Financial Terms Glossary

G

Glass-Steagall Act

The Glass-Steagall Act was a piece of legislation passed in the US in the 1930s which separated commercial banks and investment banks. The aim was to protect the customers of commercial banks from the riskier activities of investment banks.

The Glass-Steagall Act was repealed in the late 1990s by the Clinton administration and since then many banks have become large organizations participating in both investment banking and commercial banking (JPMorgan, Citi, Barclays etc.).

Goodwill

Goodwill is an accounting measure that refers to some of the intangible assets of a company. The difference between Intangible Assets and Goodwill is that the assets listed under Intangible Assets have an expiry point (contracts, trademarks etc.) whereas Goodwill assets never expire.

Some examples of Goodwill are:

  • Brand name
  • Customer loyalty
  • Proprietary production methods (i.e. the recipe formula for Coke).

Whenever a company is acquired for an amount higher than the book value, intangible assets and goodwill usually account for the difference.

Gross Domestic Product (GDP)

GDP stands for Gross Domestic Product and is the measure of the output of a country. It is the value of all goods and services produced by a country within a given time period (usually one year).

Growth rate of GDP is one of the main indicators of economic health and future outlook, and most developed economies aim for between 1 and 10% growth rate per year (tending towards lower values).

The calculation for GDP is:

  • Consumption + Investments + Government Spending + Net Exports
Gross National Product (GNP)

GNP stands for Gross National Product and is the measure of the total economic performance of a country. It is simply GDP plus any earnings from overseas investments, minus any income earned by foreign investors.

GNP is not used as frequently as GDP, because it takes into account the performance of other economies rather than just the domestic one.

Growth Stock

A growth stock is any stock that is predicted to grow at a rate higher than that of the market average. Growth stocks typically do not pay any dividends but rather reinvest earnings into investments in developing the company.

For a young investor, growth stocks are probably one of the most desirable investments for long-term portfolio performance.

H

Haircut

A haircut is a term referring to price spreads and the market value of assets. Almost all assets have a spread between the buy and sell price and this is one of the meanings of haircut.

The other meaning of the term haircut is how much an asset is reduced in value for calculating collateral levels. This is used as a buffer because there is a risk that the collateral behind an asset will devalue in the market, and the haircut is meant to take this into account.

For example, if a bond is issued at par (100) and then at maturity investors only receive 90 back, they will have taken a haircut of 10.

Hedge

Hedge is a term used in trading that simply means opening a position in order to reduce risk. This is usually done by either buying an asset that moves in the opposite direction to your main position, or by taking the opposite position in a correlated asset (such as a derivative).

For example, if the portfolio of an investor is fairly correlated to the health of the economy, they may take out positions in gold (which usually rises if the economy is doing badly) to hedge their risk.

Hedging is used to reduce risk and is typically done through the use of derivatives such as options and futures, although it may be done using other assets (i.e. gold, government bonds).

A perfect hedge will mean there is zero risk in holding a position (or a combination of positions) although this is extremely hard to obtain as very few assets are perfectly correlated or move exactly the same amounts.

Hedge Fund

Hedge Funds are a frequently misunderstood area of finance, yet they are one of the main movers of global markets and one of the key influencers of global liquidity. In order to join a hedge fund it is usually necessary to have experience in either trading, equity research or investment banking experience, although some hedge funds do recruit directly out of graduate school. It is less necessary to have obtained an MBA to get into hedge funds than it is for private equity firms, but a CFA may be of some use.

What Is A Hedge Fund?

A hedge fund is a pool of money from investors which is used to invest in wide-ranging areas of finance, i.e. in different asset classes, different regions etc and is part of the buy-side. Hedge funds are largely unregulated and have the ability to invest in many different ways, one of the most important being to short assets either through borrowing or through derivatives. Traditionally they were called hedge funds because they used derivatives and securities to hedge all their positions, but nowadays hedge funds do not do that to such an extent and are more speculative. Hedge funds will invest in all kinds of assets, including:

  • Bonds
  • Equities
  • Derivatives
  • Real Estate
High Frequency Trading (HFT)

High Frequency Trading (or HFT) is the method of trading utilizing computer-automated algorithmic software to buy and sell assets. This software runs extremely complex systems to determine slight inefficiencies in the market and make tiny profits per trade, but to execute millions of trades per day.

Usually the traders with the fastest software will make the most profit as they can out-trade the slower systems.

High Frequency Trading is fairly controversial due to it's ability to create obscure trends and to exacerbate falling stock prices (Lehman Brothers 2008, Dow Jones flash crash 2010).

High Yield

High yield bonds (also known as junk bonds) burst into fashion in the 1980s, with Drexel Burnham Lambert and Michael Milken being the earliest pioneers.

A high yield bond usually has a very high interest rate (typically 3% or more) but is rated as being below investment grade, i.e. very risky.

The idea behind this is that by buying enough different high yield bonds, the few which default and do not pay off will be more than outweighed by those which do, and investors can achieve high returns with a relatively low rate of risk.