In corporate finance, the term earnings refers to a company’s profits, or their net income, which is shown on the bottom line of the income statement. It is calculated as a business’s total sales (or revenue) less all expenses and interest. In most cases taxes are also subtracted from revenue to calculate earnings. Earnings is a very important figure used for accounting and taxes purposes, as well as to determine a company’s value, performance, and stock price.
Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA)
EBITDA is a way of measuring just a company’s operational performance, without the interference of external and non-operational factors such as financing decisions, the tax environment, and accounting techniques. The formula for EBITDA is EBITDA=Net Income + Interest + Taxes + Depreciation + Amortisation.
Analysts often use EBITDA as a way of stripping away distortions to get a clearer comparison between companies and a more accurate idea of their profitability. This metric can also be used to estimate cash flows or as the basis for valuing an enterprise. Some analysts criticise the widespread use of EBITDA, citing that it ignores the cost of assets and working capital, among other weaknesses. EBITDA is not recognised under the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).
Earnings per Share
Earnings per Share (EPS) is a company’s total profit divided by the total number of company shares held by shareholders (not including those held by the company itself). It can be tracked over time and is an important measure of a company’s profitability and overall worth. It can also be used as the basis for calculating other important ratios and figures, like price-to-earnings or the price of a stock itself.
EPS does have limitations as a measure of a company’s profitability. For instance, it does not take into account the capital required to generate those earnings. Also, a company could buy back its own shares, reducing the outstanding shares and inflating the EPS ratio.
Earned Income Credit (EIC)
The Earned Income Credit, also referred to as the Earned Income Tax Credit, is a mechanism instated by the US federal government to reduce the amount of taxes owed by taxpayers who fall on the lower end of the earning spectrum, especially when they have children.
Originally created in 1975, the EIC was successively expanded in several subsequent legislative initiatives. It is meant to subsidise the earnings of working families, encourage earners to work, and lift people out of poverty.
ECN stands for Electronic Communications Network, which is a digital forum that matches buyers and sellers of securities, usually stocks and currencies, and facilitates the trade or automatically executes the buy or sell order. ECNs’ advantages include cutting out middlemen, greater privacy than trading over an exchange, and the ability to engage in after-hours trading. ECNs can have access fees and commissions that raise the overall price of trades. The U.S. Securities and Exchange Commission requires that ECNs be registered as broker-dealers.
Econometrics is the application of statistical and mathematical methods in order to analyse economic data. The purpose of this activity is to develop financial and economic theories and hypotheses, for example to try to forecast future trends using findings provided by historical data. Through the use of econometrics, you can develop new strategies or test the effectiveness of pre-existing theories and hypotheses through data comparison.
Firstly, the method involves analysing a set of data, through which you suggest a financial or economic theory to explain the relationship between the variables. Following this, a statistical model capable of quantifying the economic theory is specified. Finally, economic forecasts are made, and tests are performed to verify the hypothesis.
The economic calendar is the timeline of events or releases that are predicted to have a major impact on specific securities, economic sectors, or whole markets. These key happenings are called market-moving events, and investors use them to plan the timing, volume, and direction of trades.
Market-moving events that may be put on an economic calendar include countries’ economic reports on specific aspects of the economy or projections of future economic performance. Examples are interest rate changes, release of unemployment data, release of the consumer price index, or publication of gross domestic product data. The events included on economic calendars can vary from calendar to calendar depending on the focus of the entity that compiles it.
Economic cycle is the term for an economy’s periodic swings between expansion (growth) and contraction (recession). It is also known as the business cycle or trade cycle. The economic cycle is most often calculated as a function of GDP growth. History does not show a regular pattern in terms of the duration of the phases. The average length of full cycles over the last seven decades in the United States has been around five and a half years, but individual cycles within that period depart widely from that average.
Economic growth refers to the increase in the production of goods and services in an economy during a specific period of time, for example in a month or a year. This phenomenon can be measured in real terms by adjusting economic growth for inflation, or in nominal terms without considering price fluctuations. One of the most commonly used metrics is GDP, i.e. gross domestic product, which measures a nation’s aggregated economic growth.
During periods of economic growth, there is typically an increase in general wealth, consumption, employment and technological innovation. Indeed, the perception of wellbeing pushes consumers to increase purchases and investments, whilst companies increase supply to satisfy the growth in demand. This also has positive impacts on the financial market, favouring property investments and listed companies whose business is linked to economic growth.
Economic Value Added (EVA™)
Economic Value Added (EVA™), also known as economic profit, is the company’s operating profit minus the return investors expect on the capital they have put into the business (the cost of capital).
EVA™ is used to measure whether the business is creating value with the capital invested, and it can therefore be used by investors to determine whether a business is a good investment. Evaluations according to EVA™ are based on the philosophy that a company’s returns must exceed the cost of capital for the company to be considered profitable. This indicator is trademarked by the consulting company Stern Stewart & Co.
Economics is a social science that studies how wealth is distributed, produced, consumed, and transferred in a society. It examines the choices made by both individuals and groups and how they interact to affect productivity, efficiency, and the availability or accumulation of resources.
The discipline of economics is divided into two main categories: microeconomics and macroeconomics. Microeconomics looks at the behaviour and choices of individual economic agents, such as how a price is set or what is expected for a price. Macroeconomics focuses on the entire economic community, analysing factors such as growth, inflation, use of resources, and policy.
Three major economic systems postulated by economics are capitalism (private ownership), communism (state ownership), and socialism (social ownership). Many consider Scottish economist Adam Smith to be the founder of modern economics. Other key figures include Karl Marx and John Maynard Keynes.
Economies of scale
The term economies of scale refers to the increase in efficiency of a company’s production process. This occurs when a company is able to reduce costs and increase productivity at the same time. This result is achieved by increasing the number of goods produced, in order to reduce costs on a larger number of goods.
The economies of scale process involve an inversely proportionate relationship between the fixed cost per unit and the quantity of goods produced. This dynamic is also reflected on variable costs. According to the economies of a scale model, large companies have a competitive advantage compared to small and medium-sized companies.
Economies of scale can be internal or external, favoured by processes such as technological innovation, manufacturing process management efficiency and raw material purchasing dynamics.
In economic terms, elasticity refers to the relationship between economic variables in terms of responsiveness. It’s a measure to calculate the effects of change on one variable that is reflected on another variable. A classic example of elasticity is the relationship between supply and demand, namely the change in demand of goods that occurs when the price of such goods changes.
Elasticity measures the sensitivity of a variable in relation to another variable. This is calculated using a numerical coefficient.
When elasticity is 0, it means that the analysed variable does not change regardless of the reference variable’s changes. This occurs when the demand for a good does not change even if its price increases or decreases. If the elasticity is 1 or higher, it means that the variable changes proportionately to the reference variable.
An embargo occurs when a government bans trade with another country or prohibits the exchange of a type of good. It is used as a political tool to pressure a country to conform to international demands on a specific issue by squeezing supply, slashing demand, or both. Trade embargoes are often mandated by the United Nations in response to humanitarian violations or threats to peace.
For example, the most-high profile embargoes imposed by the US in recent history have been against Cuba, North Korea, Iran, and Venezuela.
In personal finance, an emergency fund is a reserve of cash or other highly liquid assets that can be used to meet large, unexpected expenses like a medical emergency, a major home repair or to provide a financial cushion in the event of loss of income.
Many financial advisors encourage people to first build up their emergency fund prior to working towards other investment goals such as retirement savings. Emergency funds should usually be large enough to cover three to six months of core expenses.
Emerging market is a term used to describe countries transitioning from a developing to developed economy. The per-capita income of these countries is usually lower than average, but their economies are growing fast and have major potential to expand.
An emerging market is often undergoing a shift in focus from raw goods to industrialisation. From an investor’s perspective, emerging markets are attractive due to the potential for high growth and returns, but this growth is also accompanied by greater volatility and greater risk. Most experts classify around 20 economies as emerging markets, with notable examples including China, India, Russia, and Brazil.
An entrepreneur is a person who opens a new business, taking risks in exchange for the potential benefits of the business. Typically, an entrepreneur is an innovation-oriented individual who thinks up new products and services and tries to anticipate market trends. They play a key role as an inspiration, bring new ideas to the market and attempt to satisfy user needs.
The entrepreneur’s activity is called entrepreneurship, i.e. the creation of a new business. Among the challenges, an entrepreneur faces are bureaucracy, the need to hire talent and finding resources to grow the business.
Environmental economics is an academic discipline that examines the economic ramifications of environmental policies. Among its core premises is that environmental systems provide economically valuable benefits that are often not taken into account by traditional economic models.
These benefits are called “economic goods” and include clean air or clean water, for example. A major branch of environmental economics deals with assigning an economic value to these goods. While economic concerns and environmental motivations are often pitted against each other in public discourse, environmental economics highlights the overlap and interrelationship between the two, using the tools of economics to make more sound environmental decisions.
In finance, equity is the value of an asset or company net of all debts (assets minus liabilities). In this case of private companies, this values is the owners’ equity, and for publicly traded companies, the appropriate term is shareholders’ equity. It is the amount of money that would be left to the owners or shareholders if all assets were liquidated and all debts paid. Synonyms for equity include book value or net asset value. Equity is an important statistic for investors when determining whether or not a stock is overpriced.
Equity Capital Market
The Equity Capital Market (ECM) is the set of institutions, transactions, and vehicles that channel capital to companies. This funding can be captured through the primary market (initial public offerings), or the secondary market (on which existing stocks and their derivatives are traded). Investment banks are major players in the ECM, and many have a dedicated equity capital market division.
Raising funds through the equity capital market is a less expensive way to finance business activities than through the debt market, where the company retains ownership but has to pay interest on the funds it receives. However, if a company raises capital through the ECM, it is then beholden to returns-focused shareholders who control a percentage of the company. Most companies seek a mix of funding through the equity and debt markets.
An equity fund, also known as a “stock fund”, pools money from different investors and invests it primarily in stocks. It is a type of mutual fund scheme. Equity funds are seen higher risk and higher reward than debt funds (bond funds), which is why they can also be referred to as growth funds.
Equity funds are an effective way for investors to diversify their stockholdings without having to directly hold a full share of each stock in their portfolio, which would require a much larger investment.
Some equity funds specialize in a specific company size (mid-cap, large-cap, etc.), a particular industry or a set geographical area.
Equity trading is the purchase and sale of stocks and their derivatives, which are financial instruments that track the performance on an underlying asset, in this case a stock or basket of stock. Through equity trading, an investor puts money into the equity capital market. Equity trading is different from trading in debt securities, where investors buy and sell bonds or other fixed-income securities on the debt capital market. Equity trading usually offers higher returns than trading debt securities does, but it is also more volatile and presents more risk.
An escrow is an agreement under which a third party to a transaction acts as a custodian of a sum of money or other consideration until a specified obligation is performed. This arrangement eliminates uncertainty and secures the transaction through the neutrality of the third party: the buyer knows the compensation won’t be released until completion of the agreed performance, and the seller or provider can depend on being paid after holding up their end of the deal. Escrow is frequently used in real estate transactions.
Ether (ETH) is a cryptocurrency used for trading on the blockchain Ethereum. It is a decentralised cryptocurrency, divisible up to 18 decimal places, for those who don’t want to purchase a whole ETH.
Ether is a token: a digital asset created by a series of computers that are part of the blockchain network. It allows you to trade peer-to-peer, make purchases in shops that accept cryptocurrencies and exchange with other cryptocurrencies. ETH can be purchased online by exchanging cryptocurrencies.
You can also invest in ETH with Contracts For Difference (CFDs), which are derivative financial instruments that allow you to speculate on the price of Ether through online trading. ETH is neither regulated nor controlled by a central bank.
The euro is the currency of 19 countries in the European Union, which form a geographic region called the eurozone. The currency was established in 1992 under the Maastricht Treaty and was introduced in markets in 1999. It is overseen by the European Central Bank. The euro is the second-most widely held reserve currency and is the world’s second-most traded currency. Its direct influence extends well beyond the eurozone to many countries whose currency is pegged to the euro.
A Eurobond, or external bond, is a bond (fixed-income debt security) issued in any currency other than the local currency in its place of issue.
For example, a bond issued by a Japanese corporation in US dollars would be considered a Eurobond. This type of bond gives issuers a wide range of choices about which markets will be most favourable for their bond issue. For investors, Eurobonds have the advantage of having low face value and high liquidity (they can be quickly converted into cash).
Eurocurrency refers to reserve currency deposits held by a country or company for overseas operations. A US dollar reserve in a British bank or a deposit in pounds in a US bank are examples of eurocurrency. Therefore, eurocurrency refers to any deposit held outside the country that issues the currency.
Today, banks perform many eurocurrency operations due to globalisation and the rapid increase in multinational transactions and deposits. The eurocurrency market originated during World War Two and started in London before expanding to countries in and outside Europe. It is a market that includes all currency exchanges, regardless of the respective domestic market.
Eurodollars are United States dollars deposited anywhere outside of the United States, whether at foreign banks or overseas branches of U.S. banks. The term originally referred only to dollar-denominated deposits at European banks, but it has since expanded to encompass U.S. dollars held anywhere overseas, including in Asia and in havens such as the Bahamas and Cayman Islands.
Eurodollars are not backed and regulated by the Federal Reserve as U.S. dollars in a U.S. bank account are. They, therefore, carry slightly more risk than their domestic counterparts. The exact level of risk varies depending on the specific country’s political, economic, and regulatory circumstances. Because they carry higher risk, Eurodollar deposits also often offer higher interest rates, which can make them attractive to investors.
European Banking Authority (EBA)
The European Banking Authority (EBA) is a European Union agency headquartered in Paris, France. It has authority over national bank regulators of member countries and is tasked with ensuring fair competition and standardised rules across the EU baking industry. It is also designed to promote transparency and mediate international bank disputes within the EU. Finally, it evaluates risks, stresses, and solvency at EU banks to ensure the stability of Europe’s banking sector.
European Central Bank (ECB)
The European Central Bank (ECB) is the monetary authority for the euro area, which includes all countries that use the euro as their official currency. Its chief mission is to preserve the purchasing power of euro (its worth in terms of how much goods or services a unit of the currency can buy). The ECB controls inflation by setting interest rates and managing foreign currency reserves. It also works in tandem with the central banks of European Union member countries, which together form the European System of Central Banks. The ECB is headquartered in Frankfurt, Germany, and is one of the EU’s seven foundational institutions.
The European Union (EU) is an economic and political body uniting 28 countries in Europe. Many of its members use a single currency, the euro, and the union allows the free flow of goods and people within its borders. In addition to economic policy, the EU also governs social and security-related matters. Its three principle governing bodies are the EU Council, EU Commission, and the EU Parliament. The EU forms one of the world’s largest and most powerful economic and political blocs.
Eurozone is the term for the group of European countries who use the Euro as their legal currency. Officially called the Euro Area, it is formed of 19 European Union countries and was founded in 1999. Its nominal GDP was estimated to be $18.8 trillion in 2018, or around 22% of the world’s economy.
There is no single definition of ethical investing, but it generally refers to investments that aim to both earn a return and align with the investor’s values, whether moral, religious, or social.
It is an umbrella term that can encompass Sustainable and Responsible Investment (SRI), Environmental, Social and Governance investing (ESG), impact investing, and green investing.
Common positive focuses of ethical investing are social justice or climate change. Meanwhile, some ethical investors concentrate on filtering out investments that support activities that do not align with their moral or religious principles (like equities informally referred to as “sin stocks”). Examples include stocks related to gambling or alcohol.
An ex-dividend refers to a share that does not qualify for a dividend payment because the purchase of the share takes place on the ex-dividend date.
In these cases, the dividend payment is made to the previous holder of the share, even if they no longer own the share at the time of the dividend payment.
Ex-dividend traded shares do not allow the trader to receive the next dividend, but they can receive payments made starting from the following one. In order to receive the dividend payment, it is necessary to buy the shares at least one day before the record date, so it is essential to know the ex-dividend dates in order to best organise purchases of dividend-paying stocks.
An exchange rate expresses the value of one currency relative to another. It always consists of a pair in which one currency is the base currency (with a value of one) and the other the quote currency. For example, a USD/EUR rate of 0.09 means that one dollar costs 0.9 euros.
Fluctuations in exchange rates can have a wide variety of impacts on trade, inflation, and interest rates. They also affect the currency market (where traders buy and sell foreign currencies), which has the highest volume of trade of any market in the world.
Exchange-Traded Notes (ETN) are a type of exchange traded product, meaning they trade on financial markets in a way similar to stocks. Although they are generally linked to the performance of an index, they are different from their cousins, Exchange-Traded Funds (ETFs), in that they do not actually own any of the underlying stocks or assets they track. Rather, they are a debt security underwritten by an issuing bank, and their safety as an investment depends on the creditworthiness of the issuing institution.
Most ETNs do not pay interest, as most debt securities do. Rather, investments are paid at maturity based on the performance of the underlying assets or index. This helps make them a more tax-efficient investment vehicle because capital gains are not realized (and therefore not taxed) until the instrument’s maturity. The risks of ETNs include default by the underwriting bank, as well as poor performance by the underlying index or benchmark.
Exchange Traded Funds (ETF)
Exchange Traded Funds (ETFs) are funds that are traded on an exchange and are regulated. You can buy or sell ETFs at any time, similar to buying or selling shares. An ETF is a collection of securities grouped within a single financial instrument, with a market value and price that fluctuates continuously.
ETFs can contain various types of financial assets, such as stocks, bonds and commodities. ETFs can be international, i.e. contain securities from various geographical areas or be composed only of domestic securities.
Investing in ETFs allows you to reduce your investment risk and you pay lower fees and costs than buying shares. ETFs are considered an alternative to classic mutual funds.
Exchange Traded Product (ETP)
Exchange-traded products are a securities (financial instruments) that trade throughout the day on an exchange. They track an underlying investment, often an index, meaning that an entire portfolio of stocks are compiled into a single security that can be bought and sold. This specific type of ETP is called an exchange-traded fund (ETF), or an index fund. Other types of ETPs include exchange-traded commodities (ETC) and exchange-traded notes (ETN).
The term exercise refers to the right to sell or buy the underlying financial instrument of a derivative financial product, usually an option. The owner of an option contract has the right (but not the obligation) to sell or buy the underlier on which the option is built, by a specified date and at a specified price.
The owner of an option may let the contract expire, i.e. close the position without exercising their right to buy or sell. If, on the other hand, they do exercise the option, they avail themself of the right to buy or sell the underlying asset at the agreed price, by the date specified in the contract. Exercising the option consists in notifying the broker of the intention to sell or buy the financial instrument underlying the option, a right that the seller is obliged to respect.