Financial glossary
for new-age investors

Discover financial terms and learn new concepts.

The Global Financial Crisis (2007-2009)

House prices and stocks (and other things) boomed from around 2001-2007. The financial system had accumulated a huge amount of debt, meaning that lots of actors (from individuals to investment funds to banks) had borrowed a ton of money. All the borrowing masked which institutions and investors actually had money – and which had simply borrowed too much money. Once some investments started to lose money, investors started withdrawing their funds. And then more and more investors started withdrawing their money, creating a snowball effect. That led to a dramatic bursting of the bubble. Stocks lost more than 50% of their value and major financial institutions, like Lehman Brothers (a major American investment bank at the time), went bankrupt. At times, it seemed like the world’s financial system might genuinely collapse. In order to stem the crisis, the US Federal Reserve had to enact some “emergency” measures which, essentially, made it impossible for any more banks to go bankrupt (at least under those emergency measures). That calmed everyone down and, eventually, the price of things like stocks and bonds recovered.

Trade War

Trade wars can occur when countries start imposing barriers to trade (tariffs, for example) against each other. A country might do this to another in order to reduce its trade balance – the amount it spends on goods and services from abroad, relative to the amount it receives from selling its own products. In 2017, the US spent $376 billion more on goods from China than vice versa. Reducing this figure would free up money for the country to spend elsewhere. The US buying fewer Chinese products is one way to go – and tariffs are another, since they raise additional money with which the government can spend elsewhere on growing the economy. By making it more expensive for companies to get stuff they want from abroad, profits are likely to suffer – since costs are rising without being offset by either higher sales or lower costs elsewhere. Companies that try to pass their higher costs along to their customers might face falling sales if would-be customers are put off by higher prices and go elsewhere or decide not to make a purchase at all. This would feed through to lower profits – and likely falling share prices, as well as lower economic growth due to less demand for products. Longer-term a country would hope that any slowdown in economic growth can be offset by its own spending on the economy, using money collected from tariffs.

Trend

A market trend indicates the prevailing direction in which the price of an asset is moving. It can often be identified by the current price relative to key moving averages like the 50-day moving average. For example, if a stock’s recent price is consistently above its 50-day moving average, it suggests the shares may be in an “uptrend” – signaling a potential continuation of price gains. Trend metrics help traders time their bets based on technical factors that should help predict future asset price movements based on historical patterns.

Unemployment Rate

It is the percentage of people not working who are actively seeking work. It is not just the percentage of people that are not working. If someone gives up looking for a new job, they cease to be counted among the “unemployed.” That’s a major reason why, despite its prominence, the unemployment rate can be somewhat misleading. Economists also look at the “labor force participation rate” which measures how the percentage of adults that are either employed or are actively looking for work. Since the financial crisis, the unemployment rate has recovered to go back down to a very low level but the participation rate remains historically quite low: that suggests that are actually more people who could be working but aren’t (and those people could ‘re-enter’ the labor force if employment opportunities arise).

Venture Capital

It’s a type of investor that typically invests in private, early-stage companies. Usually, venture capital firms invest in companies that they think will grow very quickly in the near future due to, for example, some sort of innovative technology that the company is developing. Venture capital funds usually take an ownership stake in the companies in which they invest (rather than, say, lending them money) and hope to sell that stake at a much higher valuation after, typically, five to ten years.

Volatility

Volatility is a statistic that measures the differences between returns of an investment over a given time period: the greater the difference, the greater the volatility. Generally, the higher the volatility, the more risky it is considered to be. Note that volatility refers both to positive and negative moves, but the nature of markets is such that negative moves typically occur more dramatically than positive moves (and, therefore, high volatility is often associated with negative performance).

Volatility Index (VIX)

The VIX is the stock market's “fear gauge”: an annualized measure that typically expresses expected volatility in the S&P 500 index over the next 30 days.

Why Companies Buy Back Shares

There are a few reasons a company might choose to buy back its own stock. It might believe its shares are undervalued by the market – and that its return on capital from buying them will be better than if it used the same money to buy machinery to build and sell more products, for example. Additionally, stock buybacks usually create more demand for a company’s shares, since there are fewer of them available to buy – and can indicate that a company’s pretty confident in its future growth prospects (it probably wouldn’t buy its shares if it didn’t believe their value would rise in the future). So, to most investors, buybacks are a positive signal – and share prices of companies that announce buybacks usually rise. A more cynical interpretation, however, is that companies buy back shares in order to prop up their share price after bad news (by itself creating more demand for its stock as discussed).

Why Deflation Is Bad

While prices are falling and things getting cheaper sounds good, actually it’s not that great... When falling prices (a.k.a. deflation) takes hold, the likelihood of prices falling further might cause people to delay making purchases. Those delays could lead to companies lowering prices to encourage customers to buy, which in turn might cause more people to hold off purchases. Of course, people won’t stop buying essentials like food, for example, but they’re likely to defer discretionary purchases, which weighs on economic growth. Additionally, since virtually all major economies rely on people, companies and governments borrowing money, inflation is necessary. It erodes the value of debt over time, making it easier to repay. So in economies with lots of debt (like the US, UK, Europe and Japan), inflation helps reduce that debt. Too much debt leads to decreased spending (cash is being used to pay interest rather than hiring workers, for example) on things like building factories, or just buying a toaster – which drives economic growth.

Why Does The US Federal Reserve – And Other Central Banks – Aim For 2% Inflation?

The Fed has two jobs: to maximize employment and to keep prices in the economy relatively stable – and inflation relates most closely to the latter. The Fed says that an inflation rate much greater than 2% per year would, over time, reduce the ability of people and companies to make long-term economic and financial decisions. The speed of rising prices would likely cause people and companies to spend less money – and the economy would suffer. On the other hand, inflation that’s well below 2% suggests the economy is doing poorly: people aren’t getting pay raises and there’s not enough demand in the economy for companies to raise prices. Central banks have therefore settled on 2% as just enough inflation to keep the economy from falling into deflation while not being so much that changes in prices become harmful.