Financial glossary
for new-age investors

Discover financial terms and learn new concepts.

Leveraged Buyout (LBO)

The acquisition of another company using a significant amount of borrowed money to fund the acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. Leveraged buyouts allow companies to make large acquisitions without having to commit a lot of capital.

Margin

Technically a “profit margin” is the amount of profit a firm makes per dollar of revenue. So, if something sells for $100 and the firm makes a $10 profit, its profit margin is 10%. Typically, firms in new areas, like some kinds of technology, have high margins while those in established industries have lower margins.

Marketable Securities

Marketable securities are highly-liquid financial instruments that can be easily bought or sold on a public market. These assets are particularly favored by companies and professional individual investors to manage their short-term cash liquidity given they can be quickly converted into cash. Investors often invest their idle cash in marketable securities to earn low-risk return that hopefully prevents the devaluation of their funds due to inflation.

Markets And Inflation

Generally speaking, stock prices shouldn’t be negatively affected by inflation because most companies should be able to raise prices by at least as much as inflation over time. I.e. if wages go up by, 2% a year then companies can probably raise their prices by about the same amount. This varies, however, depending on what a company sells: if gas prices have jumped, for example, then people might be less willing to buy discretionary items like designer clothing as they’re forced to pay up at the pump. But if diapers go up in price too, because gas prices make their transport to stores more expensive, parents will still be willing to buy them. Investors in assets that pay a fixed amount of interest (i.e. bonds) feel inflation’s pinch more. That’s because higher inflation means the value of money is eroding more quickly than it was before. If an investor earns a fixed amount, say $50,000 a year, from their investments, that money will buy fewer goods and services as inflation increases. And so it makes sense that the investments from which that income comes should be worth less, too – explaining why bonds perform poorly in an inflationary environment.

Market Share

Market share represents a company's sales as a percentage of total sales within its industry, serving as a crucial metric in assessing a firm's competitive position and market dominance. It reflects how a company stacks up against its competitors and the extent of its influence over market trends.

Market Structure

The number of firms that produce a certain type of product. For example, there are two major producers of aircrafts (Boeing and Airbus) and a few smaller ones (like Bombardier). But there are hundreds of thousands of independent convenience stores in America. The former is an example of an highly concentrated market structure (a.k.a. an oligopoly) – which typically has a very high barrier to entry and a strong ability to control prices. The latter is a much more competitive market where the companies have very little pricing power (i.e. one store cannot sell a chocolate bar for $2 when everyone else sells it for $1).

Mergers And Acquisition

A merger is when two companies combine and an acquisition is when one company buys another. As the terms are somewhat overlapping (a company can be “bought” and then “merged” into the existing operations) they are often used as one term, as in “M&A”.

Mortgage

It’s just a loan, i.e. money that someone borrows from a bank, except that it is secured by real estate. So, for example, if you have a mortgage on your home but you fail to pay the interest that you owe each month, the bank can take ownership of your home. Since so many people use a mortgage to buy a home, mortgage rates (i.e. the interest rates on mortgages) have a huge impact on property prices.

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is a cornerstone of technical analysis and a staple on many traders’ dashboards. Developed by Gerald Appel in the late 1970s, it's valued for its ability to reveal momentum, direction, and the speed of securities price changes. MACD has a dual function as both a trend-following and a momentum indicator in technical analysts' toolkits. It has two main components: the MACD line and the signal line. The MACD line is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA, offering insights into the current momentum and potential trend reversals. The signal line, usually a 9-period EMA of the MACD line, serves as a trigger for buy or sell signals based on where the MACD line intersects it. Additionally, the MACD histogram, representing the difference between the MACD line and the signal line, provides a visual representation of momentum strength and potential price direction changes.

Negative Interest Rate

Much like the general term “interest rates,” the phrase negative interest rates can refer to a few different things. In the context of a central bank instituting negative interest rates, it typically means that the central bank has created a rule whereby banks that deposit their own money with the central bank have to pay a fee to do so (in normal times, those banks would expect to receive interest payments from the central bank, much as you would expect to receive interest in your bank account). The idea is that banks will choose to lend out the money to people and businesses instead of keeping it with the central bank. The phrase “negative interest rates” is also sometimes used to describe a scenario where bonds are trading at such a high price that an investor who buys them is guaranteed to lose money if they were to hold the bond until it expires. This should really be termed “negative yields,” but the term “negative interest rates” is often used interchangeably (note: such bonds often trade at such high prices because central banks are directly buying the bonds, thus driving up their price).