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February 19, 2016 , By BlabberCat

9 terms to improve your finance vocabulary

9 terms to improve your finance vocabulary

Don’t we want to keep up with our well-read peers who know big business terms? When we hear bankers or economists or investors confidently use words such as FANG stocks, short selling, crowd funding, which are enough to send us into a tizzy. With news such as stock markets going haywire, falling oil prices and declining exports ruling the financial section in the newspapers, BlabberCat ‘paws’ in to decode some of the complex words that one might hear frequently in this generation of young professionals so you can sound fancy too! – Samreen Akhter

Graphics Sheejal Maskara

1. Crowd funding

It means what it says. Literally! The idea here, is to fund a project or venture asking a large number of people for small amounts of money. Traditionally, projects were funded asking a few people for large amounts of money. However, with the Internet coming into the picture, the tables have turned as it is now easier to reach thousands of people, if not millions. Those seeking funds will have to create a profile of their idea on one of the several websites that provide the platform for both the fund seekers and the public. One of the first instances of crowd funding seemed to have taken place way back in 1997. The fans of a British rock band, Marillion, used the Internet to collect enough funds for their band so that Marillion could afford a U.S. tour. So, with the hype of start-ups everywhere, one needs to know of this new source of funding that has slowly, but steadily, gained world-wide popularity.

2. Bootstrapping

This refers to the process of establishing a business with very little resources or almost nothing. Bootstrappers have a few options such as their savings, personal income and the lowest possible operating costs to choose from. Several major global corporations such as Coca Cola, Apple, Dell Computers started of as bootstrapped ventures. They are an expert when it comes to stretching their already limited resources as far as they can. It is an inexpensive and an effective way to ensure a positive cash flow as it reduces the amount of money borrowed and there, reduces the interest costs.

3. Quantitative Easing

Also known as QE, this is definitely one of the most trending terminologies in the world of Finance. Traditionally, central banks have been responsible for keeping the supply of money in an economy in check adjusting the interest rates at which banks borrow overnight. QE is the unconventional monetary policy that is adopted the central banks when the short term interest rates are at or are approaching zero. To carry out QE, central banks purchase securities such as government bonds from the banks. This, in turn, increases the liquidity in the economy which lowers the interest rates and boosts investments. Additionally, banks may decide to keep aside the additional funds generated through quantitative easing in reserves rather than lending them out to individuals and businesses.

4. FPO

We are all aware of Initial Public Offerings or IPOs where a company issues it’s shares to the public for the first time. However, when an existing public company that is already listed on an exchange, issues new shares to the investors or existing shareholders, it is known as a Follow On Public Offer or an FPO. The main purpose of an FPO is almost the same as an IPO – to raise capital for expansion or to pay off debts.

5. LIBOR

LIBOR or the London Interbank Offered Rate is the benchmark rate that is charged some of the major banks of the world when they give short term loans to each other. It is the first step for calculating interest rates on various loans including but not limited to mortgages, student loans, corporate bonds and many more, provided throughout the world and is based on five major currencies – U.S. Dollar (USD), Euro (EUR), Pound Sterling (GBP), Japanese Yen (JPY) and Swiss Franc (CHF). There are a total of 35 different LIBOR rates each day with the three month U.S Dollar rate being the most commonly quoted one!

6. Short Selling

Imagine selling something that you do not own! And imagine doing that and actually make a profit! Sounds too good to be true, right? But that is exactly what happens in short selling. However, such a thrilling activity has to come with huge risks of losses. In this case, the seller borrows the securities from the owner and sells it in the market with the hope that he will buy it at a lower price in the future and theremake a profit on the transaction. It generally happens when one expects the prices of those specific shares to decline in the future. This activity involves a lot of speculation and the losses can be infinite, thus, only experiences traders who are familiar with this territory enter into such transactions.

7. Green Funds

As the name itself suggests, they are investment vehicles that will only invest in companies that are socially conscious in their business dealings and promote  and fulfill their environmental responsibilities. These vehicles may have a strategy to avoid companies having a negative impact (alcohol, weapons, etc.) or choose companies that ensure well being of the environment (energy conservation, literacy programs, etc.) or even both. It is still debatable whether socially responsible investing can churn out good returns for the investors, but, many investors see this as a valuable investment option as it ensures a better environment for all.

8. FANG stocks 

NOPE! It has nothing to do with draculas or vampires or werewolves. It is, in fact, an acronym created a few years ago Jim Cramer of The Street, representing the most popular and well performing stocks from the world of technology in recent times – Facebook, Amazon, Netflix and Google. So you know what investors are talking about when they mention that they opted in/out of FANG stocks.

9. Short Squeeze 

This refers to the situation in which heavily shorted stock (stock that is selling like hot cakes because of an expected price fall) suddenly witnesses a sharp increase in its price, which forces the short sellers to close their short position (buying those shares). This heavy closing of short position adds to the upward price pressure on the shares. A short squeeze is generally triggered a positive development that indicates that the prices will now go upwards, contrary to the previously held belief that the prices will fall.

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Terms such as Quantitative Easing and negative interest rates have been recently discussed in our previous articles where it was explained how the central banks throughout the world are trying to increase the supply of money ensuring that banks have more reserves to lend out to people and, in a few countries, the central banks have started penalizing the commercial banks for parking unnecessarily huge reserves with them.

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