Important Finance Terminologies (N-Q)

Important Finance, Accounts and Economics Terminologies

What is Net Present Value (NPV)

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

What Is the North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) was implemented in order to promote trade between the U.S., Canada, and Mexico. The agreement, which eliminated most tariffs on trade between the three countries, went into effect on January 1, 1994. Numerous tariffs–particularly those related to agriculture, textiles, and automobiles–were gradually phased out between January 1, 1994 and January 1, 2008.

What Is Net Asset Value – NAV

The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), the NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded (invested or redeemed).

What Is Net Income (NI)

Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company's income statement and is also an indicator of a company's profitability.

What Is Net Profit Margin

The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.

What Is Net Operating Income – NOI

Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used in other industries, it is referred to as “EBIT”, which stands for “earnings before interest and taxes”.

What is Normal Distribution

Normal distribution, also known as the Gaussian distribution, is a probability distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence than data far from the mean. In graph form, normal distribution will appear as a bell curve.

What Is a Null Hypothesis

A null hypothesis is a type of hypothesis used in statistics that proposes that there is no difference between certain characteristics of a population (or data-generating process).

For example, a gambler may be interested in whether a game of chance is fair. If it is fair, then the expected earnings per play is 0 for both players. If the game is not fair, then the expected earnings is positive for one player and negative for the other. To test whether the game is fair, the gambler collects earnings data from many repetitions of the game, calculates the average earnings from these data, then tests the null hypothesis that the expected earnings is not different from zero.

What Is Net Worth

Net worth is the value the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company's health and it provides a snapshot of the firm's current financial position.

What Is Neoliberalism

Neoliberalism is a policy model—bridging politics, social studies, and economics—that seeks to transfer control of economic factors to the private sector from the public sector. It tends towards free-market capitalism and away from government spending, regulation, and public ownership.

What Is Operating Income

Operating income is an accounting figure that measures the amount of profit realized from a business's operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS).

What Is Outsourcing

Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.

What Is the Organization of the Petroleum Exporting Countries (OPEC)

The Organization of the Petroleum Exporting Countries (OPEC) is a group consisting of 14 of the world’s major oil-exporting nations. OPEC was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. Countries that belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (the five founders), plus the United Arab Emirates, Libya, Algeria, Nigeria, and five other countries.

What is an Oligopoly

Oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms. A monopoly is one firm, duopoly is two firms and oligopoly is two or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.

What Is Over-The-Counter

Over-the-counter (OTC) refers to the process of how securities are traded for companies that are not listed on a formal exchange such as the New York Stock Exchange (NYSE). Securities that are traded over-the-counter are traded via a broker-dealer network as opposed to on a centralized exchange. These securities do not meet the requirements to have a listing on a standard market exchange.

What Is Operating Leverage

Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.

What is an Over-The-Counter Market

An over-the-counter (OTC) market is a decentralized market in which market participants trade stocks, commodities, currencies or other instruments directly between two parties and without a central exchange or broker. Over-the-counter markets do not have physical locations; instead, trading is conducted electronically. This is very different from an auction market system. In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed. In general, OTC markets are typically less transparent than exchanges and are also subject to fewer regulations. Because of this liquidity in the OTC market may come at a premium.

What Is an Overdraft

An overdraft is an extension of credit from a lending institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

What Is an Operating Margin

The operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating profit by its net sales.

What Is Opportunity Cost

Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another. While financial reports do not show opportunity cost, business owners can use it to make educated decisions when they have multiple options before them. Bottlenecks are often a cause of opportunity costs.

What Is an Overdraft

An overdraft is an extension of credit from a lending institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

What Are Open Market Operations (OMO)

Open market operations (OMO) refers to when the Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money.

What Is Overhead

Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. It is important for budgeting purposes but also for determining how much a company must charge for its products or services to make a profit. In short, overhead is any expense incurred to support the business while not being directly related to a specific product or service.

What is an Onerous Contract

An onerous contract is an accounting term for a contract that will cost a company more to fulfill than the company will receive in return.

What Is an Option

Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.

• Call options allow the holder to buy the asset at a stated price within a specific timeframe.
• Put options allow the holder to sell the asset at a stated price within a specific timeframe.

What Is a Ponzi Scheme

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers.

What Is Price-to-Earnings Ratio – P/E Ratio

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

What Is a Profit and Loss Statement (P&L)

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.

What Is a Partnership

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.

There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners have limited liability. There also is the so-called "silent partner," in which one party is not involved in the day-to-day operations of the business.

What Is a Promissory Note

A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

What Is a Prospectus

A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, and mutual funds. The document can help investors make more informed investment decisions because it contains a host of relevant information about the investment security.

What Is Pro Rata

Pro rata is a Latin term used to describe a proportionate allocation. It essentially translates to "in proportion," which means a process where whatever is being allocated will be distributed in equal portions.

What is Per Capita GDP

Per capita gross domestic product (GDP) is a metric that breaks down a country's economic output per person and is calculated by dividing the GDP of a country by its population.

What Is Perfect Competition

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

• All firms sell an identical product (the product is a "commodity" or "homogeneous").
• All firms are price takers (they cannot influence the market price of their product).
• Market share has no influence on prices.
• Buyers have complete or "perfect" information—in the past, present and future—about the product being sold and the prices charged by each firm.
• Resources for such a labor are perfectly mobile.
• Firms can enter or exit the market without cost.

What is Producer Price Index (PPI)

The producer price index (PPI), published by the Bureau of Labor Statistics (BLS), is a group of indices that calculates and represents the average movement in selling prices from domestic production over time.

What Is Present Value – PV

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.

What Is Personal Finance

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. It often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

What Is a Public Limited Company (PLC)

The acronym PLC (public limited company) at the end of a company name signifies that the business offers shares to the public. It is used in Great Britain and some Commonwealth nations and is the equivalent of the U.S. "Inc."

What Are Preference Shares

Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.

What Is a Put Option

A put option is a contract giving the owner the right, but not the obligation, to sell, or sell short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre-determined price the put option buyer can sell at is called the strike price.

What is a Qualified Dividend

A qualified dividend is a dividend that falls under capital gains tax rates that are lower than the income tax rates on unqualified, or ordinary, dividends. Dividend tax rates for ordinary dividends (typically those that are paid out from most common or preferred stocks) are the same as standard federal income tax rates, or 10% to 37% for the most recent tax year. By comparison, qualified dividends are taxed as capital gains at rates of 20%, 15% or 0% depending on tax bracket. Because of this discrepancy in rate, the difference between ordinary vs. qualified dividends can be substantial when it comes time to pay taxes.

What Is a Qualified Institutional Buyer

An investor is dubbed a qualified institutional buyer (QIB) if they are thought to require less regulatory protection than unsophisticated investors. QIB's can be a corporation that the Securities and Exchange Commission’s (SEC) Rule 501 of Regulation D classifies as an accredited investor, banks, trust funds, pension plans or any entity comprised of sophisticated investors.

What Is a Qualified Institutional Placement (QIP)

A qualified institutional placement (QIP) is, at its core, a way for listed companies to raise capital, without having to submit legal paperwork to market regulators. It is common in India and other southeast Asian countries. The Securities and Exchange Board of India (SEBI) created the rule to avoid the dependence of companies on foreign capital resources.

What Is a Qualified Opinion

A qualified opinion is a statement issued in an auditor's report that accompanies a company's audited financial statements. It is an auditor's opinion that suggests the financial information provided by a company was limited in scope or there was a material issue with regard to the application of generally accepted accounting principles (GAAP)—but one that is not pervasive. Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements.

What is Qualitative Analysis

Qualitative analysis uses subjective judgment to analyze a company's value or prospects based on non-quantifiable information, such as management expertise, industry cycles, strength of research and development, and labor relations.

What Is Quality Control

Quality control (QC) is a process through which a business seeks to ensure that product quality is maintained or improved. Quality control requires the business to create an environment in which both management and employees strive for perfection. This is done by training personnel, creating benchmarks for product quality and testing products to check for statistically significant variations.

What Is Quantitative Analysis (QA)

Quantitative analysis (QA) is a technique that seeks to understand behavior by using mathematical and statistical modeling, measurement, and research. Quantitative analysts aim to represent a given reality in terms of a numerical value.

What Is Quality Management

Quality management is the act of overseeing all activities and tasks that must be accomplished to maintain a desired level of excellence. This includes the determination of a quality policy, creating and implementing quality planning and assurance, and quality control and quality improvement. It is also referred to as total quality management (TQM).

What is Quantitative Trading

Quantitative trading consists of trading strategies based on quantitative analysis, which rely on mathematical computations and number crunching to identify trading opportunities. Price and volume are two of the more common data inputs used in quantitative analysis as the main inputs to mathematical models.

What Is the Quantity Demanded

Quantity demanded is a term used in economics to describe the total amount of a good or service that consumers demand over a given interval of time. It depends on the price of a good or service in a marketplace, regardless of whether that market is in equilibrium. The relationship between the quantity demanded and the price is known as the demand curve, or simply the demand. The degree to which the quantity demanded changes with respect to price is called the elasticity of demand.

What Is a Quasi Contract

A quasi contract is a retroactive arrangement between two parties who have no previous obligations to one another. It is created by a judge to correct a circumstance in which one party acquires something at the expense of the other.

The contract aims to prevent one party from unfairly benefiting from the situation at the other party's expense. These arrangements may be imposed when goods or services are accepted, though not requested, by a party. The acceptance then creates an expectation of payment.

What Are Quick Assets

Quick assets refer to assets owned by a company with a commercial or exchange value that can easily be converted into cash or that are already in a cash form. Quick assets are therefore considered to be the most highly liquid assets held by a company. They include cash and equivalents, marketable securities, and accounts receivable. Companies use quick assets to calculate certain financial ratios that are used in decision making, primarily the quick ratio.

What Is a Quota

A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Countries sometimes impose them on specific products to reduce imports and increase domestic production. In theory, quotas boost domestic production by restricting foreign competition.

What Is a Quoted Price

A quoted price is the most recent price at which an investment (or any other type of asset) has traded. The quoted price of investments such as stocks, bonds, commodities, and derivatives change constantly throughout the day as events occur that affect the financial markets and the perceived value of various investments. The quoted price represents the most recent bid and ask prices that buyers and sellers were able to agree on.

 

(Source: Investopedia)