Glossary

Welcome to Fineco’s Glossary! It will help you better understand the financial terminology and master your financial skills.

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Labour Market

The term “labour market”, or job market, describes the set of interactions between the supply of labour (workers) and the demand for them (employers). On the macroeconomic level, important labour market indicators are unemployment and labour productivity. On the microeconomic level, supply and demand in labour markets determine factors like wages, hours worked, and benefits.

Labour market dynamics are highly complex and can be influenced by phenomenon like immigration, population ageing, globalization, automation and the overall health of a country’s economy.

Law of Demand

The law of demand is the economic principle that the higher the price, the lower the demand, and vice-versa. In reality, there are many factors that can distort this inversely proportional relationship, like income limitations or preferences.

Some goods, called “Giffen goods”, actually exhibit the opposite behaviour. But all else being equal, the law of demand holds true. This law is often represented as a graph with a line sloping downward, with the price on the Y-axis and the quantity on the X-axis (in economics, the independent variable is plotted on the Y-axis).

Leverage

Leverage means using borrowed funds to place bigger trades and potentially magnify profits. It takes its names from physics, where a simple input force on a lever can be amplified many times over in the output force. The analogy holds in the world of finance, where aim is to recover the cost of borrowing money many times over by leveraging the debt.

Business use leverage by financing new endeavours with debt rather than new equity. Traders can also use leverage to increase their potential returns (and risk) by engaging in forex or derivatives trading on margin. Under this arrangement, brokers lend traders money so they can place trades that are potentially worth many times the amount of capital they have in their account. If the trade goes well, they walk away with a return much higher than what they would have received without leverage. However, a trade that goes sour could saddle them outsized losses.

Life Insurance

Life insurance, also termed life assurance, is an agreement under which the person who purchases the insurance (called a policyholder) periodically pays a set amount (called a premium) to an insurer in exchange for the pay-out of a lump sum upon their death, which is received by the policyholder’s beneficiaries.

The two main types of life insurance are term life insurance, which expires after a set amount of time and pays out no benefit after that period, and whole life insurance, which does not expire and pays a return on the investment in addition to the lump sum death benefit.

Policyholders use life insurance to achieve two main objectives: financial protection, for example to replace income from the deceased that a family depended on, or investment, where policyholders seek to grow their capital for retirement, manage their estate, or defer taxes.

Limit Order

A limit order is a trader’s direction to a broker to automatically buy or sell a security at a certain threshold or better. When buying, this means the broker will automatically buy the security at a certain price or lower; and when selling, the security needs to meet or exceed a certain price for the order to execute.

Unlike market orders, which are directions to execute a transaction immediately at the market price, limit orders are a type of pending order and are only implemented if and when specific conditions are met.

Liquid Asset

Liquid assets are resources or property that can easily be converted into cash. The most liquid of assets is cash itself. Other highly liquid assets include stocks, bonds, accounts receivable, and money market funds. Among the least liquid assets are real estate, artwork, or machinery. An asset’s liquidity depends to some extent on how many interested buyers there are.

Companies keep track of their liquid assets (also known as current assets if they are expected to be converted to cash within a year) for cash flow purposes and to make sure they can pay their debts. Investors may also analyse a company’s liquid assets to calculate their solvency or liquidity ratios and decide how financially sound the organization is.

Liquidity

Liquidity refers to how easily a person or entity can convert its assets into cash. It is an important measure of a company’s ability to meet its short term obligations. Different assets fall on different points of the liquidity continuum, depending on how fast they can be sold without significantly impacting their value.

Cash is the most liquid asset because it can be instantly traded without diminishing its worth at all. Stocks and other securities fall at various points along the spectrum based on how much demand there is for them. Real estate or real property such as antiques or artwork are less liquid; it will likely take more time to find the right buyer willing to pay full value for these types of assets.

In the context of investing, liquidity refers to how readily a security can be traded on the market. The de facto measure of a security’s liquidity is the bid-ask spread, which is the difference between the highest purchase price quoted by a buyer and the lowest price a seller offers for that security: the tighter this spread, the more liquid the market.

Liquidity Ratio

A liquidity ratio measures how easily a business can pay off its debts without having to seek out additional financing. The higher the ratio, the more capable it is of converting assets into cash to meet its short-term obligations. The three most common ratios are:

  • The current ratio, which is calculated by dividing the current assets line by the current liabilities line on the company’s balance sheet.
  • The quick ratio. This metric is stricter because it subtracts less liquid assets like inventory and prepaid expenses from current assets before dividing them by current liabilities.
  • The cash ratio. This ratio is the strictest; it only allows cash and marketable securities in the numerator (and then divides by current liabilities).

Investors can use liquidity ratios to evaluate a company’s investment worthiness. A very low ratio might mean a company is struggling to meet its obligations, while a very high one could signal that a company is not fully leveraging its assets to make a profit.

Live currency rates

Also known as live forex rates or live exchange rates, live currency rates are real-time streams of currency exchange rates, which is the value of one currency relative to another. Line graphs are a common way of visually representing live currency rates.

Forex traders follow live currency rates to make decisions about when to make trades. They are offered free on many websites.

Loan

A loan is a quantity of money or other asset that an owner (a lender) turns over to another person or entity (a borrower), under the condition that it be returned according to an agreed-upon schedule. In most cases lenders are compensated for the loan based on how long the money or asset is in the borrower’s possession. This compensation is called interest, while the value of the loan itself is called the principal.

Common types of loans include personal loans, car loans, mortgages, home equity loans, credit card transactions, and payday loans. Loans can either be secured or unsecured. In a secured loan, a borrower pledges an asset that will become the lender’s if the borrower does not repay the loan. An unsecured loan means no collateral is offered as a guarantee of repayment.