Glossary

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

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Paper money

Paper money is also known as banknotes and is used in a country to make or receive payments for goods and services. Paper money is usually issued and controlled by a central bank and includes security features to keep it from being counterfeited. In many countries, paper money used to be backed by gold or silver, but it is now fiat money, meaning it is backed by the stability and good faith of its issuer rather than by a physical substance.

Penny stock

According to the U.S. Securities and Exchange Commission, penny stocks are units of ownership in small companies that trade at less than $5 per share. They are also termed small cap stocks or micro-cap stocks.

Penny stocks do not meet the requirements for listing on an exchange, so they are sold over-the-counter and are less regulated than more widely traded stocks. This has given them a reputation for being prone to scams like “pump and dump” schemes.

Because the companies that issue penny stocks are small and often have high growth potential, investing in them can be highly lucrative, but their lack of regulation combined with low liquidity (few ready buyers) can make them highly risky.

Pension Plan

Under a pension plan scheme, employers contribute to a fund that is managed to provide employees with income when they retire. Employees can also contribute to some pension plans. Pension plans are considered a defined-benefit retirement scheme, which means that the amount paid out on retirement is pre-established.

This means the employer rather than the employee bears the investment risk, as the employee is obligated to pay the retirement benefit regardless of how the fund performed. In contrast, a defined-contribution plan has a set contribution amount, but the amount paid out depends on the portfolio’s performance.

Performance Bonds

A performance bond, or contract bond, is a financial guarantee provided by one party to a contract to another to ensure it will fulfil its obligations under the contract. For example, if a hospital hires a construction company to build a new wing, it may require a performance bond from the contractor to make sure it will build the wing as specified. A performance bond is issued by a third party like a bank or insurance company for a fee.

In the sphere of futures contracts, “performance bond” is a somewhat outdated term for what is now called margin. Margin is the good faith money deposited in an account to secure the contract. A typical margin for futures contracts would be 5-10% of the total contract value.

Pip

A pip is a unit of measurement used in the sphere of currency trading to describe small changes in exchange rates. It stands for “percentage in point.” For currency pairs, a pip is equivalent to one hundredth of one percent (0.0001) and is the smallest measured increment of change. Since it is a unit of measurement, a pip does not have intrinsic value; rather, it is value depends on the amount of currency being traded, known as the lot size.

Political economy

Political economy is the study of the interaction between politics and economies, encompassing subjects as varied as trade, policy, the production and distribution of wealth, history, government, and cultural customs, among others. The discipline differs from pure economics in that rather than focusing on how to optimise the use of scarce goods, it centres on how groups within a society make decisions that affect economic choices. In other words, political economy is concerned with the political constraints or motivations that make actual policy align or misalign with the optimal solutions found through plain economics.

Price action

Price action simply means changes in the price of a security over time. It is the subject of technical analysis. Traders focusing on price action try to distinguish trends based on past movements and use this information to make short-term decisions about when to buy or sell securities. There are different ways of visually representing price action to make the data easier to interpret, including candlestick patters, line graphs, and box charts.

Price Discrimination

Price discrimination refers to the practice of charging different prices for the same product or service based on what a customer is willing to pay. Under this concept, the value the consumer will get from a service or good, their demographic circumstances, or spatial or temporal considerations (high season, remote locations, etc.) can all influence a unit’s price. The aim of price discrimination is to eliminate consumer surplus (when a consumer does not pay as much as they expected to). The three degrees of price discrimination are:

  • Perfect price discrimination, also known as personized or first-degree pricing. With perfect pricing, a company gets as much as it possibly can for every single unit, and there is no consumer surplus.
  • Second-degree price discrimination, where prices vary as a function of quantity sold (for example, a lower cost for wholesale goods).
  • Third-degree price discrimination, where different groups are offered different prices. An example would be children skiing for less at a ski resort.

Prime Brokerage

Prime brokerages, also referred to as prime brokers, provide services to hedge funds or other large financial institutions to facilitate their complex investing activities. Most large banks, like Morgan Stanley, Goldman Sachs, Credit Suisse, and UBS have a prime brokerage unit.

Essential services offered by most prime brokerages are leverage for client trades, as well as securities lending to facilitate short selling. Prime brokerages can also provide their clients with extensive research, act as custodians, advise on evolving regulatory issues, and introduce them to potential new investors. These brokerages earn money through fees and the spread in interest rates between funds borrowed and funds lent.

Private Equity

Private equity capital is used to fund or invest in companies without listing them on a public exchange. Private equity firms often buy businesses or take a majority stake in them and then take an active role in transforming them to make the companies more profitable. Since this type of equity is privately held, decision-makers are not beholden to stockholders and quarterly performance goals and can have more time and flexibility to use unique strategies to restructure companies and make them more lucrative.

As an asset class, private equity has the downside of being less liquid than its publically-listed counterpart. Venture capital is a subset of private equity focusing on entrepreneurs and start-ups.

Profit

Profit is total revenue, or sales, minus expenses. Making a profit is the ultimate aim of businesses and the measure of their success. Profits can be expressed in three main ways: 1) gross profits, which are sales minus the cost of goods sold; 2) operating profit, which is gross profit minus operating expenses; and 3) net profit, which is earnings after all expenses, including taxes and interest. Profits may be paid directly to small business owners as income, paid as dividends to shareholders in corporations, or reinvested in the business or investment that yielded them. The opposite of a profit is a loss.

Proprietary trading

Proprietary trading, or prop trading, is when a financial firm or bank trades directly with its own funds instead of acting as a broker and earning money from the commissions it charges its clients. Proprietary traders expose their capital to the full potential to lose or make money on a trade, which could lead to more profits but also carries more risk. Firms or banks with prop trading desks have to strictly separate their operations for clients from their proprietary activities to prevent conflicts of interest and fraudulent conduct like front running. Regulations like the Volcker Rule are making it more difficult to engage in proprietary trading.