Financial glossary
for new-age investors

Index Fund

An index fund is an investment vehicle – usually either a mutual or an exchange-traded fund (ETF) – designed to replicate the performance of a specific market benchmark. These funds operate under a simple premise: by mirroring the components of a market index, they aim to offer the same returns as those indexes.

Inflation

Inflation measures the rate at which prices of goods and services have risen or fallen over a period (usually monthly, compared to the one before or the same time last year). If inflation is positive, the same amount of cash buys fewer goods and services year after year. In that way, inflation also measures the rate at which the purchasing power of money has fallen (or risen if inflation is negative).

Inflation And Debt

Inflation is a way of reducing that debt, because inflation is, essentially, the rate at which the value of money erodes (rising inflation means $1 will buy less over time). If one (person or company) has a lot of debt, and the value of each dollar is eroding, then the effective “value” of that debt is shrinking – becoming easier to pay off in the future.

Initial Coin Offering (ICO)

The process by which a company raises funds for a new venture by offering a digital currency to investors. Investors receive a portion of the new cryptocurrency in exchange for either an existing cryptocurrency (like bitcoin) or cash. Being unregulated, this process bypasses the requirements of other fundraising methods used by banks and venture capitalists.

Insider Buying/Selling

What is insider buying/selling?

Insider buying and selling refer to the transactions made by company executives and directors, (and sometimes, major shareholders) – considered to be on the inner circle of the company in question. Insiders buying up company shares may suggest they think the stock is undervalued or that upward price movements are likely. Conversely, insiders selling stock could indicate perceived overvaluation or a potential share price decline on the cards. Buying and selling activity by insiders is legal (albeit only at certain times) and is publicly disclosed. Nevertheless, they can offer clues about management’s confidence in the company's growth prospects.

Interest

Interest is what you pay to borrow money – or what someone pays you to borrow money from you. So, when you take out a loan from a bank, you have to pay a set amount of money (like, say, 3% per year) for the privilege of borrowing that money. Equally, when you buy a bond, you are effectively lending money to a company or government and, as such, are paid interest each year (i.e. a cash payment) by the borrower in order to compensate you for the fact that you are lending them your money.

Interest Rates And Inflation

In theory, lower interest rates lead to higher prices by boosting economic activity and weakening the value of a country’s currency. It boosts economic activity by making it cheaper for businesses and people to borrow money, thereby making it cheaper for a business to build a new factory – and then buy equipment and hire workers for that factory, for example. It also makes it cheaper for people to borrow money to buy a new home, which means that they’re more likely to go out and buy a new sofa and TV to fit out the home (also, existing homeowners might sell their home at a higher price and spend some of the money). The economic boost from higher demand leads, eventually, to companies being able to raise their prices for their goods and services – and thus inflation rises. When a country’s interest rate goes down, international investors are less willing to invest in that country (because they’re not getting paid as much in interest). And so, the value of that country’s currency goes down. In turn, it becomes more expensive for that country to buy goods from abroad. For example, if the US dollar goes down in value, olive oil that is made in Italy goes up in price for people in the US. And so, as prices go up, inflation does too.

Investment Bank

It’s the part of a bank that focuses primarily on advising and raising money for companies (in the form of helping them to issue new stock or bonds to investors). An investment bank also typically trades stocks, bonds and other investments in the secondary market, partly as a way to help create a trading market for the stocks and bonds that it helped create (on behalf of the companies that issued them). Goldman Sachs is one of the world’s most well-known investment banks.

Investment Management

It’s a fairly general term that refers to the act of managing investments, including stocks, bonds, real estate and other “assets.” The term “investment manager” refers to the person or company doing the management, e.g. choosing which stocks to buy, or choosing what proportion of the total investment value to invest in, say, stocks versus bonds.

Leverage

Financial leverage refers to using borrowed capital to fund an investment, aiming to increase the potential return on equity. It involves taking on debt to finance the purchase of assets assuming that the returns from the investment will exceed the cost of borrowing. This approach amplifies potential gains and losses, making it a powerful but risky tool in financial management. By leveraging, companies or individuals can significantly expand their investment capacity without initially committing a large amount of their own capital.