Top 10 Financial Terms
by Eric Nager on Jul 31, 2018
If you don’t know the difference between asset-backed securities and securities, you may want to take a look at these common financial terms and their definitions.
Asset Backed Securities
Asset-backed securities are bonds or notes that are backed by assets such as credit card accounts receivable, auto loans, and home equity loans.
Blue chips are well-established, well-recognized, financially stable companies. Blue Chip companies offer a variety of products and services, have been in business for a number of years, have weathered economic downturns successfully, and have continued to offer stability and growth to investors.
Your home, your car, your Picasso, even your stocks and bonds are considered to be capital assets. If you’re a business owner, anything you’ve purchased that has a longer life than one year, such as a computer, a printing press, or a warehouse, are considered capital assets.
Derivatives are considered a category of security, with several different kinds of derivatives available. Originally used to help ensure a more balanced exchange rate for internationally traded products, derivatives are used in a variety of situations today, including insuring against risk or speculating on the future price of a particular asset.
Dow Jones Industrial Average
Created in 1896, and later named after founder Charles Dow, the Dow Jones Industrial Average is the price-weighted average of how 30 large, publicly owned company’s stock traded on the New York Stock Exchange (NYSE) and the Nasdaq on a particular day.
An acronym, EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization. EBITDA is used to report company profits before debt interest and taxes owed are subtracted. EBITDA is best used to compare profitability between several companies that are similarly sized or in the same industry.
Hedge funds pool funds from accredited investors and are typically set up as a limited partnership or limited liability company. Once adequate funds are raised, the money is invested as promised. Hedge funds are not regulated as heavily as other investments such as mutual funds, making them a high-risk, high-reward proposition, and are typically limited to wealthy investors, as well as institutional investors.
International Monetary Fund
Created in 1944 in order to help stabilize currency exchange rates between countries, the International Monetary Fund or IMF has a current membership of 189 countries and is tasked with promoting international monetary cooperation, while helping to facilitate the balanced growth in international trade.
While we’re all familiar with the term, the actual meaning of a recession may elude some. A recession is a significant decline in economic activity that is typically measured by a country’s gross domestic product (GDP) that lasts longer than a few months. Unfortunately, there is no accurate way to predict a recession, though trends such as falling asset and home prices can indicate that a recession is looming on the horizon. A recession can last up to 18 months, though the effects can linger much longer.
A security can mean any stock, bond, treasure note, or certificate of interest in any profit sharing arrangement which can include oil, gas, and mineral rights. A security represents an investment by the owner of the security, has an assigned value, and may be sold.
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