Financial glossary: N-R
- 13 October 2011
- From the section Business
The current financial crisis has thrown terminology from the business pages onto the front pages of newspapers, with jargon now abounding everywhere from the coffee bar to the back of a taxi.
Here is a guide to many of the business terms currently cropping up regularly, as well as some of the more exotic words coined to describe some of the social effects of the financial crisis.
Naked short selling A version of short selling, illegal or restricted in some jurisdictions, where the trader does not first establish that he is able to borrow the relevant asset before selling it on. The aim with short selling is to buy back the asset at a lower price than you sold it for, pocketing the difference.
Nationalisation The act of bringing an industry or assetssuch as land and property under state control.
Negative equity Refers to a situation in which the value of your house is less than the amount of the mortgage that still has to be paid off.
OECD The Organisation for Economic Co-operation and Development is an association of industrialised economies, originally set up to administer the Marshall Plan after World War II. The OECD provides economic research and statistics, as well as policy recommendations, for its members.
Options A type of derivativethat gives an investor the right to buy (or to sell) something - anything from a share to a barrel of oil - at an agreed price and at an agreed time in the future. Options become much more valuable when markets are volatile, as they can be an insurance against price swings.
Ponzi scheme Similar to a pyramid scheme, an enterprise where funds from new investors - instead of genuine profits - are used to pay high returns to current investors. Named after the Italian fraudster Charles Ponzi, such schemes are destined to collapse as soon as new investment tails off or significant numbers of investors simultaneously wish to withdraw funds.
Preference shares A class of shares that usually do not offer voting rights, but do offer a superior type of dividend, paid ahead of dividends to ordinary shareholders. Preference shareholders often also have somewhat better protection when a company is liquidated.
Prime rate A term used primarily in North America to describe the standard lending rate of banks to most customers. The prime rate is usually the same across all banks, and higher rates are often described as "x percentage points above prime".
Private equity fund An investment fund that specialises in buying up troubled or undervalued companies, reorganising them, and then selling them off at a profit.
PPI The Producer Prices Index, a measure of the wholesale prices at which factories and other producers are able to sell goods in an economy.
Profit warning When a company issues a statement indicating that its profits will not be as high as it had expected. Also profits warning.
Quantitative easing Central banks increase the supply of money by "printing" more. In practice, this may mean purchasing government bonds or other categories of assets, using the new money. Rather than physically printing more notes, the new money is typically issued in the form of a deposit at the central bank. The idea is to add more money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages more borrowing and investment. Some economists fear that quantitative easing can lead to very high inflation in the long term.
Rating The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint - based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB- or higher are considered "investment grade". Below that level, they are considered "speculative grade" or more colloquially as junk.
Rating agency A company responsible for issuing credit ratings. The major three rating agencies are Moody's, Standard & Poor's and Fitch.
Recapitalisation To inject fresh equityinto a firm or a bank, which can be used to absorb future losses and reduce the risk of insolvency. Typically this will happen via the firm issuing new shares. The cash raised can also be used to repay debts. In the case of a government recapitalising a bank, it results in the government owning a stake in the bank. In an extreme case, such as Royal Bank of Scotland, it can lead to nationalisation, where the government owns a majority of the bank.
Recession A period of negative economic growth. In most parts of the world a recession is technically defined as two consecutive quarters of negative growth - when economic output falls. In the United States, a larger number of factors are taken into account, such as job creation and manufacturing activity. However, this means that a US recession can usually only be defined when it is already over.
Repo A repurchase agreement - a financial transaction in which someone sells something (for example a bond or a share) and at the same time agrees to buy it back again at an agreed price at a later day. The seller is in effect receiving a loan. Repos were heavily used by investment banks such as Lehman Brothers to borrow money prior to the financial crisis.
Repos are also used by speculators for short selling. The speculator can buy a share through a repo and then immediately sell it again. At a later date the speculator hopes to buy the share back from the market at a cheaper price, before selling it back again at the pre-agreed price via the repo.
Reserve currency A currency that is widely held by foreign central banks around the world in their reserves. The US dollar is the pre-eminent reserve currency, but the euro, pound, yen and Swiss franc are also popular.
ReservesAssets accumulated by a central bank, which typically comprise gold and foreign currency. Reserves are usually accumulated in order to help the central bank defend the value of the currency, particularly when its value is pegged to another foreign currency or to gold.
Retained earnings Profits not paid out by a company as dividends and held back to be reinvested.
Rights issue When a public company issues new shares to raise cash. The company might do this for a number or reasons - because it is running short of cash, because it wants to make an expensive investment or because it needs to be recapitalised. By putting more shares on the market, a company dilutes the value of its existing shares. It is called a "rights" issue, because existing shareholders have the first right to buy the new shares, thereby avoiding dilution of their existing shares.
Ring-fence A recommendation of the UK's Independent Commission on Banking. Services provided by the banks that are deemed essential to the UK economy - such as customer accounts, payment transfers, lending to small and medium businesses - should be separated out from the banks other, riskier activities. They would be placed in a separate subsidiary company in the bank, and provided with its own separate capital to absorb any losses. The ring-fenced business would also be banned from lending to or in other ways exposing itself to the risks of the rest of the bank - in particular its investment banking activities.