Important Finance Terminologies (R-U)

Important Finance, Accounts and Economics Terminologies

What is Real Gross Domestic Product (GDP)?

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as "constant-price," "inflation-corrected", or "constant dollar" GDP.

What Is a Repurchase Agreement

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.

What Is Return on Invested Capital (ROIC)?

Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its money to generate returns. Comparing a company's return on invested capital with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively. This measure is also known simply as "return on capital."

What Is the Receivables Turnover Ratio?

The accounts receivable turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. The receivables turnover ratio is also called the accounts receivable turnover ratio.

What Is Return on Investment (ROI)?

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

What Is a Rate of Return (RoR)?

A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.

What Is Rational Choice Theory?

Rational choice theory states that individuals use rational calculations to make rational choices and achieve outcomes that are aligned with their own personal objectives. These results are also associated with an individual’s best, self-interests. Using rational choice theory is expected to result in outcomes that provide people with the greatest benefit and satisfaction given the choices they have available. 

What Is a Required Minimum Distribution (RMD)?

A required minimum distribution (RMD) is the amount of money that must be withdrawn from a traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age.

What Is Real Estate?

Real estate is property made up of land and the buildings on it, as well as the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water, and any additional mineral deposits.

What Is Retained Earnings?

Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. A business generates earnings that can be positive (profits) or negative (losses).

What Is Regression?

Regression is a statistical method used in finance, investing, and other disciplines that attempts to determine the strength and character of the relationship between one dependent variable (usually denoted by Y) and a series of other variables (known as independent variables).

What Is a Real Estate Investment Trust (REIT)?

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

What Is a Renewable Resource?

A renewable resource is one that can be used repeatedly and does not run out because it is naturally replaced. A renewable resource, essentially, has an endless supply such as solar energy, wind energy, and geothermal pressure. Other resources are considered renewable even though some time or effort must go into their renewal (e.g., wood, oxygen, leather, and fish). Most precious metals are renewable also. Although precious metals are not naturally replaced, they can be recycled because they are not destroyed during their extraction and use.

What Is Return on Assets—ROA?

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage.

What Is Return on Equity (ROE)?

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company’s assets to create profits.

What Is Risk Averse?

The term risk-averse describes the investor who chooses the preservation of capital over the potential for a higher-than-average return.

What Is the Retention Ratio?

The retention ratio is the proportion of earnings kept back in the business as retained earnings. The retention ratio refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends. The retention ratio is also called the plowback ratio.

What Is a Random Variable?

A random variable is a variable whose value is unknown or a function that assigns values to each of an experiment's outcomes. Random variables are often designated by letters and can be classified as discrete, which are variables that have specific values, or continuous, which are variables that can have any values within a continuous range.

What Is Risk Analysis?

Risk analysis is the process of assessing the likelihood of an adverse event occurring within the corporate, government, or environmental sector. Risk analysis is the study of the underlying uncertainty of a given course of action and refers to the uncertainty of forecasted cash flow streams, the variance of portfolio or stock returns, the probability of a project's success or failure, and possible future economic states. Risk analysts often work in tandem with forecasting professionals to minimize future negative unforeseen effects.

What is a Recession?

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment. However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

What Is Recapitalization?

Recapitalization is the process of restructuring a company's debt and equity mixture, often to make a company's capital structure more stable.

What Is a Revaluation?

A revaluation is a calculated upward adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can include wage rates, the price of gold, or a foreign currency.

 

What Is Standard Deviation?

The standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. It is calculated as the square root of variance by determining the variation between each data point relative to the mean. If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation.

What Is SWOT Analysis?

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company's competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential.

What Is the S&P 500 Index?

The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. Other common U.S. stock market benchmarks include the Dow Jones Industrial Average or Dow 30 and the Russell 2000 Index, which represents the small-cap index.

The S&P does not currently provide the total list of all 500 companies on its website, outside of the top 10. Many of the top companies in the S&P 500 include technology firms and financial businesses.

What Is the Sarbanes-Oxley (SOX) Act of 2002?

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to help protect investors from fraudulent financial reporting by corporations. Also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards.

What Is the Securities and Exchange Commission (SEC)?

The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. It also approves registration statements for bookrunners among underwriting firms.

What Is Short Selling?

Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. It is an advanced strategy that should only be undertaken by experienced traders and investors.

What Is the Solvency Ratio?

The solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt obligations and is used often by prospective business lenders. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations.

What Is a Spread?

A spread can have several meanings in finance. Basically, however, they all refer to the difference between two prices, rates or yields.

In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond or commodity. This is known as a bid-ask spread.

What is the Stock Market?

The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.

What Is a Subsidiary?

In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or the holding company.

The parent holds a controlling interest in the subsidiary company, meaning it has or controls more than half of its stock. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly owned subsidiary. Subsidiaries become very important when discussing a reverse triangle mortgage.

What is a Stop-Limit Order?

A stop-limit order is a conditional trade over a set timeframe that combines the features of stop with those of a limit order and is used to mitigate risk. It is related to other order types, including limit orders (an order to either buy or sell a specified number of shares at a given price, or better) and stop-on-quote orders (an order to either buy or sell a security after its price has surpassed a specified point).

What Is Six Sigma?

Six Sigma is a quality-control methodology developed in 1986 by Motorola, Inc. The method uses a data-driven review to limit mistakes or defects in and process. Six Sigma emphasizes cycle-time improvement while at the same time reducing manufacturing defects to a level of no more than 3.4 occurrences per million units or events. In other words, the system is a method to work faster with fewer mistakes.

What Is a Sinking Fund?

A sinking fund is a fund containing money set aside or saved to pay off a debt or bond. A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue. A sinking fund is established so the company can contribute to the fund in the years leading up to the bond's maturity.

What is a Tariff?

A tariff is a tax imposed by one country on the goods and services imported from another country.

What Is Technical Analysis?

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

 What Is Term Life Insurance?

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.

What Is Terminal Value (TV)?

Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated. Terminal value assumes a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.

What Is Third World?

"Third World" is a phrase that can be used to describe a class of economically inferior nations. Historical observations have developed a four-part segmentation for dividing the world’s economies by economic status. Third World falls behind First World and Second World but is ahead of Fourth World though Fourth World countries are hardly recognized at all.

What Is Total Quality Management (TQM)?

Total quality management (TQM) is the continual process of detecting and reducing or eliminating errors in manufacturing, streamlining supply chain management, improving the customer experience, and ensuring that employees are up to speed with training. Total quality management aims to hold all parties involved in the production process accountable for the overall quality of the final product or service.

What Is a Trade Deficit?

A trade deficit occurs when a country's imports exceed its exports during a given time period. It is also referred to as a negative balance of trade (BOT).

What Is a Treasury Bill?

A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.

What Is the Triple Bottom Line (TBL)?

The triple bottom line (TBL) is a framework or theory that recommends that companies commit to focus on social and environmental concerns just as they do on profits. The TBL posits that instead of one bottom line, there should be three: profit, people, and the planet. A TBL seeks to gauge a corporation's level of commitment to corporate social responsibility and its impact on the environment over time.

What is a Trust?

A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. In finance, a trust can also be a type of closed-end fund built as a public limited company.

What Is a Trustee?

A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. A trustee may be appointed for a wide variety of purposes, such as in the case of bankruptcy, for a charity, for a trust fund, or for certain types of retirement plans or pensions. Trustees are trusted to make decisions in the beneficiary's best interests and often have a fiduciary responsibility to the trust beneficiaries.

What Is Transfer Pricing?

Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between a subsidiary, an affiliate, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims.

What Is the Time Value of Money (TVM)?

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.

What Is a Traveler’s Check?

A traveler’s check is a once-popular but now largely outmoded medium of exchange utilized as an alternative to hard currency. The product typically is used by people on vacation in foreign countries. It offers a safe way to travel overseas without cash. The issuing party, usually a bank, provides security against lost or stolen checks. Beginning in the late 1980s, traveler’s checks have increasingly been supplanted by credit and prepaid debit cards.

What Is a Turnkey Business?

A turnkey business is a business that is ready to use, existing in a condition that allows for immediate operation.

The term "turnkey" is based on the concept of only needing to turn the key to unlock the doors to begin operations. To be fully considered a turnkey solution, the business must function correctly and at full capacity from the moment when it is initially received.

What Is an Underwriter?

An underwriter is any party that evaluates and assumes another party's risk for a fee. The fee is often a commission, premium, spread, or interest. Underwriters are critical to the financial world including the mortgage industry, insurance industry, equity markets, and common types of debt security trading. A lead underwriter is called a book runner.

What Is a Unicorn?

A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed stage venture capital fund based in Palo Alto, California.

What Is the Unemployment Rate?

The unemployment rate is the share of the labor force that is jobless, expressed as a percentage. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall. 

What Is Unlevered Free Cash Flow (UFCF)?

Unlevered free cash flow (UFCF) is a company's cash flow before taking interest payments into account. Unlevered free cash flow can be reported in a company's financial statements or calculated using financial statements by analysts. Unlevered free cash flow shows how much cash is available to the firm before taking financial obligations into account.

The Formula for UFCF is:

{UFCF} = {EBITDA} - {CAPEX} - {Working Capital} - {Taxes}

Where:

 {UFCF} = {Unlevered free cash flow}

Unsecured Note

An unsecured note is a loan that is not secured by the issuer's assets. Unsecured notes are similar to debentures but offer a higher rate of return. Unsecured notes offer less security than a debenture. Such notes are also often uninsured and subordinated. The note is structured for a fixed period of time.

What Is Universal Banking?

Universal banking is a system in which banks provide a wide variety of comprehensive financial services, including those tailored to retail, commercial, and investment services. Universal banking is common in some European countries, including Switzerland.

What Is an Unlawful Loan?

An unlawful loan is a loan that fails to comply with—or contravenes—any provision of prevailing lending laws. Examples of unlawful loans include loans or credit accounts with excessively high interest rates or that exceed the legal size limits that a lender is permitted to extend.

What is Unlevered Beta ?

Beta is a measure of market risk. Unlevered beta (or asset beta) measures the market risk of the company without the impact of debt. Unlevering a beta removes the financial effects of leverage thus isolating the risk due solely to company assets. In other words, how much did the company's equity contribute to its risk profile.

What Is Universal Life (UL) Insurance?

Universal life (UL) insurance is permanent life insurance with an investment savings element and low premiums that are similar to those of term life insurance. Most UL insurance policies contain a flexible-premium option. However, some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums).

 

(Source: Investopedia)