Financial glossary
for new-age investors
Discover financial terms and learn new concepts.
Quantitative Easing
It’s when a central bank, like the US Federal Reserve, directly purchases government bonds from the market (sometimes it purchases other, similar bonds). The result is, in theory, lower interest rates for the economy: it’s cheaper for people and businesses to borrow money. They, in theory, do things like buy cars or build factories, e.g. stuff that stimulates the economy. It also physically puts cash into the economy (because the bonds are bought with cash). And that cash, in theory, gets put to work doing things – like buying cars and building factories – that boosts the economy.
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Recession
Technically, a recession is when the size of the overall economy shrinks for two consecutive quarters (i.e. gross domestic product gets smaller). It, basically, is when the economy is getting smaller. Note that an economy actually shrinking is different than “slowing economic growth,” which is when an economy that’s growing begins to grow at a slower pace.
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Restructuring
The term is used to describe significant changes that are made to a company. Those changes can be to things like its operations (e.g. separating various activities into different formal businesses) and/or its debt (e.g. agreeing with a company’s bondholders to give them shares in the company instead of paying them back in cash).
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Return On Equity
It’s the amount of money a company makes in profit as a percentage of the money that shareholders have invested in it. So, if a barber invests $100,000 in his barber shop and makes $30,000 profit after a year of business, then he’s made a 30% “return on his equity.” Its commonly used by banks as a measure of their profitability. For example, a small bank might make $100 million with their $1 billion of shareholders’ money while a large bank perhaps makes $500 million with $10 billion of shareholders’ money. The larger bank is making more money in absolute terms but the smaller bank is more profitable (in other words, investors would probably rather invest with the smaller bank). In that sense, it allows for different-sized banks to be compared to one another.
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Return On Invested Capital (ROIC)
Return on invested capital (ROIC) is a measure of profitability that gauges how effectively a company has used the money it’s taken from investors. A higher return is better and at a minimum, companies should be delivering returns higher than their cost of capital – i.e. they should be using investors’ money to earn more money.
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Revenue
It’s just like sales, but it includes other income like fees or interest. So, it’s an all-inclusive number of how much money a company brought in as a result of all of its activities. Again, it does not include costs. So let’s say Apple sells $10 billion worth of iPhones in 2015 and gets paid $1 billion in interest for all the cash it holds then it’s ‘revenues’ are $11 billion for 2015 (these numbers are not reflective of Apple’s actual numbers, by the way – it’s just an example).
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Roth IRA
A Roth Individual Retirement Account (IRA) lets you pay taxes on money going into your account on the promise that future withdrawals are tax-free (usually on retirement). Unlike traditional IRAs, funded with pre-tax dollars and taxed upon withdrawal, contributions to a Roth IRA are made with after-tax dollars. While there are no current-year tax benefits, it provides tax-free growth and tax-free withdrawals in retirement once you meet certain eligibility conditions. A Roth IRA can be an appealing choice for those who expect to be in a higher tax bracket in the future or who prefer the flexibility of tax-free withdrawals.
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