Definition of 'Balance Of Payments - BOP'
A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa.
Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency.
This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.
Definition of 'Current Account Deficit'
Occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.
A substantial current account deficit is not necessarily a bad thing for certain countries. Developing counties may run a current account deficit in the short term to increase local productivity and exports in the future.
Definition of 'Deficit'
The amount by which expenses exceed income or costs outstrip revenues. Deficit essentially refers to the difference between cash inflows and outflows. It is generally prefixed by another term to refer to a specific situation - trade deficit or budget deficit, for example. Deficit is the opposite of "surplus" and is synonymous with shortfall or loss.
For example, if a nation has exports of $2 billion and imports of $3 billion in a given year, it would have a trade deficit of $1 billion for that year. Similarly, a government that has revenues of $10 billion and expenditures of $12 billion in a particular year would have a budget deficit of $2 billion in that period.
Large and growing deficits over prolonged periods of time are unsustainable in most cases, irrespective of whether they are incurred by an individual, corporation or government. Huge deficits over a number of years can wipe out equity for an individual or a company's shareholders, eventually leaving bankruptcy as the only option. Although sovereign governments have a much greater capacity to sustain deficits, negative effects in such cases include lower economic growth rates (in case of budget deficits) or a plunge in the value of the domestic currency (in case of trade deficits).
Definition of 'SME'
SME sector of India is considered as the backbone of economy contributing to 45% of the industrial output, 40% of India’s exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets.
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Definition of 'Liability'
A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.
Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability.
Outside of accounting and finance this term simply refers to any money or service that is currently owed to another party. One form of liability, for example, would be the property taxes that a homeowner owes to the municipal government.
Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.
Definition of 'Balance Sheet'
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).
Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.
Definition of 'Financial Statements'
Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.
It is a standard practice for businesses to present financial statements that adhere to generally accepted accounting principles (GAAP), to maintain continuity of information and presentation across international borders. As well, financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes. Financial statements are integral to ensuring accurate and honest accounting for businesses and individuals alike.
Definition of 'Inclusion Amount'
An additional amount of income that a taxpayer may have to report as a result of leasing a vehicle or other property for business purposes. The inclusion amount must be reported if the fair market value of the leased vehicle exceeds a certain threshold.
The inclusion amount is designed to limit the taxpayer's deduction amount to the amount that would be deductible as depreciation if the taxpayer owned the vehicle or equipment. This prevents the taxpayer from being able to deduct the entire amount of the larger lease payment versus the lesser amount of the depreciation.
The inclusion amount will differ according to the type of property or equipment that is leased; the inclusion amount for cars is different than the rate applied to office equipment or computers. Car leases require that an inclusion amount be included for every year that a vehicle is leased, while other property needs an inclusion amount only if the business usage drops to 50% or less during the year.
Definition of 'Maximum Loan Amount'
Describes the maximum amount that a borrower can borrow. The maximum loan amount is based on a combination of different factors involving the specific loan program, the value of the property that secures the loan and the borrower's qualifying ratios and credit history. Lenders typically offer various loan programs with maximum loan amounts tailored for different classes of borrowers.
In the mortgage industry, the Office of Federal Housing Enterprise Oversight (OFHEO) sets maximum loan amount limits on the mortgages that Fannie Mae and Freddie Mac may guarantee.
Because Fannie Mae and Freddie Mac guarantee a large percentage of mortgages originated in the United States, the "conforming loan limit" is an important number in the mortgage finance industry, as large mortgage default levels will create great strain on Fannie Mae and Freddie Mac.
Definition of 'Loan-To-Value Ratio - LTV Ratio'
A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.Calculated as:
For example, Jim needs to borrow $92,500 to purchase a $100,000 property. The LTV ratio yields a value of about 92.5%. Since bankers usually require a ratio at a maximum of 75% for a mortgage to be approved, it may prove difficult for Jim to get a mortgage.
Similar to other lending risk assessment ratios, the LTV ratio is not comprehensive enough to be used as the only criteria in assessing mortgages.
Definition of 'Total Debt Service Ratio - TDS'
A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt. More specifically, this ratio shows the proportion of gross income that is already spent on housing-related and other similar payments.Receiving a ratio of less than 40% means that the potential borrower has an acceptable level of debt.
Definition of 'Recurring Debt'
Any payment used to service a debt obligation that occurs on a continuing basis. Recurring debt involves payments that cannot be easily canceled at the payer's request, including alimony or child support, and loan payments.
Definition of 'Five Cs Of Credit'
A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default.
The five Cs of credit are:
-Character
-Capacity
-Capital
-Collateral
-Conditions
Definition of 'Unsecured Loan'
A loan that is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral. An unsecured loan is one that is obtained without the use of property as collateral for the loan. Borrowers generally must have high credit ratings to be approved for an unsecured loan.
Because an unsecured loan is not guaranteed by any type of property, these loans are bigger risks for lenders and, as such, typically have higher interest rates than secured loans (such as a mortgage). Although the interest rates are higher, the rates may still be lower than those of credit cards. Unlike mortgage loans, the interest on an unsecured loan is not tax deductible.
An unsecured loan may be a good option for individuals who do not have enough equity in their homes to be approved for a home equity loan. An unsecured loan may have a fixed interest rate and be due at the end of a specified term, or it can exist as a revolving line of credit with a variable interest rate.
Definition of 'Signature Loan'
A type of personal loan offered by banks and other finance companies that uses only the borrower's signature and promise to pay as collateral.
A signature loan can typically be used for any purpose the borrower chooses, although the interest rates will be higher than most forms of credit due to the lack of any real collateral.
The lender will typically just look for a solid credit history and a source of income when deciding whether to issue a signature loan. A co-signer may be requested by the lender, but the co-signer would only be signing a promissory note, and would be called upon only in the event that the borrower is unable to repay the loan.
Interest rates on signature loans can run very high - even higher than credit cards. Borrowers should only choose this option when they are in great need and they have the income to repay the loan.
Also known as a "good faith loan" or "character loan".
Definition of 'Rule Of Thumb'
A guideline that provides simplified advice regarding a particular subject. A rule of thumb is a general principle that provides practical instructions for accomplishing or approaching a certain task. Typically, rules of thumb develop as a result of practice and experience rather than scientific research or theory.
Investors may be familiar with a variety of "financial rules of thumb" that are intended to help individuals learn, remember and apply financial guidelines, including those that address methods and procedures for saving, investing and retirement. Although a rule of thumb may be appropriate for a wide audience, it may not apply universally to every individual and unique set of circumstances.
There are a number of rules of thumb that provide guidance for investors. Well-known financial rules of thumb include:
- A home purchase should cost less than two and a half years' worth of your income.
- Always save at least 10% of your take-home income for retirement.
- Have at least five times' worth your gross salary in life insurance.
- Pay off your highest-interest credit cards first.
- The stock market has a long-term average return of 10%.
- You should have an emergency fund equal to at least three to six months' worth of household expenses.
- Your age represents the percentage of bonds you should have in your portfolio.
- Your age subtracted from 100 represents the percentage of stocks you should have in your portfolio.
There are also rules of thumb for determining how much net worth you will need to retire comfortably at a normal retirement age. Here is the calculation that Investopedia uses to determine your net worth:
If you are employed and earning income:
((your age) x (annual household income)) / 10
If you are not earning income or you are a student:
((your age – 27) x (annual household income)) / 10
Definition of 'Four Percent Rule'
A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that will allow funds to be withdrawn for a number of years. The 4% rate is considered to be a "safe" rate, with the withdrawals consisting primarily of interest and dividends. The withdraw rate is kept constant, though it can be increased to keep pace with inflation.
The four percent rule helps financial planners and retirees set a portfolio's withdrawal rate. Life expectancy plays and important role in determining if this rate is going to be sustainable, as retirees who live longer will need their portfolios to last a longer period of time and medical costs and other expenses can increase as the retiree ages.
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programs.
The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment.
Banking
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.
Definition of 'Capital Markets'
A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.
Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is tapping the investing public for capital and is therefore using the capital markets. This is also true when a country's government issues Treasury bonds in the bond market to fund its spending initiatives.
Definition of 'Primary Market'
A market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.
Also known as "new issue market" (NIM).
The primary markets are where investors can get first crack at a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. Exchanges have varying levels of requirements which must be met before a security can be sold.
Once the initial sale is complete, further trading is said to conduct on the secondary market, which is where the bulk of exchange trading occurs each day. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred.
Definition of 'Public Offering Price - POP'
The price at which new issues of stock are offered to the public by an underwriter. Because the goal of an IPO is to raise money, underwriters must determine a public offering price that will be alluring to investors. When underwriters determine the public offering price, they look at factors such as the strength of the company's financial statements, how profitable it is, public trends, growth rates and even investor confidence.
Investors and analysts sometimes use the initial public offering price as a benchmark against which a stock's current price can be compared. If a company's share price rises significantly above its initial public offering price, the company is considered to be performing well. However, if the share price later dips below its initial public offering price, this is considered a sign that investors have lost confidence in the company's ability to create value.
Definition of 'Initial Public Offering - IPO'
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.
Also referred to as a "public offering."
Definition of 'Direct Public Offering - DPO'
When a company raises capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. DPOs are an alternative to underwritten public offerings by securities broker-dealer firms where a company's shares are sold to the broker's customers and prospects.
Direct public offerings are considerably less expensive than traditional underwritten offerings. Additionally, they don't have the restrictions that are usually associated with bank and venture capital financing. On the other hand, a DPO will typically raise much less than a traditional offering.
Definition of 'New Fund Offer - NFO'
A security offering in which investors may purchase units of a closed-end mutual fund. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities.
A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to further operations. New fund offers are often accompanied by aggressive marketing campaigns, created to entice investors to purchase units in the fund. However, unlike an initial public offering (IPO), the price paid for shares or units is often close to a fair value. This is because the net asset value of the mutual fund typically prevails. Because the future is less certain for companies engaging in an IPO, investors have a better chance to purchase undervalued shares.
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