A bail-in is a strategy for saving a distressed bank or financial institution from collapse by requiring its creditors or depositors to bear part of the losses. Bail-ins’ better-known siblings, bailouts, are also designed to keep financial institutions from ruin but are different from bail-ins in that in a bailout external parties such as governments inject funds (usually from taxes) into the entity instead of requiring the cancellation of debts owed to creditors.
Bail-ins recently arose in Europe as a way to work around the political backlash associated with bailouts. This approach was pioneered in Cyprus in 2013.
A bailout is the use of external funds (generally from a government) to rescue a financial institution, business, or country on the verge of collapse. This capital injection is usually provided to avoid a bankruptcy or failure that would have broadly negative effects for a country or region.
Notorious examples of bailouts include the bank bailouts during the 2008 financial crisis and the European Union’s bailout of the Greek economy that started in 2010 and lasted almost a decade. Bailouts can be politically charged because in most cases taxpayers are the ones paying for them. Bailouts are not to be confused with bail-ins, in which the creditors of the financially distressed party are made to bear part of the burden of rescuing it.
Balance of payments
The balance of payments is a document recording all transactions between individuals, businesses, and government entities in one country (called residents) and those of other countries (called non-residents). It encompasses imports and exports of goods and services, as well as cross-border financial investments, remittances, foreign aid, and money spent by non-residents in the resident country, or vice-versa.
In the strictest sense of the term, the balance of payments should always add up to zero, but economists often refer to a balance of payments surplus or deficit. For instance, if a country does not have enough revenue coming in to pay for its imports, it must use reserves or go into debt to pay for them, generating a deficit. The opposite situation would be a surplus.
Balance of trade, also known as international trade balance, is the difference between a country’s exports and imports over a set period of time. It is part of a broader measure of all cross-border financial transactions called the balance of payments, which also includes items such as remittances, foreign aid, and international investing.
If a country sells more goods and services to other countries than it buys, it is said to have a trade surplus, or positive trade balance. Conversely, a country that buys more goods and services than it sells internationally is said to have a trade deficit, or negative trade balance. Countries with a trade deficit will have to borrow money to pay for imports, while nations with a surplus will tend to lend money.
Balance of trade
A balance sheet is a financial statement created by companies, showing a series of specific data on the company’s activities, financial position and liabilities. It is a useful tool for companies, but also for investors and shareholders to study a listed company’s business and results.
A balance sheet’s simple formula is obtained by adding up the liabilities and net capital to get data on the company’s activities. Studying company balance sheets is seen as a key part of fundamental analyses, namely the assessment of a listed company’s fundamentals in order to determine its current situation and future growth prospects.
The balance sheet is one of three major financial statements, along with the cash flow statement and the income statement. Listed companies in the UK publish their balance sheet every six months and yearly, whereas large companies publish them quarterly.
Banks are institutions that receive deposits of money from people or entities and use that money to make loans or other investments. To encourage people to deposit their money, banks pay account holders interest on the amount they deposited with the bank. They profit on the difference between the interest rate paid and the interest rate charged when they lend out money.
Banks are required by law to keep a certain amount of money as reserves to back their obligations rather than lending it out. The two main types of banks are retail banks and investment banks. Modern banks arose in Renaissance Italy in the 14th century.
Bankruptcy occurs when a person or company is not able to pay its debts. In this case, a legal bankruptcy proceeding, that can be initiated either by the debtor or creditor, begins. The competent authorities assess the available options for repaying the debt, for example by quantifying the debtor’s activities, which can then be taken from them and sold in order to repay the debt partially or fully.
According to the UK government’s website, you can declare bankruptcy when you are not able to repay your debts. You must submit an application to the Insolvency Service, which will then be assessed by an adjudicator who will decide whether it’s possible to proceed with a bankruptcy declaration. The application is done online and costs £680. If the judge authorises the bankruptcy, your assets can be sold to repay your debts, and your name will be added to the Individual Insolvency Register.
Bank of England (BoE)
The Bank of England (BoE) is the United Kingdom’s central bank. Its role is to ensure that the UK has safe banknotes, stable prices, sound banks and a resilient financial system.
The Bank of England issues banknotes and monitors the main payment systems used in the UK, including debit and credit card schemes. The institution also checks that the cost of living is stable, ensuring that money retains its purchasing power.
To ensure the economic and financial systems’ stability, the Bank of England has several tools at its disposal, including managing interest rates to keep inflation under control. The BoE also carries out supervisory activities, data collection, release of statistical reports, production of research and educational resources.
A bank reconciliation is a comparison of a person’s or business’s accounting records to their bank statement to make sure they match up. One of the most common examples of bank reconciliation in the personal sphere is balancing a checkbook, although most reconciliation is now paperless and done using software.
Performing bank reconciliations can help identify missing payments and accounting errors and give a person or entity a clearer picture of their financial situation.
A bank statement is a record of all transactions in an account at a financial instruction during a certain time period (usually a month or year). These transactions are categorised as debits or credits and include money put into the account by the holder or other parties, interest paid, fees charged, amounts spent on purchases, transfers, ATM withdrawals, and other items.
A bank statement helps an account holder keep track of their finances. The holder can compare their own records to the statement to identify any fraudulent activity or mistakes.
A banker’s acceptance is a promise guaranteed by a bank that a specific party will make a payment on a future date. Also known as a bill of exchange, this instrument is like a cheque, but it is post-dated and cannot be converted to cash immediately. It is most commonly used for international transactions like import-export where parties don’t know each other, and it gives the seller (exporter) the security of the bank’s creditworthiness rather than that of the buyer (importer).
Unlike other time drafts, which are promises to pay on a future date, the ownership of banker’s acceptances can be transferred before its maturity date. This means these drafts can be traded as low-risk money market instruments on the secondary market.
A bar chart is a graphical representation of how prices move over a certain period time. Technical traders use this type of chart, which plots the opening, high, low, and closing prices of a security over a given timeframe. The chart’s bars are commonly coloured red to reflect negative price movements and green to reflect positive price movements. Bar charts help traders identify trends in the price movements of assets or securities.
In general parlance and in other fields, a bar chart refers to a different graphic representation of data, also known as a bar graph. This type of bar chart is a way to visually represent and compare different categories of data. For example, an economist could chart the comparative exports of different types of grains (corn, wheat, etc.), measured in tons, by plotting them along the x-axis, with the height of the bar showing the relative weight of each crop export.
BAT is an acronym for three of China’s largest and most dynamic technology companies:
Baidu Inc., Alibaba Group Holdings Ltd. and Tencent Holdings Ltd.
Baidu provides internet services, AI and has one of the world’s top search engines. Alibaba’s focus is on e-commerce, although it has also expanded into areas like cloud computing. Tencent is the world’s largest video game retailer, and its business portfolio also includes the social media platform WeChat.
BAT stocks are the subject of much debate and speculation among investors, with one camp insisting they are overvalued and another underscoring their upside potential. The attention they garner is comparable to the buzz surrounding companies like Alphabet, Meta, Netflix, Amazon and Apple on the US market.
A bear market means a prolonged and pronounced drop in the value of the stock market (of at least 20% over two months or more). Its converse is a bull market, which is marked by sustained growth.
A bear market is usually fueled by pessimism: investors see economic warning signs like rising unemployment and flee equities for the relative safety of fixed income or other safe-haven assets.
A bearer bond is a type of fixed-income debt instrument issued by businesses or governments that is unregistered. This means no records are kept of who owns it or when it changes hands.
Bearer bonds are like cash in that whoever holds them owns them. This makes them a very anonymous asset, so in the past they have often been used for schemes like money laundering or tax evasion. They are also vulnerable to forgery, loss and theft. Because of these downsides, bearer bonds are a thing of the past in most countries.
Behavioural economics is an academic discipline at the intersection of psychology and economics. It studies the human factors that influence economic decision-making, with a focus on empirical data. It is a relatively new field in economic pioneered by Richard Thaler of the University of Chicago.
One of its premises is that people don’t always make the rational, well-informed decisions that would lead the market to correct itself naturally.
Key terms in this field include the availability heuristic (where people rely on easily recalled information rather than objective data to make decisions), bounded rationality (which explores the limits to people’s rationality in terms of time and cognitive ability), and bounded self-interest (people’s willingness to sacrifice for others rather than acting out of pure self-interest).
Behavioural finance is an academic discipline that uses psychology to explore why participants in financial markets make the choices they do. It is particularly concerned with human irrationality and flawed decision-making.
This field of study arose in the 1908s and 1990s as a response to the efficient market hypothesis (EMH), which holds that investors can’t beat the market because security prices are always “fair” and reflect all available information.
Behavioural finance, however, examines how people’s choices are often irrational and emotionally charged, leading to market inefficiencies. These counterproductive behaviours are termed biases, and a few of the most common are herd behaviuor, overconfidence, and confirmation bias.
The term “bid” refers to the price at which a buyer is willing to purchase a security, commodity, or currency on a financial market, as well as the quantity they wish to buy.
The related term “ask” refers to the price the seller wants for the asset. The difference between these two prices is the bid-ask spread. The bid represents the demand for a particular asset, and the bid-ask spread measures market liquidity.
In the context of securities markets, a bid price is the highest amount that a buyer is willing to pay for a given financial product. It is the counterpart to the ask price (or sell price or offer price), which is the lowest price at which a seller is willing to sell a security. The difference between the two is the bid-ask spread, also known as simply the spread.
A more general definition of bid price is the highest price a buyer is willing to pay for a service, asset, or contract (not limited to securities).
The bid-ask spread is the amount by which the asked price, or the minimum amount requested by the seller, exceeds the bid price, or the maximum amount the buyer is willing to pay. In a securities trading context, it is often shortened to “the spread,” and it is an important indicator of a security’s liquidity. The smaller the difference between the bid and ask prices, the more liquid the stock or instrument is, which means it is easier to convert into cash. If the spread is 0, the asset in question is known as a frictionless asset.
A binary option is a financial instrument that centres on the question of whether a commodity, stock, currency pair, or index will close above a certain price by a certain date. If it does, the holder of the option is paid $100, regardless of the price they paid for the option, but if it does not, the worth of the option falls to $0, and the investor loses all money invested. The price threshold is called the strike price, and an option that closes above it is said to be in the money.
Binary options can be seen as attractive because they are cheaper to buy than the underlying asset and can magnify returns. However, they present a higher risk because they only have two possible outcomes and the investor wagers everything. They are banned in many economies because they are prone to frau and can be considered a form of gambling.
A bitcoin trader is an intermediary that deals in the cryptocurrency Bitcoin with the aim of profiting by buying low and selling high. They can buy Bitcoin using fiat money—money backed by the official government of a nation, such as US dollars— or altcoins, which are other cryptocurrency alternatives. The newness and volatility of cryptocurrencies makes Bitcoin trading an inherently risky activity.
A blue chip is a highly successful corporation with a sound, longstanding reputation for good performance. The term is taken from poker, where blue chips represent the highest-value bets.
Examples of blue chip firms include Coca Cola, Walmart, IBM, and Apple.
A blue chip company usually pays out hefty and growing dividends to its shareholders. Blue chip stocks are considered safe investments. However, their price tag matches their high reputation, so they are not considered the best investments for a highly growth-focused objective.
Bollinger Bands® are a proprietary analysis tool used to measure volatility in the prices of securities (such as stocks) over time. The three bands displayed in the visual rendering of this analysis represent the simple moving average, sandwiched by bands at two standard deviations above and below. Because standard deviation measures the variation or dispersion within a dataset, a more volatile price will have a wider band. Traders often consider these bands when deciding to buy or sell securities. The method was created by John Bollinger in the 1980s.
Bombay Stock Exchange
The Bombay Stock Exchange was the first securities market in Asia and is now the biggest securities market in India. It is also among the top ten exchanges in the world by market capitalization. Officially founded in 1875, it has its roots in groups of brokers who would meet and trade under banyan trees in Bombay.
A bond is a debt instrument issued by a government or corporation to raise capital for its operations. Most bonds pay a fixed amount of interest to the holder (called a coupon) and have a maturity date, which is the date on which the initial amount lent by the bondholder (the principal) is paid back. Most bonds are tradeable instruments, and instead of holding them to maturity, many investors buy and sell them to profit from changes in price due to shifting interest rate conditions. Unlike shareholders, who are partial owners of a company, bondholders are lenders or creditors.
Bond Equivalent Yield
Bond Equivalent Yield (often abbreviated as BEY) is a hypothetical yield used to compare fixed income securities that do not pay out on an annual basis with those that do. This figure, expressed as a percentage, is different from the coupon rate, which is the periodic interest paid to the bondholder for most bonds (but not zero-coupon bonds). The formula for calculating a Bond Equivalent Yield is ((Par Value – Purchase Price) / Purchase Price) * 365/ Days to maturity.
Bond ETF is short for bond exchange-traded fund, or a fund that trades throughout the day on a securities market and tracks an underlying index of bonds. These funds are most often passively managed. They combine the ease of stock trading with access to the bond market, and they are more liquid and provide more diversity than individual bonds, since an entire portfolio can be bought or sold in a single trade. Bond ETFs generally pay out interest on a monthly basis, and the investor’s principal is exposed to more risk in a bond ETF than it would be if holding an individual bond.
Bond funds, also known as debt funds, are pools of money that is invested exclusively in bonds or other debt securities to generate monthly income for their investors. They are generally grouped according to types of bonds (corporate, municipal, government, etc.), bond rating (high or low risk), and time to maturity (short-term or long-term).
Bond funds have low barriers to entry as they have little to no minimum investment requirements. They are more liquid and provide more diversity than individual bonds. However, a bond fund will charge a fee to cover its management services. Also, since it includes a mix of securities, the interest payments will vary from month to month instead of being fixed like those of an individual bond.
Bond insurance is coverage purchased by a bond issuer to insure a bond’s principle and interest to bondholders if it defaults on those payments. It enhances the issuer’s creditworthiness, which makes it less expensive for it to borrow money (i.e. investors are willing to buy lower-yield bonds). The insurance premium is set based on the perceived risk of default, and insurers generally only insure investment-grade bonds. Investors benefit because the insurer will pay out if the bond issuer cannot. Issuers use this option when it reduces the overall cost of financing their debt.
A bond ladder is a set of bonds or other fixed-income securities (like certificates of deposit) with staggered maturity and interest payment dates. This means their interest and principal is repaid at different intervals, providing a constant cash flow and regular opportunities to reinvest, allowing investors to take advantage of more favourable market conditions.
A bond ladder provides more diversity than buying a single bond, shielding an investor from risks like default by the issuer. It also reduces interest rate risk, or the possibility of being locked in long-term to an unfavourable yield. The bonds at the top of the ladder (with the longest time to maturity and generally higher yields) can also counterbalance drops in yields for short-term bonds.
The bond market is a space for buying and selling debt securities, usually issued by governments or corporations looking to raise capital to fund projects or finance existing debt. It is also known as the debt market or credit market.
The bond market can be divided into two main categories: the primary market and the secondary market. The primary market involves purchasing new debt directly from the issuer. On the secondary market, brokers trade in bonds and other debt securities that have already been issued, profiting from the difference between the price at which they buy bonds (bid price) and the price at which they sell them (ask/offer price).
A bond rating is a score or grade assigned to a bond by a rating agency based on the creditworthiness of the issuer and the likelihood of a default, which is when the issuer is unable to pay the bond’s principal when it comes due.
The three most popular rating agencies are Standard & Poor’s, Moody’s and Fitch. These ratings apply to all kinds of bonds, including corporate, municipal and sovereign bonds.
In general, a bond with a lower rating will have a higher yield (meaning it pays out a higher interest rate) to compensate for the increased risk of default.
A break-even analysis is a financial tool used to determine the point at which an investor would recoup the amount invested. For stocks, for instance, this is the point at which the stock’s market price is equal to its original cost.
This method can also be used in a business context to compare revenue and costs in different scenarios and ascertain how much sales a business needs in order to cover its expenses.
In investing, the breakeven point (BEP) is the price at which an investor will neither lose nor gain money on an investment. It is also known as the break-even price. In the case of stocks, an investor’s BEP is when the market price is equal to the price the investor paid for it. For options, it is the strike price plus or minus the premium paid (depending on whether it is a call or put option).
Brexit is a coinage combining the words “British” and “exit.” It describes the United Kingdom’s decision to withdraw from the European Union as a result of a referendum held on June of 2016. Brexit took effect on January 31, 2020. Brexit has had broad ramifications for the UK’s economy, financial sector, and currency. It has changed the dynamics of commerce between the island nation and its mainland trading partners, and the details of the new relationship between the UK and members of the EU continue to be negotiated.
A broker is an intermediary who buys or sells something for someone else. Brokers can arrange the exchange of real estate, art, commodities, insurance, and other products and services; however, this term is most commonly used to refer to an investment broker. This type of broker can be a company or individual that acts as an agent for a client and buys and sells financial products on their behalf. They usually earn by charging a fee or commission for each transaction.
A brokerage account is a financial account that an investor opens with a brokerage firm. The investor puts funds into the account, and a broker, or an intermediary acting on behalf of the investor, then makes trades with those funds (buying and selling stocks, bonds, and other securities).
Brokerage accounts can be full service, which means they provide thorough guidance but charge high commissions or advisory fees. Alternatively, discount brokerages provide less guidance but lower fees, they are often simply on online interface allowing investors to execute their own trades.
Brokerage accounts are taxable, meaning investors must pay taxes on any capital gains in the account. They are different from retirement accounts, such as IRAs and Roth IRAs, which are special tax-sheltered alternatives.
In finance, when the word “bull” is used as an adjective, it usually refers to a market where prices are rising or expected to rise (a “bull market”). As a noun, a “bull” is a person or entity that buys financial security in the expectation that its value will increase.
In this context, the opposite of “bull” is “bear.” The term “bear” denotes the expectation that prices will fall. In a bear market, demand for securities is strong, and supply is weak, whereas the opposite is true in a bull market.
A bull market is a sustained cycle of rising stock market prices. The term generally refers to a positive run that lasts more than two months, represents a gain in value of over 20%, and is sandwiched between two bear market periods. Bull markets are marked by investor confidence, which drives strong demand for stocks. They are also often accompanied by economic expansion, GDP growth, and low unemployment.
The business cycle is an economic phase characterised by a period of growth or degrowth. It is a trend that constantly repeats itself over time and is related to the increase or decrease of a country’s Gross Domestic Product (GDP).
Economic cycles affect all national economies, manifesting themselves consistently on a global scale or just on a group of local economies or one country’s economy.
Usually, economic cycles are characterised by an expansion phase (economic growth) and a contraction phase (economic depression).
As well as these two phases, there are two more economic cycles, i.e. the peak moment, or an economy’s maximum growth, and the trough period. The economic cycle changes during these two moments, switching from a growth phase to a contraction and vice versa.
Buy-in refers to an operation carried out by an investor when a seller doesn’t deliver at all or delivers supplies late. In this case, the investor carries out a protective investment, repurchasing the shares that the issuer didn’t supply or didn’t deliver within the agreed time frames.
Before this operation, a buy-in notice is issued whereby the initial seller is warned about this procedure. Often, the seller has to refund the buyer the difference between the cost of repurchasing the shares and that initially agreed.
Repurchasing shares helps the investor hedge an open position, this is why it’s seen as a defensive or safety investment.