Financial Terms Glossary

Q & R

Quantitative Easing (QE)

Quantitative Easing is the name given to government policy to increase the money supply by injecting liquidity into the economy. This is done by buying government assets back from the market.

The reason behind using quantitative easing is that it will increase the capital within the financial sector and therefore increase the amount which banks lend to consumers and small businesses, in an effort to promote economic growth. Quantitative easing is usually only done when interest rates are already extremely low and there are no other measures which can be taken.

Unfortunately, there is very little evidence to show that QE helps at all; in fact the evidence is to the contrary. The negative impact of QE is that an increase in the money supply without a corresponding increase in demand for money is likely to push up inflation.

Rally

A rally is a term used in the movements of assets such as indices, bonds and equities. It refers to the continuous increase in price, usually by a large amount. Typically, a rally will occur after prices have either been falling or not moving for a period of time.

Rallies are caused by simple supply and demand economics. When there is large demand for an asset relative to supply, the price will rise accordingly.

Rating

A rating is an assessment of credit-worthiness assigned to a bond, corporation or country. The idea behind a rating is that it gives investors an idea of how likely an entity is to repay its debts.

The ratings are assigned by a rating's agency, with the most famous being Moody's and Standard & Poors and typically follow a letter system with AAA being the top rating. As of 2011, some AAA rated countries are the United Kingdom, Germany, Hong Kong and Switzerland.

Resistance Line

A resistance line is used in technical analysis to determine a price level through which an asset is unlikely to pass. Using lines of support and resistance allows investors to assess whether an asset is near the top or bottom of its short-term trend. Resistance lines can be drawn at any price point which the asset has touched several times, but not passed for a given length of time.

In a long position, a resistance line shows the highest price the asset should fall to and in a short position it shows the lowest price it should rise to.

A basic trading strategy is to buy at levels of support and sell at levels of resistance.

Retainer

A retainer is a fee paid in a takeover firm in case the deal falls through. The company making the acquisition will include the payment as a sign of their good faith and intent to follow through with the deal.

Typically, retainers are between 10% and 20% of the total value of the deal.

Revenue

Revenue is one of the most basic and fundamental financial figures for a company. It is the total amount of income from the sale of its products and/or services. Revenue is also known as gross income.

  • The calculation for revenue is:

Sum (Price of Good x Quantity Sold)

I.e. the sum of the income generated from selling each unit.

Most of the figures in financial statement projections are based on a percentage of revenue. Although revenue in itself is very important for working out all the other figures of a company's financials, revenue in itself does not actually say anything about profitability.

S

Securities And Exchange Commission (SEC)

The SEC (also known as Securities and Exchange Commission) is a body set up by the US Congress with the purpose of regulating the security and takeover market. The SEC is needed for the protection of investors and to prevent any possible fraud. All public companies have to submit financial statements to the SEC and any corporate action in which a company acquires 5% or more equity in another firm must be reported to the SEC.

The SEC is made up of 5 commissioners, each of which is appointed and approved by the President of the US and the US Senate.

Security

A security is a financial instrument representing ownership, the right to ownership or debt owed. Some examples of a security are:

  • Stock
  • Derivative
  • Bond
  • Swap

It can be traded and valued due to what it represents. Essentially any financial asset is a security.

Short

Short is a term used in trading to denote selling an asset and profiting when it's value goes down. This is a tricky way to invest and is usually only available to those investors trading with derivatives or in hedge funds and prop trading desks.

Being short is done by borrowing the asset, selling it in the market, buying the asset back at a lower price then returning it to the original lender and keeping the difference.

An example of how the word short is used is:

  • I'm short Bank of America

This means the investor has borrowed Bank of America stock, sold it and is hoping to rebuy it at a lower price to return to the lender to earn a profit.

Small Cap

A small-cap (small capitalization) firm is one with a market capitalization of under $2 billion. This figure is an approximation and may change over time or be defined differently among different industries.

Spread

A spread is simply the difference in price between two assets, or the difference in the buy and sell price of a single asset.

For single assets, a more liquid asset will have a tighter spread than an illiquid one because there is less risk for the market maker. Market makers earn their profits through spreads.

Stop

A stop is a type of order relating to the trading of an asset. It is placed with a broker and indicates a price level at which the owner of the asset wishes to exit their position. This will limit their losses to a certain amount, but also means if the market dips slightly below their stop level and then rebounds they will still exit the position.

Stop orders are most frequently used in conjunction with limit orders on assets with extreme fluctuation and volatility.

Subprime

Subprime refers to a group of debtors with a poor credit history / rating, meaning they are less likely to repay their debts than other borrowers. Using the FICO system, an individual with a score of less than 640 is classified as subprime. Due to the higher risk of default, subprime loans are more risky than prime loans and therefore the subprime borrowers will be charged a higher interest rate which is ironic as they are the ones least likely to be able to pay the interest.

Subprime mortgage lending along with mortgage securitization was one of the main causes of the 2007-2008 financial crisis.