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Understanding financial terms

Assets can include collectible items such as this 1955 Patek Philippe watch, which has appreciated considerably over the past 50 years.


Financial Markets
Economic Indicators

(CNN) -- Following are some common terms you might come across in looking at your financial affairs.

Arbitrage: The act of buying and selling the same asset in different markets to take advantage of price variations.

Asset: An item owned or controlled by an individual or an economic entity such as a company. Assets can be current assets (such as cash, inventory and accounts receivable), fixed assets (such as a building, machinery and plant) and intangible assets (such as goodwill, patents and intellectual property) and long-term investments.

Balanced investment portfolio: This is a group of investments which includes a mix of all the usual asset classes. Typically, it might be made up of cash, fixed interest, property, and local and international shares.

Buy-back: The re-purchasing of a previously sold asset. Often companies will offer to buy shares back from shareholders as part of a capital management program. Also used in managed funds and derivatives.

Cash rate: A benchmark rate for bank lending, usually set by a country's central bank.

Currency risk: The risk involved in transactions where more than one currency is involved. For example, a movement in international exchange rates may change the cost of buying an asset before the purchase is completed.

Equities: A synonym for shares. Equity also refers to the after-debt value of an asset.

Hedge fund: A private investment fund that uses high risk techniques such as short selling and derivatives to achieve a higher return. Maligned in some quarters because of the perception that some hedge funds have so much leverage their activitives can be detrimental to the global financial system.

Initial public offer: The first sale of a company's shares to the public. Commonly known by the abbreviation IPO.

Intestate: To die intestate is to die without leaving a valid will. In these circumstances, a person's assets are distributed according to the law of the land. From the Latin testis, for "witness."

Junk bond: A high risk, high yielding debt security issued by a company that is rated below BBB. Interest rates typically are three or four percentage points above safer, higher-rated securities. Junk bonds were a big part of the lending scene in the U.S. in the 1980s and early 1990s.

LIBOR: The abbreviation for the London Inter Bank Offered Rate, set at 11 a.m. daily in London by a number of major banks. It is the rate at which big banks will lend to each other, and so is a reference rate for other lending.

Limited liability: A company structure in which a shareholder's liability is limited to the value of his/her shares in the company.

Purchasing power: The ability to use a certain sum of money to buy a physical asset. For example, $100 usually will buy more staple goods (food, transport, clothing) in a developing economy than it will in the capital city of an advanced economy, where living costs can be expected to be higher. But anomalies abound.

Rights issue: An offer to the holder of an existing security (such as a share) to buy new securities issued by the same company, usually at a discount to the current market price.

Risk weighting: An estimate of the relative risk between different forms of investment. An investment in an unknown or new venture will have a higher risk weighting than one in an operation with an established track record.

Seller's market: This occurs when goods are scarce and in demand, allowing sellers to obtain better prices.

Shares: A share represents ownership of part of a company. Shares in companies that are listed on a stock exchange can be bought or sold at the prevailing market price. Also known as equities.

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