. The benefits last only for a defined length of time or until the worker finds employment, whichever comes first. In the United States, unemployment compensation was ushered in by the Social Security Act of 1935, when the economy was struggling through the Great Depression. The U.S. unemployment compensation system is jointly managed by federal and state governments, and it financed through payroll taxes on employers in most states.Unemployment benefits also are known as unemployment insurance or unemployment compensation. Also see Bankruptcy, Great Depresion, Social Security.

Unemployment Rate: The unemployment rate is a measure of the number of people who are unemployed. It is the share of the labor force that is jobless, and it is calculated as a percentage of all people that are currently employed. The U.S. Bureau of Labor Statistics releases a monthly employment report, and it is the most commonly cited national rate. The bureau arrives at the rate by dividing the number of unemployed individuals by all individuals currently in the labor force. The formula is (number of unemployed ¸ total currently employed = quotient ´ 100 = percentage unemployedThe unemployment rate is a lagging indicator, meaning that it generally rises or falls after economic conditions change, rather than before. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall. During periods of recession, an economy usually experiences a relatively high unemployment rate. Also see Recession.

Value: Value is the worth in money, the personal worth perceived by an individual or estimated worth of an asset, good or service. Value is used to quantify the worth of something, and different types of value can be applied to explain various situations. For example, the value of a company can be described in terms of its intrinsic value (the value of the sum of all of its assets, like equipment), book value (the value of all of its stock), actual cash value (the sum of all its liquid assets) or market value (the price that a purchaser will be willing to pay). In accounting, value describes what something is worth in terms of something else. For example, the price of bottled water might be $1.50. The $1.50 for the water would represent the generally accepted worth, or value, of the water. But in the event of a catastrophe, like a severe earthquake, that $1.50 bottle of water suddenly becomes more valuable to some people who might be willing to pay much more for it. So in simple terms, value is in the eye of the beholder and whether a good or service meets his or her needs and how willing they are to pay for the item. The value of an asset, good or service can change over time. For example, the price of a stock changes almost every hour. Also see Asset, Liquid, Liquid Asset, Stock.

Variable Rate: A variable rate is one relating to a loan or savings account with an interest rate that may be changed in response to economic conditions. A variable rate can go up or down, because it is based on an underlying benchmark interest rate or index that changes periodically. The obvious advantage of a variable interest rate is that if the underlying interest rate or index declines, the borrower's interest payments also fall. On the other hand, if the underlying index rises, interest payments increase. Most loans are installment loans with a specified number of payments leading to the loan being paid off by a particular date. As interest rates vary, the required payment will go up or down according to the change in rate and the number of payments remaining before completion. Examples of variable interest rate loans are mortgages, automobile loans and credit cards. While some mortgage loans have variable interest rates, it is more commonly referred to as an adjustable-rate mortgage (ARM). In addition, many ARMs start with a low, fixed interest rate for the first few years of the loan, only adjusting after that time period has expired.The opposite of a variable rate is a fixed rate. Also see Credit Card, Fixed Rate, Index, Interest, Loan, Mortgage.

Vig: Vig is a slang term, short for vigorish, used mostly in both legalized and illegal gambling. It refers to the percentage that a bookmaker retains in a wagering transaction. Vig also has come to mean the interest payment on a loan paid back to a creditor. If the term, vig, is used in a loan transaction, a person is more than likely dealing with a loan shark. Also see Creditor, Interest, Loan, Loan Shark .

Wall Street: Wall Street is a street in lower Manhattan (New York City) that is the original home of the New York Stock Exchange and the historic headquarters of the largest U.S. stock brokerage companies and investment banks. The term, Wall Street, also is used as a collective name for the financial and investment community, which includes stock exchanges, big banks, brokerages, securities companies and big businesses. Today, however, brokerage and securities companies are widely spread geographically beyond Wall Street. This allows investors higher access to the same information available to Wall Street's tycoons. Wall Street got its name from the wooden wall that Dutch colonists built in lower Manhattan in 1653 to defend themselves from the British and Native Americans. The wall was taken down in 1699, but the name stuck. The area became a center of trade in the 1700s, and in the late 1790s, publicly traded investments were issued. The New York Stock Exchange, the world's largest stock exchange in terms of market capitalization, can trace its roots to this time and area. After World War I, Wall Street and New York City surpassed London to become the world's most significant financial center. Today, Wall Street remains the home of several important financial companies. The New York Stock Exchange is still found on Wall Street, as are several banks and brokerages. Wall Street often is shortened to The Street. Also see Big Bank, Capitalization, Investor, Stock.

Will: A will is a legal document containing instructions on what should be done with a person's money and property after he or she dies. A person's last will and testament outlines what to do with possessions, whether he or she is leaving them to another person or group or donating them to charity. A will also communicates what happens to other things for which he or she is responsible, such as custody or guardianship of dependents (children.) It also makes arrangements for any special circumstances, which may include the care of a special-needs child or an aging parent. A person writes a will while he or she is still alive, and its instructions are carried out once the individual passes away. The will names a still-living person as the executor (manager) of the estate (all the deceased's accounts and assets left behind). A special court of law, called a probate court, usually supervises the executor to ensure that he or she carries out wishes specified in the will. The court ensures that the deceased's assets are given to the right people in the right amount. A basic will can have sections added to it, such as power of attorney or a medical directive, which direct the executor on how to handle matters if a person becomes physically or mentally incapable of not making life or death decisions. Also see Asset.

Withdrawal: A withdrawal involves removing funds from a bank account, savings plan, pension or trust. Withdrawal can be done over a period of time in fixed or variable amounts or in one lump sum. The withdrawal can be a cash withdrawal or in-kind withdrawal. A cash withdrawal requires converting the holdings of an account, plan, pension or trust into cash, usually through a sale. An in-kind withdrawal simply involves taking possession of assets without converting to cash. Most simple accounts do not charge any penalty for withdrawals. In some cases, however, conditions must be met to withdraw funds without paying a penalty. For example, some individual retirement accounts, known as IRAs, have special rules that govern the timing and amounts of withdrawals. A beneficiary (the owner of the IRA) must start making withdrawal by age 70-1/2. Otherwise, the person who owns the account is charged a penalty equal to 50 percent of the required withdrawal. On the other hand, an account owner must refrain from withdrawing funds until at least age 59-1/2, or the Internal Revenue Service takes 10 percent of the withdrawal amount in a penalty. Also see Internal Revenue Service, IRA, Savings Account, Trust.

 

 

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