Glossary

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

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Maastricht Treaty

Formally known as the Treaty on European Union, the Maastricht Treaty is the document that created the European Union (EU). It was signed by 12 nations on February 7th, 1992 and went into effect on November 1st, 1993.

The treaty establishes universal EU citizenship and specifies certain economic aspects of the EU, including the common currency (Euro), the free movement of capital between member countries, and the formation of the European Central Bank (ECB). It also sets out the criteria for new states to join the Eurozone, which centre on inflation control, public debt, interest rates, and other factors.

MACD indicator

MACD stands for Moving Average Convergence/Divergence, and it is a tool used to characterise the strength and duration of trends in security prices. It belongs to the field of technical analysis, meaning that it focuses on price patterns only, rather than financial analysis or fundamental analysis of the underlying factors influencing an asset’s value. It can be used to create a signal line for triggering purchases or sales of a security, and it shows traders when trends begin to gain or lose momentum. The indicator was invented by Gerald Appel in the 1970s.

Macroeconomics

Macroeconomics is an academic discipline that studies the overarching factors that affect and shape markets. It is often contrasted with microeconomics, which focuses on individual economic actors such as consumers or companies.

Concepts commonly examined in this discipline include price behaviours, unemployment, inflation or deflation, monetary policy, supply and demand, and gross domestic product (GDP). Key macroeconomic thinkers include Adam Smith, John Maynard Keynes, and Milton Friedman.

Macroeconomic research can be important to traders and investors because it helps them understand economy-wide factors that drive security prices. For example, if the Federal Reserve decides to increase monetary supply, this macroeconomic decision will likely lead to lower interest rates, which will have consequences for specific types of securities, such as increased bond prices.

Make to Order

Make to Order (MTO) is a manufacturing strategy where a product is only made after an order for it has been placed. Under this scheme, which is also known as mass customisation, products take longer to deliver but can be much more flexible in terms of their specifications, since buyers can provide their parameters beforehand. MTO is driven by demand-side cues and reduces the risk of a stock of obsolete products. It is the opposite of Make to Stock.

Margin account

A margin account is a type of account with a brokerage firm that allows the holder to borrow money from the brokerage to leverage trades, meet cash flow needs while trades settle, or simply access a line of credit. The loans are secured by the assets held in the account and have an associated periodic interest payment. If a trader buys securities using the funds accessible through their margin account and the security then outperforms the cost of the interest, the trader will come out ahead due to the additional return. However, if the trade goes poorly, the trader will be stuck paying off the debt in addition to the losses from the drop in the value of the investment.

Margin Call

A margin call is a broker’s requirement that a margin account holder brings the balance of the account up to a mandatory threshold, called the maintenance margin. This can be achieved either by contributing cash or selling off assets in the account.

When an investor uses a margin account, they trade using their own funds plus money borrowed from a broker with the aim of magnifying their gains (a concept called leverage). Brokers use margin calls to limit risks inherent to this practice and comply with regulatory requirements. Maintenance margins typically range from 25% to 40% of the total value of the portfolio.

Margin of Safety

The margin of safety is a concept first articulated by Benjamin Graham and used widely by Warren Buffet in his investment decision.

It refers to the practice of determining a stock’s intrinsic value and only buying it if it is priced well below that value, or only selling it if it is priced significantly above that value. This margin serves as a cushion for the investor in case of risks that were unknown or not taken into account.

To apply this principle, investors have to research a company’s fundamentals (like sales growth, dividend yield, P/E ratio) to determine the actual worth of a stock and decide where its market price stands in relation to its intrinsic value.

Margin trading

Margin trading is the purchase and sale of financial instruments using money borrowed from a brokerage firm. The account used to access these funds is called a margin account, and it allows traders to leverage their trades.

Marginal Utility

Marginal utility is a microeconomic concept that describes the amount of value a consumer gets from one additional unit of a good or service. Total utility is the aggregate value of all units consumed. The marginal utility typically diminishes with each additional good consumed.

To understand this concept, imagine you’re at a bakery and you’re hungry, so you buy a chocolate chip cookie. You relish the chewy texture punctuated by the bitter, melting chocolate. So, you decide to buy another one. The second one is not quite as good because the first one took the edge off your hunger, and the cookie has lost some of its novelty. Its marginal utility has dropped. But you still enjoy and finish it and eye a third. But ultimately, you decide you’ve had enough and it’s not worth the price: the marginal utility of the third “unit” has dropped below the cost of acquiring it.

Market

A market is a theoretical or physical space in which goods, services, financial instruments, or other items of value are exchanged. Markets can be delimited along geographical or regulatory lines, or on the basis of the type of item exchanged on them. They connect buyers and sellers and are thus shaped by supply and demand. Market size can be determined based on the number of participants or based on the total value that changes hands within a certain period of time.

Market Failure

Market failure is a term used in the field of economics to describe cases where the self-interested actions of individuals do not lead to the best outcome for the group or market as a whole.

An example of a market failure is a mismatch between supply and demand. Market failures can be caused by distortions like monopolies, incomplete information about the market, or people using public goods but not paying for them (e.g. driving on roads but not paying the taxes that fund them). Market failures can be addressed through legislation, subsidies, or better information on the market, among other solutions.

Micro credit

Micro credits, also known as micro-loans or micro-finance, are small amounts of money lent generally to individuals or small businesses to cover start-up costs, operating costs, or cash flow needs. This financing mechanism is used in cases where a borrower has no collateral for securing a loan or no way of proving their creditworthiness. Micro credits are often extended to groups to reduce the risk of default.

Proponents of micro-lending argue that these credits can lift people out of poverty by allowing them to enter the economy and generate an income stream. Its detractors claim it can drive poor households into debt.

Microeconomics

Microeconomics is a science that examines the behaviour and choices of individual economic agents and describes these dynamics using mathematics. It is one of two main economic disciplines, along with macroeconomics, which focuses on the entire economic community and factors like growth, inflation, use of resources, and policy.

Microeconomics is normative rather than prescriptive, meaning it is concerned with what is happening in an economy and how different changes influence each other rather than what should be happening. Key topics that fall within the domain of microeconomics include market structure, pricing, market failure, supply and demand, production, and opportunity cost.

Monetary Policy

Monetary policy is the set of decisions made by a country’s monetary authority (such as Central Banks) about expanding or limiting the supply of money and delivering that money to markets.

The chief aim of monetary policy is to ensure a nation’s economic health by preventing deflation or hyperinflation. Monetary policy decisions have a direct impact on market factors such as interest rates and how much funds are available for loans.

Momentum trading

Momentum trading is a strategy that profits from riding the upswing of a security and then jumping to a different one as soon as the uptrend of the first shows signs of flagging. A trend’s momentum is determined by factors like trade volume and the speed of price changes.

Momentum traders sell stocks that are losing value and invest in stocks that are already performing well, even if it means buying them at a high price, under the assumption that their momentum will carry them even higher. This style of trading requires tight vigilance to recognise reversals and sell instruments that are losing value.

Monetarism

Monetarism is a macroeconomic approach that holds that the total amount of money in an economy (the money supply) is the most important factor in an economy’s performance and determines other aspects like inflation, production, and employment.

Monetarists emphasise the powerful role of central banks, like the U.S. Federal Reserve. Essentially, they believe that the greater the money supply from that central bank, the lower the lending rates and the higher the consumption within an economy. However, if the money supply is constantly increased over the long term, demand will outstrip supply, leading to rising prices and inflation. Milton Friedman is credited with inventing monetarism.

Mortgage

A mortgage is a loan from a financial institution in which the borrower offers property they already own or are purchasing through the loan as collateral. If a person takes out a mortgage to buy a house, the bank that granted the mortgage loan can take away the house if the person fails to repay the debt and any interest owed. This process is called foreclosure.

Most mortgages have 15- or 30-year terms. They provide the advantage of allowing people to own property without having to pay the full price up front. However, the longer it takes a person to pay off a mortgage, the more interest she will ultimately pay on the loan.

Mutual Fund

A mutual fund is a company that pools money from a variety of investors and uses it to buy a portfolio of assets. Investors buy shares in the company, the value of which reflects the fund’s holdings. These shares entitle the owner to a portion of the income the mutual fund generates and also expose the individual investor to its gains or losses.

Mutual funds are run by professionals who manage the fund’s assets to maximize its gains. Mutual funds have the advantage of offering investors a highly diversified portfolio at a much lower price than they would have to pay to hold a unit of each of its components. Types of mutual funds include equity funds, fixed-income funds, and index funds.