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Kevin Mao

Definitions - 12 views

started by Kevin Mao on 18 Apr 12
  • Kevin Mao
    #1 Kevin Mao on 18 Apr 12
     
    This topic will include the definitions of key terms that relate to Finance, Banking, and the Shadow Banking System.
  • Kevin Mao
    #2 Kevin Mao on 17 May 12
     
    Shadow Banking - Financial transactions across the global financial system that goes unregulated. It can also refer to unregulated activity by regulated financial institutions.

    http://www.investopedia.com/terms/s/shadow-banking-system.asp
  • Kevin Mao
    #3 Kevin Mao on 18 May 12
     
    Leverage - "1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

    2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

    Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.

    Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value."

    http://www.investopedia.com/terms/l/leverage.asp#axzz1vAKg26eK
  • Kevin Mao
    #4 Kevin Mao on 18 May 12
     
    Derivative - "A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.

    Derivatives are contracts and can be used as an underlying asset.

    Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes."

    http://www.investopedia.com/terms/d/derivative.asp#ixzz1vBC9gCij
  • Kevin Mao
    #5 Kevin Mao on 18 May 12
     
    Hedge Fund - "An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

    It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market."

    http://www.investopedia.com/terms/h/hedgefund.asp#ixzz1vByyH1LE
  • Kevin Mao
    #6 Kevin Mao on 18 May 12
     
    Stress Testing - "A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge how certain stressors will affect a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios.

    A stress test is also used to evaluate the strength of institutions. For example, the Treasury Department could run stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Changing factors could include interest rates, lending requirements or unemployment."

    http://www.investopedia.com/terms/s/stresstesting.asp#ixzz1vBzp5bjc
  • Kevin Mao
    #7 Kevin Mao on 18 May 12
     
    Housing Bubble - "A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts."

    http://www.investopedia.com/terms/h/housing_bubble.asp#ixzz1vC0IXE81
  • Kevin Mao
    #8 Kevin Mao on 18 May 12
     
    Nationalization - "Nationalization is the takeover of ownership and control of a privately owned enterprise by the state."

    http://www.thecanadianencyclopedia.com/articles/nationalization
  • Kevin Mao
    #9 Kevin Mao on 18 May 12
     
    Systemic Risk - "The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or "market risk.""

    http://www.investopedia.com/terms/s/systematicrisk.asp#ixzz1vC39Tdft
  • Kevin Mao
    #10 Kevin Mao on 18 May 12
     
    Moral Hazard - "The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles."

    http://www.investopedia.com/terms/m/moralhazard.asp#ixzz1vC3Kyeck
  • Kevin Mao
    #11 Kevin Mao on 18 May 12
     
    Prime Rate - "The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are available for mortgage, small business and personal loans."

    http://www.investopedia.com/terms/p/primerate.asp#ixzz1vC61RBXn
  • Kevin Mao
    #12 Kevin Mao on 18 May 12
     
    Proprietary Trading - "When a firm trades for direct gain instead of commission dollars. Essentially, the firm has decided to profit from the market rather than from commissions from processing trades."

    http://www.investopedia.com/terms/p/proprietarytrading.asp#ixzz1vC6yJ52J
  • Kevin Mao
    #13 Kevin Mao on 18 May 12
     
    Interest - "1. The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

    2. The amount of ownership a stockholder has in a company, usually expressed as a percentage.

    Interest is commonly calculated using one of two methods: simple interest calculation, or compound interest calculation."

    http://www.investopedia.com/terms/i/interest.asp#ixzz1vC730cbi

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