Definition Purchasing Power Parity (PPP) is an economic theory which states that in the absence of transportation costs and other trade barriers, identical goods should have the same price in different countries when expressed in a common currency. This concept is primarily utilized for comparing economic productivity and standards of living between nations, as it takes into account the relative cost of local goods and services.
Key Principles PPP is based on two key principles:
Definition Return on Investment (ROI) is a key financial metric used to measure the profitability of an investment relative to its cost. It expresses the gain or loss generated from an investment, particularly in relation to the capital invested. Typically expressed as a percentage, ROI helps investors determine the efficiency of their investments and compare the profitability of various options. The basic formula for ROI is:
\(\text{ROI} = \frac{\text{Net Profit}}{\text{Initial Investment}} \times 100\%\) Components of ROI Net Profit: This is the total return from the investment minus the costs associated with that investment.
Definition Beta is a financial metric that indicates the volatility of a security, typically a stock, relative to the volatility of a benchmark index, such as the S&P 500. It serves as a measure of the security’s sensitivity to overall market movements. A Beta greater than 1 implies that the security is more volatile than the market, while a Beta of less than 1 indicates that it is less volatile.
Definition Capital structure is a fundamental concept in finance that refers to the mix of debt and equity that a company uses to finance its operations and growth. It represents how a firm funds its overall operations and assets through various sources of funds. Understanding a company’s capital structure is essential for assessing its financial health and risk profile.
Components of Capital Structure The primary components of capital structure include:
Definition The Debt to Equity Ratio (D/E Ratio) is a key financial metric used to assess a company’s financial leverage by comparing its total liabilities to its shareholder’s equity. It provides insight into the proportion of debt financing used by a company relative to its equity, reflecting its ability to cover debts with its own assets.
Components The Debt to Equity Ratio is calculated using the following components:
Total Liabilities: This includes all financial obligations the company owes, such as loans, mortgages and other debts.
Definition AUM means Assets Under Management. It refers to the total market value of the investments that a financial institution or investment manager manages on behalf of clients. This figure includes all assets managed across various investment vehicles, such as mutual funds, hedge funds, pensions and separate accounts. AUM is a critical metric used to assess the size, influence and financial health of an investment firm, as well as its ability to attract and retain clients.
Definition Capital gains refer to the increase in value of an asset or investment from the time it is purchased to the time it is sold. When the selling price exceeds the original purchase price, the difference is considered a capital gain and is often subject to capital gains tax. This concept is central in the fields of accounting and finance, particularly in investment and tax planning.
Types of Capital Gains Short-Term Capital Gains: Gains on assets held for one year or less.
Definition An ETF (Exchange-Traded Fund) is a type of investment fund and marketable security that tracks an index, commodity, bonds or a basket of assets like an index fund. Unlike mutual funds, ETFs trade like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.
Importance of ETFs ETFs are important for providing investors with the flexibility of trading stocks alongside the diversification benefits of mutual funds.
Definition Financial data encompasses quantitative information related to financial transactions, market activities and the financial status of entities. It serves as the backbone for financial analysis, investment decision-making and regulatory compliance. This data includes, but is not limited to, balance sheets, income statements, cash flow statements and market price information. Accurate and timely financial data is crucial for investors, analysts and regulators to evaluate a company’s performance, assess market conditions and make informed decisions.
Definition A financial statement is a formal record that outlines the financial activities and condition of a business, individual or other entity. Essential for decision-making, these documents provide a snapshot of financial health, offering insights into assets, liabilities, revenues and expenses. Financial statements are indispensable tools for investors, management and regulators to assess financial stability, performance and growth prospects.
Components Balance Sheet: Also known as a statement of financial position, it displays an entity’s assets, liabilities and shareholders’ equity at a specific point in time, offering a snapshot of its financial standing.