Persistently rising general price levels brought about by rising input costs. In general, there are three factors that could contribute to cost-push inflation: rising wages, increases in corporate taxes, and imported inflation (when imported raw or partly-finished goods become moreexpensive, often as a result of currency depreciation). For inflation to be cost-push in nature, increases in input prices must affect a large proportion of the country’s producers, so as to be able to push up the general price level.
The framework, typically hierarchical, within which an organization arranges its lines of authority and communications, and allocates rights and duties. Organizational structure determines the manner and extent to which roles, power, andresponsibilities are delegated, controlled, and coordinated, and how information flows between levels of management. An structure depends entirely on the organization’s objectives and the strategy chosen to achieve them. In a centralized structure, the decision making power is concentrated in the top layer of the management and tight control is exercised over departments and divisions. In a decentralized structure, the decision making power is distributed and the departments and divisions have varying degrees of autonomy. An organizational chart illustrates the organizational structure.
A measurement of price iinflation that takes into account all types of inflation that an economycan experience. Unlike core inflation, headline inflation also counts changes in the price of food and energy. Because food and energy prices can rapidly increase while other types of inflation can remain low, headline inflation may not give an accurate picture of how an economy is behaving. Headline inflation is more useful for the typical household because it reflects changes in the cost of living, while core inflation is used by central banks because core inflation is less volatile and shows the effects of supply and demand on GDP better.
Client’s order to a broker to buy or sell a commodity or security when a specified price is reached, either above (on a buy order) or below (on a sell order) the price current at the time the order is given. A stop order to sell becomes amarket order when the item is offered at or below the specified price. A stop order to buy becomes a market order when the item is bid at or above the specified price. See also limit order.
SIMPLE 401(k) Plan
A retirement plan sponsored by employers which is attractive for employers because it avoidssome of the administrative fees and paperwork of plans such as a 401(k) plan. Employersbenefit from the tax-deductible contributions made to the plan, and employees may elect to have salary deferrals in order to contribute to the plan. The employer has the option of matching a certain portion of the employee’s deferrals or making non-elective contributions to all eligible employees (an annual limit applies in both cases). A minimum compensationeligibility requirement exists for employees who want to join this plan, and employees cannot establish any other qualified retirement plans at the same time.
Particular item or thing, specially the one being acquired under a contract or purchase order. Distinct but integral part of a document (such as a contract, constitution, or statute) identified by a unique number. Piece of nonfictional writing on a specific topic, identified by its title and often by its author(s), and published with other such literary works.
Practice of buying stock with money borrowed from the broker. In this arrangement, the investormakes a cash down payment (called the margin) with the broker and can purchase stocksworth about twice the cash amount. The broker charges interest on this loan (in addition to thecommission on each buy/sell trade) and the investor has to keep the entire stockholding with the broker as collateral. Also, the investor has to put up additional cash in case the value of the stockholding falls below a certain amount. Margin trading is a double-edged sword – it cuts both ways. If the stock price rises, the investor makes twice as much profit as with his own cash only. Similarly, if the stock price falls, the investor loses twice the amount. In slang, this practice is called ‘investing on steroids.’
Power of attorney arrangement in which a customer gives limited or complete authority to an agent (bank, broker, orinvestment-portfolio manager) to buy and/or sell securities or commodities on the customer’s behalf without the customer’s prior approval or knowledge. Also called controlled account. See also managed account.
gross profit margin
What remains from sales after a company pays out the cost of goods sold. To obtain grossprofit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.
For example, if a company receives $25,000 in sales and its cost of goods sold were $20,000, the gross profit margin would be equal to $25,000 minus $20,000, divided by $25,000, or 20%. Basically, 20% gross profit margin means that for every dollar generated in sales, the company has 20 cents left over to cover basic operating costs and profit.
Basic approaches to strategic planning that can be adopted by any firm in any market or industry to improve itscompetitive performance. The three fundamental marketing strategies (which, though different, are not mutually exclusive) are: differentiation strategy, focus strategy, and low cost strategy.
A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressivestrategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressiveinvesting goals. They are restricted by law to no more than 100 investors per fund, and as aresult most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds paya management fee; however, hedge funds also collect a percentage of the profits (usually 20%).
A promissory note or a corporate bond which (in the US) is backed generally only by the reputation and integrity of theborrower and (in the UK) by the borrower’s specific assets. When unsecured, it is called a bare debenture or naked debenture; when secured by a charge on a specific property, it is called a mortgage debenture.
capital market line
A graph relating risk (as represented by the market portfolio’s beta) and the required return for the market portfolio. This is a positive, linear relationship that originates from the Capital MarketAsset Pricing theory which states that all investors will own the market portfolio (as opposed tosingle securities). However, the amount of risk they will take on is positively correlated toexpected return, where expected return = risk-free rate + portfolio beta * (the difference between the expected returnon the market as a whole and the risk-free rate).
A transaction in which a corporation exchanges existing bonds (debt) for newly issued stock(equity). For example, XYZ company can in essence cancel a portion of their debt and transferthe equivalent balance to equity. A debt-equity swap can help a company that is in financialtrouble by canceling some of its outstanding debt. Other companies may take advantage of this process if the current value of their stock is high, allowing them to trade more debt for less stock.
Statistical technique of inferring unknown from the known. It attempts to predict future data by relying on historical data, such as estimating the size of a population a few years from now on the basis of current population size and its rate of growth. Extrapolation may be valid where the present circumstances do not indicate any interruption in the long-established past trends. However, a straight line extrapolation (where a short-term trend is believed to continue far in into future) is fraught with risk because some unforeseeable factors almost always intervene. See also interpolation.
Current assets minus current liabilities. Working capital measures how much in liquid assets acompany has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also callednet current assets or current capital.
Summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) andlenders, and what is its current financial position. The three basic financial statements are the (1) balance sheet, which shows firm’s assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm’s activities during a stated period. Also called business financials.
financial holding company
Financial company that handles a variety of financial transactions and whose services are monitored by the Federal Reserve Board. The lists of financial services that a financial holding company can provide were formulated under the Gramm-Leach-Billey Act of 1999. An institution whose services encompass at least 85% of those of a banking institution may apply to be a financial holding company. In 2008, American Express, a credit card company, was changed into a financial holding company.
Capacity, knowledge, or skill that matches or suits an occasion, or makes someone eligible for a duty, office, position,privilege, or status. Qualification denotes fitness for purpose through fulfillment of necessary conditions such as attainment of a certain age, taking of an oath, completion of required schooling or training, or acquisition of a degree or diploma. Qualification does not necessarily imply competence. Precise limitation (from general to particular) of language, scope, orterms that would otherwise be interpreted broadly or differently.
A metric for deriving the value of a business. Meaning Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization, it compares the value of a company, including debt and other liabilities to its actual earnings, not including non-cash assets. The resulting enterprise multiplecan be used to compare one company to another within the same industry, since the calculation is independent of the capital structure of a company. A lower enterprise multiple may indicate that a company is undervalued.
General: Exchange of equal or identical advantages or privileges, such as removal of traveling restriction between twocountries. International trade: Lowering of import duties and other trade barriers in return for similar concessions from another country. Reciprocity is a traditional principle of GATT/WTO, but is practicable only between developed nations dueto their roughly matching economies. For trade between them and developing nations, the concept of relative reciprocity is applied whereby the developed nations accept less than full reciprocity from their developing trading partners.
The repurchasing of all of a company’s outstanding stock by employees or a private investor. As aresult of such an initiative, the company stops being publicly traded. Sometimes, the company might have to take on significant debt to finance the change in ownership structure. Companies might want to go private in order to restructure their businesses (when they feel that the process might affect theirstock prices poorly in the short run). They might also want to go private to avoid the expense andregulations associated with remaining listed on a stock exchange. also called going private. opposite ofgoing public.
The process of moving from a government-controlled system to a privately run, for-profit system.
Industrial action during which an employer withholds work, and denies employees access to the place of work. In effect, it is a strike by the management to compel a settlement to a labor dispute on terms favorable to the employer. When lock outaction is taken by several employers in concert, it is called a joint lockout. Also called shut out.
Principles, rules and procedures selected, and consistently followed, by the management of an organization (the accounting entity) in preparing and reporting the financial statements. Accounting policies deal specifically with matters such asconsolidation of accounts, depreciation methods, goodwill, inventory pricing, and research and development costs. Accounting policies must be disclosed in the annual financial statements. See also summary of significant accounting policies.
Call or put option whose strike price is not determined until the option is exercised. At the time ofexercise, the holder can exercise the option at any underlying price that has occurred during theoption’s life. In the case of a call, the buyer will choose the lowest price, and in the case of a put, the buyer will choose the highest price. The premium on such options tends to be high since it gives the buyer great flexibility, and the writer has to take on a lot of risk.
Purchase price, including commissions and other expenses, used to determine capital gains andcapital losses for tax purposes. This can be determined by several methods. For a purchasedinvestment, the tax basis is the amount paid. If inherited, the tax basis is the value of the stock on the date of the original owner’s death. If received as a gift, the tax basis is the amount that was originally paid for the investment, unless the market value of the investment on the date the gift was given waslower. also called cost basis or basis.
Comparatively small amount of capital contributed in the very beginning by a firm’s founder(s). It is rarely provided by lendersor institutional investors because startup is the riskiest stage in a firm’s life cycle with the highest chance of failure. Also called front end money, front money, or startup capital.
Accounting: The idea in accounting that once an accounting method is adopted, it should be followed consistently from oneaccounting period to the next. If, for any reason, the accounting method is changed, a full disclosure of the change and anexplanation of its effects on the items of the financial statements must be given. One of the duties of an auditor is to make sure the consistency principle is being followed because, without this, any change might make correct interpretation of thefinancial data impossible. Also called consistency concept. See also accounting concepts.
An arbitrage strategy usually consisting of the purchase of a particular security and the sale of a similarsecurity (often the purchase of a security and the sale of a corresponding futures contract). Basistrading is done when the investor feels that the two securities are mispriced with respect to each other, and that the mispricing will correct itself such that the gain on one side of the trade will more thancancel out the loss on the other side of the trade. In the case of such a trade taking place on a security and the futures contract, the trade will be profitable if the purchase price plus the cost of carry is less than the futures price. also called cash and carry trade.
Manufacturing: Device or mechanism installed or instituted to guide or regulate the activities or operation of an apparatus,machine, person, or system. Law: Ownership of controlling shares in a company. See management control.
Type of economy that gives the government total control over the allocation of resources. A planned economy alleviates the use of private enterprises and allows the government to determine everything from distribution to pricing. Planned economies basically give the government dictatorship type control over the resources of the country. Planned economies can provide stability, but also can limit thegrowth and advancement of the country if the government does not allocate resources to the innovative enterprises.
Project network-modeling step in which the entire job is graphically subdivided into manageable work elements (tasks). WBS displays the relationship of each task to the other tasks, to the whole and the end product (goal or objective). It shows the allocation of responsibility, and identifies resources required and time available, at each stage for project monitoring andmanagement. Also called activity decomposition chart.
In the case of an interest rate swap, the market interest rate paid by the party responsible for the fixedpayments. In general, a well-defined market rate exists for this payment, and when a swap is initiated, the fixed rate paid is usually quite close to the market swap rate. However, as the swap matures the fixed rate paid on the swap stays constant, while the swap rate might change, and these two rates can diverge.
Critical appraisal involving examination, measurement, testing, gauging, and comparison of materials or items. An inspection determines if the material or item is in proper quantity and condition, and if it conforms to the applicable or specified requirements. Inspection is generally divided into three categories: (1) Receiving inspection, (2) In-process inspection, and (3) Final inspection. In quality control (which is guided by the principle that “Quality cannot be inspected into a product”) the role of inspection is to verify and validate the variance data; it does not involve separating the good from the bad