Financial glossary
for new-age investors

Discover financial terms and learn new concepts.

Acquisitions And Stock Prices

When one company buys another, the share price of the company being bought (a.k.a. the target) usually rises – and that of the company doing the buying (a.k.a. the acquirer) usually falls. The target’s price jumps because the acquirer usually has to pay more than the current share price – a premium – in order to take over the company: placing a high value on the target sweetens the deal for its investors who’ll likely make a tidy profit and are therefore likely to accept. The premium also partly reflects the buyer’s assessment of the company’s value when combined with its own organization. The acquirer’s share price tends to fall if investors think its paid too much for the target – perhaps leaving less money for other things like investing in growth or paying a dividend – or if investors aren’t convinced it’ll be able to generate sales or cost synergies it may have promised. Acquiring companies comes with “execution risk” – the possibility things might not go according to plan. Systems, personnel, and culture can all clash when brought together, and any potential benefits from the partnership can be a long way off – or even found to be non-existent.

Activist Investor

An investor that purchases large numbers of a public company’s shares (and usually tried to get a seat on their board) to try to effect changes in the company the investor believes to be positive for the share price. This can be good or bad for the company, often depending on whether the activist investor’s plans offer long-term value or simply a short-term boost to the share price.

Amortization

Amortization is the gradual and systematic reduction of the cost value of an intangible asset over its useful life. Unlike tangible assets, which are depreciated, intangible assets – like patents, trademarks, copyrights, licenses, and goodwill – are not physical in nature but provide value to a business. Amortization allocates the capital expense of these assets across their expected duration of benefit, affecting a company's financial statements by spreading out the cost. The accounting technique reflects the consumption of the asset's economic benefits and aligns its expense with the revenue it generates, ensuring compliance with accounting principles.

Analyst Rating

Analysts, who typically work at investment banks on the “sell side” of financial markets, assign ratings to publicly traded stocks. These ratings indicate the analyst’s view on whether “buy side” investors – think asset managers, hedge funds, etc. – should buy into or avoid a particular company’s shares. Analyst ratings are typically categorized as Buy/Outperform/Overweight to express a positive view, Hold/Neutral/Equalweight for a balanced view, or Sell/Underperform/Underweight to express a negative view. These ratings can serve as a snapshot of an analyst’s expectations of a stock's future performance and are therefore helpful in investors’ decision-making.

Antitrust Law

Since competition usually drives down prices for customers, the government tries to ensure that no major industry suffers from a lack of competitiveness. This almost always involves laws that preclude explicit collusion between companies regarding setting prices. It sometimes involves the government blocking companies from merging with each other or buying one another. When there are only a few number of companies in an industry, there are usually stringent laws on how much those companies can charge their customers (e.g. utilities like power and water suppliers).

APR (Annual Percentage Rate)

An annual percentage rate (APR) represents the actual cost of borrowing money on an annual basis. It includes the interest rate as well as additional fees or costs associated with the loan. By combining all charges into a single figure, the APR makes it clear to borrowers how much they’ll pay in total over a year. A lower APR indicates a cheaper loan, while a higher APR suggests a more expensive one. This metric is crucial for borrowers as it allows them to compare different loan products on a level playing field, ensuring they understand its full annual cost.

Arbitrage Trading

Arbitrage trading is a popular investment strategy that capitalizes on price discrepancies between markets to secure a profit. By simultaneously buying an underpriced asset in one market and the same asset in another market in which it's overpriced, traders (if not computer algorithms run by traders) exploit the difference for risk-free gains.

Asset

Something that a person or company owns. It can be a factory, or a loan that a bank has made or even something somewhat intangible like intellectual property.

Balanced Portfolio

When grouped together, one’s investments are called a ‘portfolio.’ A balanced portfolio is one that holds a variety of different types of investments. For example, some stocks, bonds, real estate and gold (perhaps). The idea is that when one goes down in value, another part of the portfolio will go up. The best example of this is when stocks go down, safe government bonds tend to go up. At this point, investors can sell some of the bonds that have made money and re-invest the proceeds in the stocks that have sold off. When the opposite happens, investors can sell stocks and buy some more bonds. The idea is that investors a) maintain the portfolio balance that is right for their risk (e.g. more stocks if they want to take more risk) and b) can, over time, benefit from volatility as things are sold when at relatively high prices and bought when at relatively low prices.

Bankruptcy

Bankruptcy is a legal process through which individuals or entities unable to meet their financial obligations can seek relief from some or all of their outstanding debts. This process is designed to provide a fresh start by relieving debtors of insurmountable burdens while ensuring that creditors receive fair treatment. Bankruptcy can let a company restructure debts and aid the organization's recovery, or it can involve liquidating assets to pay creditors.