This glossary contains very basic explanations of commonly used financial terms. It is by no means comprehensive and some financial terms can be interpreted in more than one way. The Necromoneycon will develop more advanced descriptions of financial terms at a latter date, when the author has the confidence or arrogance to do so. Economics is a complex subject, but too many of us have become complacent in our ignorance. If we are to debate without looking like fools then we must be equipped with at least the basics.
ABS - Asset Backed Security - a security based around a pool of assets, which can be quite diverse. The underlying assets are valued as a group and cannot be sold individually.
Bond - a contract promising to pay back a loan at regular intervals, with interest.
Caja - a short-hand term for a Spanish savings bank, which is similar to a Credit Union.
CDO - Collaterised Debt Obligation
CDS - Credit Default Swap
CMO - Collaterised Mortgage Obligation
Credit Union - a cooperative financial organisation that is owned by the account holders. Its main goals are to provide savings accounts and offer other financial services, including loans, to its members at low cost.
Equity - the most basic definition of this is the final value of assets after all liabilities (debts) have been paid. There are many different kinds of equity for which this definition is far too simplistic.
FROB - Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria). This is an initiative by Spain to re-structure its banking system and re-capitalise credit institutions.
GDP - Gross Domestic Produce. This is the total output of goods and services from a nation over the course of one year.
Leverage - putting existing assets to work to accumulate greater wealth in the long term. An example of leverage is a business investing in extra equipment, sometimes by borrowing, in order to increase output / efficiency over the longer term, i.e. 'making money work for you'.
MBS - Mortgage Backed Security - a Security based on payments for mortgage loans.
Securitisation - the process of selling debt to third parties in the form of Bonds. The debt may be a mortgage, a credit card balance, a personal loan, etc. The purpose of Securitisation is to spread the credit risk and improve the cashflow of the lender (bank) by providing investment opportunities. Interest paid by the loanee provides an income for the bondholders.
Security - broadly speaking, a certificate or document with a financial value.
SPV - Special Purpose Vehicle (or Special Purpose Entity) - a company that is set up purely to facilitate a complex financial transaction. An SPV can be used to isolate a highly risky project from the parent company.
Stagflation - the situation where low consumer demand, exacerbated by economic recession (high unemployment) and rising inflation, prevents or severely stunts economic growth. Low consumer demand exerts pressure on suppliers to lower their prices, which. with high inflation, reduces profits. Low profits means less growth, which prolongs the recession. A vicious circle has developed!
