Money and Finance in Society
Expert-defined terms from the Professional Certificate in Economic Anthropology course at London School of Business and Administration. Free to read, free to share, paired with a globally recognised certification pathway.
Money and Finance in Society Glossary #
Money and Finance in Society Glossary
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A
1. Asset Allocation #
Asset allocation refers to the strategy of dividing an investment portfolio among different asset classes such as stocks, bonds, and cash equivalents to manage risk and achieve specific investment goals. It involves determining the percentage of each asset class in a portfolio based on factors like risk tolerance, time horizon, and financial goals.
2. Amortization #
Amortization is the process of spreading out loan payments over time, typically for a fixed period, to pay off a debt gradually. It involves making regular payments that include both principal and interest, with the goal of reducing the outstanding balance to zero by the end of the loan term.
3. Arbitrage #
Arbitrage is the practice of exploiting price differences in different markets to make a profit with little to no risk. It involves buying an asset in one market at a lower price and simultaneously selling it in another market at a higher price to capitalize on the price differential.
4. Assets #
Assets are economic resources that have value and can be owned or controlled to produce future benefits. They can be tangible, such as cash, property, or equipment, or intangible, such as patents, trademarks, or goodwill. Assets are typically classified as current (e.g., cash and inventory) or non-current (e.g., property and investments).
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B
5. Bonds #
Bonds are debt securities issued by governments, corporations, or other entities to raise capital. Investors who purchase bonds are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Bonds are typically considered safer investments than stocks but offer lower returns.
6. Balance Sheet #
A balance sheet is a financial statement that provides a snapshot of an organization's assets, liabilities, and equity at a specific point in time. It shows the company's financial position by detailing what it owns (assets), what it owes (liabilities), and the difference between the two (equity). The balance sheet follows the formula: Assets = Liabilities + Equity.
7. Bankruptcy #
Bankruptcy is a legal process that allows individuals or organizations to seek relief from their debts when they are unable to repay them. It involves declaring insolvency and either reorganizing debts under court supervision (Chapter 11) or liquidating assets to repay creditors (Chapter 7). Bankruptcy can have long-lasting financial consequences.
8. Bitcoin #
Bitcoin is a digital or virtual currency that uses cryptography for security and operates independently of a central authority, such as a government or financial institution. It is decentralized and can be used for peer-to-peer transactions without the need for intermediaries. Bitcoin is one of the most well-known cryptocurrencies.
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9. Capital #
Capital refers to financial assets or resources that individuals, businesses, or governments use to generate income or wealth. It can include cash, machinery, buildings, investments, and other tangible or intangible assets. Capital is essential for starting or expanding businesses, investing, and achieving long-term financial goals.
10. Collateral #
Collateral is an asset that a borrower pledges to a lender as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup some or all of the outstanding debt. Common types of collateral include real estate, vehicles, equipment, and financial instruments.
11. Commodities #
Commodities are raw materials or primary agricultural products that can be bought and sold, such as gold, oil, wheat, and livestock. They are standardized and interchangeable with other goods of the same type, allowing for easy trading on commodity exchanges. Commodities play a crucial role in global trade and financial markets.
12. Compound Interest #
Compound interest is the interest calculated on the initial principal amount as well as on the accumulated interest from previous periods. It allows for exponential growth of an investment over time, as each interest payment is added to the principal, resulting in higher future interest payments.
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13. Debt #
Debt is money borrowed by an individual, business, or government from another party with the promise to repay the principal amount plus interest. It can take the form of loans, bonds, mortgages, or credit card balances. Debt allows for immediate access to funds but comes with the obligation to make regular payments.
14. Derivatives #
Derivatives are financial contracts whose value is derived from an underlying asset, index, or reference rate. Common types of derivatives include options, futures, forwards, and swaps. Derivatives are used for hedging, speculation, and arbitrage in financial markets but can also pose significant risks if not properly managed.
15. Dividends #
Dividends are payments made by a corporation to its shareholders from its profits or reserves. They represent a portion of the company's earnings distributed to investors as a return on their investment. Dividends can be paid in cash, additional shares of stock, or other forms, providing income for shareholders.
16. Default #
Default occurs when a borrower fails to meet the legal obligations or conditions of a loan agreement, such as making timely payments or meeting financial covenants. It can lead to serious consequences, including legal action, damage to credit ratings, and foreclosure or bankruptcy proceedings.
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17. Equity #
Equity represents ownership interest in a company, calculated as total assets minus total liabilities. It is the value of the shareholders' stake in the business and can be expressed as common stock, preferred stock, or retained earnings. Equity holders have residual claim on the company's assets after creditors are paid.
18. Exchange Rate #
An exchange rate is the value of one currency in terms of another currency, determining the cost of goods, services, and investments across borders. Exchange rates fluctuate based on factors like interest rates, inflation, political stability, and market speculation. They play a crucial role in international trade and finance.
19. Entrepreneurship #
Entrepreneurship is the process of creating, launching, and managing a new business venture with the goal of making a profit. Entrepreneurs take on risks and uncertainties to develop innovative products or services and capitalize on market opportunities. Entrepreneurship is essential for economic growth and job creation.
20. ETFs (Exchange #
Traded Funds): ETFs are investment funds traded on stock exchanges that hold assets such as stocks, bonds, or commodities. They offer diversified exposure to various markets and sectors at a lower cost than traditional mutual funds. ETFs combine the features of stocks and mutual funds, providing liquidity and flexibility to investors.
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21. Financial Markets #
Financial markets are platforms where individuals, institutions, and governments trade financial assets such as stocks, bonds, currencies, and commodities. They facilitate capital formation, price discovery, and risk management through buying and selling of securities. Financial markets can be classified as primary or secondary markets based on the issuance of securities.
22. Fiscal Policy #
Fiscal policy refers to the government's use of spending and taxation to influence the economy. It aims to stabilize economic fluctuations, promote growth, and address social issues through budgetary decisions. Fiscal policy can be expansionary (increasing spending or reducing taxes) or contractionary (cutting spending or raising taxes).
23. Forex (Foreign Exchange) #
Forex is the global marketplace for trading currencies, where participants buy, sell, and exchange foreign currencies. It is the largest and most liquid financial market in the world, with daily trading volumes exceeding trillions of dollars. Forex trading allows for speculation, hedging, and international transactions.
24. Financial Literacy #
Financial literacy is the knowledge and understanding of financial concepts, products, and practices needed to make informed decisions about money management. It includes skills such as budgeting, saving, investing, and debt management. Improving financial literacy can lead to better financial outcomes and long-term security.
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G
25. GDP (Gross Domestic Product) #
GDP is the total value of all goods and services produced within a country's borders in a specific period, usually annually or quarterly. It is a key indicator of a country's economic health and growth, measuring the size of its economy. GDP can be calculated using three approaches: production, expenditure, and income.
26. Globalization #
Globalization is the process of increasing interconnectedness and interdependence among countries, economies, and cultures through trade, communication, and technology. It leads to the integration of markets, production, and services on a global scale, impacting social, political, and economic systems worldwide.
27. Gold Standard #
The gold standard is a monetary system in which the value of a country's currency is directly linked to a specific amount of gold. Under the gold standard, currencies could be exchanged for gold at a fixed rate, providing stability and limiting inflation. The gold standard was widely used before the adoption of fiat currencies.
28. Grants #
Grants are funds provided by governments, organizations, or institutions to support projects, initiatives, or individuals without the expectation of repayment. Grants are typically awarded based on specific criteria, such as merit, need, or alignment with the funder's goals. They can be used for research, education, community development, and other purposes.
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29. Hedge Funds #
Hedge funds are private investment funds that pool capital from accredited investors to pursue aggressive investment strategies with the goal of generating high returns. Hedge funds can invest in a wide range of assets, use leverage and derivatives, and employ complex trading techniques. They are known for their flexibility and risk management.
30. Hyperinflation #
Hyperinflation is a rapid and extreme increase in the general price level of goods and services within an economy. It erodes the value of a country's currency, leading to skyrocketing prices, loss of purchasing power, and economic instability. Hyperinflation can have devastating effects on businesses, consumers, and the overall economy.
31. Human Capital #
Human capital refers to the knowledge, skills, experience, and abilities that individuals possess and contribute to economic productivity. It includes factors like education, training, health, and creativity that enhance a person's value in the labor market. Human capital is essential for innovation, growth, and competitiveness in the global economy.
32. High #
Frequency Trading: High-frequency trading (HFT) is a form of algorithmic trading that uses powerful computers and sophisticated algorithms to execute large numbers of trades at ultra-fast speeds. HFT aims to exploit small price discrepancies in financial markets and capitalize on fleeting opportunities for profit. It has raised concerns about market fairness and stability.
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I
33. Inflation #
Inflation is the rate at which the general price level of goods and services rises over time, leading to a decrease in purchasing power. It is typically measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI) and can be caused by factors like demand-pull, cost-push, or monetary expansion. Moderate inflation is considered healthy for economic growth.
34. Interest Rate #
An interest rate is the cost of borrowing money or the return on investment expressed as a percentage of the principal amount. It determines the amount of interest that borrowers pay on loans and the earnings that lenders receive on deposits or investments. Interest rates are set by central banks, financial institutions, or market forces.
35. Investment #
Investment is the act of allocating money or resources to purchase financial assets, real estate, or business ventures with the expectation of generating income or profit. Investors seek to grow their wealth, achieve financial goals, and build long-term security through diversified portfolios. Investment decisions involve risk assessment and return analysis.
36. IRA (Individual Retirement Account) #
An IRA is a tax-advantaged retirement savings account that individuals can open to invest in stocks, bonds, mutual funds, or other assets for retirement planning. Contributions to traditional IRAs may be tax-deductible, while earnings grow tax-deferred until withdrawal. Roth IRAs offer tax-free withdrawals in retirement.
37. Initial Public Offering (IPO) #
An IPO is the process by which a private company offers its shares to the public for the first time to raise capital and become a publicly traded company. It involves issuing new shares to investors and listing them on a stock exchange for trading. IPOs can provide liquidity to existing shareholders and fund expansion opportunities.
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38. Joint Venture #
A joint venture is a business agreement between two or more parties to collaborate on a specific project or venture for mutual benefit. Each party contributes resources, expertise, or capital to the joint venture and shares in the risks, costs, and rewards of the partnership. Joint ventures can be formed for various purposes, such as research, development, or market expansion.
39. Junk Bonds #
Junk bonds, also known as high-yield bonds, are fixed-income securities issued by companies with low credit ratings or high default risk. They offer higher yields to compensate investors for the increased probability of default. Junk bonds can be attractive to investors seeking higher returns but come with greater volatility and credit risk.
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K
40. Keynesian Economics #
Keynesian economics is an economic theory developed by economist John Maynard Keynes that advocates for government intervention in the economy to promote economic growth and stability. It emphasizes the role of aggregate demand, fiscal policy, and public spending to combat recessions, unemployment, and inflation. Keynesian policies have influenced modern macroeconomic theory and policy.
41. KYC (Know Your Customer) #
KYC is a regulatory requirement that financial institutions must follow to verify the identity of their customers and assess their risk profile. It involves collecting relevant information, such as identification documents, address, and financial history, to prevent money laundering, fraud, and terrorist financing. KYC ensures compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
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42. Leverage #
Leverage is the use of borrowed funds or debt to increase the potential return on an investment or financial transaction. It allows investors to amplify their exposure to assets, such as stocks or real estate, by using a smaller amount of their own capital. Leverage can magnify gains but also increase risk and potential losses.
43. Liabilities #
Liabilities are financial obligations or debts that an individual, business, or organization owes to creditors. They represent claims against assets and can be current (due within one year) or non-current (due after one year). Common liabilities include loans, mortgages, accounts payable, and bonds. Managing liabilities is essential for financial health and stability.
44. Liquidity #
Liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. Liquid assets are readily convertible to cash, such as stocks, bonds, and currencies, while illiquid assets may take longer to sell or incur higher transaction costs. Liquidity is crucial for financial markets and investment portfolios.
45. Libor (London Interbank Offered Rate) #
Libor is the benchmark interest rate at which major banks in London lend to each other in the international interbank market. It serves as the reference rate for trillions of dollars in financial contracts, including loans, derivatives, and mortgages. Libor is used to determine borrowing costs for individuals, businesses, and governments worldwide.
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M
46. Monetary Policy #
Monetary policy is the process by which a central bank manages the supply of money, interest rates, and credit in an economy to achieve specific macroeconomic objectives. It aims to control inflation, stabilize prices, promote economic growth, and maintain financial stability. Central banks use tools like interest rate changes, open market operations, and reserve requirements to implement monetary policy.
47. Mutual Funds #
Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of investors. Mutual funds offer diversification, liquidity, and access to various asset classes for individual and institutional investors.
48. Market Capitalization #
Market capitalization, or market cap, is the total value of a company's outstanding shares of stock calculated by multiplying the share price by the number of shares outstanding. It reflects the market's valuation of a company and is used to rank companies by size (e.g., large-cap, mid-cap, small-cap). Market capitalization is a key metric for investors and analysts.
49. Microfinance #
Microfinance is a financial service that provides small loans, savings, insurance, and other financial products to low-income individuals or entrepreneurs who lack access to traditional banking services. It aims to alleviate poverty, promote economic empowerment, and foster entrepreneurship in underserved communities. Microfinance institutions operate on a small scale and often target marginalized populations.
50. Market Risk #
Market risk, also known as systematic risk, is the risk of losses due to factors that affect the overall performance of financial markets, such as economic conditions, interest rates, and geopolitical events. It cannot be diversified away and impacts all investments to some degree. Market risk is an inherent part of investing and requires active management and risk mitigation strategies.
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N
51. Net Worth #
Net worth is the difference between an individual's assets (what they own) and liabilities (what they owe), providing a measure of their financial health and wealth. It represents the value of an individual's equity or ownership stake and can be positive (assets exceed liabilities) or negative (liabilities exceed assets). Net worth is used to assess financial well-being and track progress towards financial goals.
52. NASDAQ #
NASDAQ is an American stock exchange that specializes in trading technology and growth-oriented companies, as well as being home to many technology giants like Apple, Amazon, and Microsoft. It is known for its electronic trading platform, high-tech companies, and innovation in financial markets. NASDAQ is one of the largest stock exchanges in the world by market capitalization.
53. Nonprofit Organizations #
Nonprofit organizations are entities that operate for purposes other than profit, such as charitable, educational, religious, or social causes. They are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and rely on donations, grants, and fundraising to support their missions. Nonprofits play a vital role in addressing social issues, providing services, and engaging with communities.
54. Net Income #
Net income, also known as profit or earnings, is the amount of money a company earns after deducting expenses,