Here are some helpful terms we have put together for your reference.
The best credit rating that can be given to borrower’s debts, indicating that the risk of a borrower defaulting is minuscule.
The things that provide income or some other value to their owner.
The key interest rate set by the Bank of England. It is the overnight that it changes banks for lending to them. The base rate – and expectations about how the base rate will change the future – directly affect interest rate at which banks are willing to lend money in sterling.
In a bear market, prices are falling and investors, fearing losses, tend to sell. This can create a self – sustaining downward spiral.
A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. The can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.
A bull market is one in which prices are generally rising and investor confidence is high.
For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares.
Commodities are products that, in their basic form, are all the same so it makes little difference from whom you buy them. That means they can have a common market price. You would be unlikely to pay more for iron ore just because it came from a particular mine, for example.
The Consumer Price Index is the measure of the price of a bundle of goods and services from across the economy. It is the most common measure used to identify inflation in a country. CPI is used as the target measure of inflation by the Bank of England and the ECB.
A situation where banks and other lenders all cut back on their lending at the same time, because of widespread fears about the ability of borrowers to repay.
If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay existing debts. Reducing lending also slows down economic growth, which also makes it harder for all businesses to repay their debts.
The assessment given to debt and borrowers by a rating agency according to their safety from an investment standpoint- based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB – or higher are considered “investment grade”. Below that level, they are considered “speculative grade” or more colloquially as junk.
Strictly speaking, a default occurs when a borrower has broken in terms of a loan or other debt, for example if a borrower missed a payment. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debt in full, such as bankruptcy or a debt restructuring.
The amount by which spending exceeds income over the course of a year.
An income payment by a company to its shareholders, usually linked to its profits.
The value of a business or investments after subtracting any debts owed by it. The equity in a company is the value of all its shares. In a house, your equity is the amount your house it worth minus the amount of mortgage debt that is outstanding.
An index of 100 companies listed in the London Stock Exchange with the biggest market value. The index is revised every three months.
A private investment fund which uses a range of sophisticated strategies to maximise returns including hedging, leveraging and derivatives trading. Authorities around the world are working on ways to regulate them.
The upward price movement of goods and services.
A situation in which the value of a borrower’s assets is not enough to repay all of its debts. If the borrower can be shown to be insolvent, it normally means they can be declared bankrupt by a court.
A debt or other form of payment obligation, listed in a company’s accounts.
London Inter Bank Offered Rate. The rate at which banks in London lend money to each other for the short-term in a particular currency. A new Libor rate is calculated every morning by financial date firm Thomson Reuters based on interest rates provided by members of the British Bankers Association.
A process in which assets are sold off for cash. Liquidation is often the outcome for a company deemed irretrievably loss-making. In that case, its assets are sold off individually, and the cash proceeds are used to repay its lenders. In liquidation, a company’s lenders and other claimants are given an order of priority. Usually the tax authorities are the first to be paid, while the company’s shareholders are the last, typically receiving nothing.
How easy something is to convert into cash. Your current account, for example, is more liquid than your house. If you need to sell your house quickly to pay bills you would have to drop the price substantially to get a sale.
Global markets dealing in borrowing and lending on a short-term basis.
A class of shares that usually do not offer voting rights, but do offer superior type of dividend, paid ahead of dividends to ordinary shareholders. Preference shareholders often also have somewhat better protection when a company if liquidated.
An investment fund that specialises in buying up troubled or undervalued companies, reorganising them, and selling them off as profit.
When a company issues a statement indicating that its profits will not be as high as it had expected. Also profits warning.
Central banks increase the amounts of money by “printing” more. In practice, this means purchasing government bonds or other categories of assets, using the new money. Rather than physically printing more notes, the new money is typically issued in the form of a deposit at the central bank. The idea is to add more money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages more borrowing and investments. Some economists fear that quantitative easing can lead to very high inflation in the long term.
A company responsible for issuing credit ratings. The major rating agencies are Moody’s, Standard & Poor’s and Fitch.
Profits not paid out by a company as dividends and held back to be reinvested.
A contract that can be assigned a value and traded. It could be a share, a bond or a mortgage-backed security.
A technique used by investors who think the price of an asset, such as shares or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and then return it to its owner, pocketing the difference. Also known as shorting.
The financial institution pledging to purchase a certain number of newly-issued securities if they are not all bought by investors. The underwriter is typically an investment bank who arranges the new issue. The need for an underwriter can arise when a company makes a rights issue or a bond issue.
A measure of a company’s ability to make payments falling due in the next 12 months. It is calculated as the difference between the company’s current assets (unsold inventories plus any cash expected to be received over the coming year) minus its current liabilities (what the company owes over the same period). A healthy company should have a positive working capital. A company with negative working capital can experience cashflow problems.
Reducing the book value of an asset, either to reflect a fall in its market value (see mark-to-marketing) due to an impaired charge.
The return of an investor from buying a bond implied by the bond’s current market price. It also indicates the current cost of the borrowing in the market for the bond issuer. The bond’s market price falls, its yield goes up, and vice versa. Yield can increase for a number of reasons. Yield for bonds in a particular currency will rise if markets think that the central bank in the currency will raise short-term interest rate due to stronger growth or higher inflation. Yields for a particular borrower’s bonds will rise if markets think there is a greater risk that the borrower will default.