Glossary

Below are some of the most used terms and definitions in the world of banking, finance and investment.

Leadership

The ability of a company's management to make sound decisions and inspire others to perform well. Effective leaders are able to set and achieve challenging goals, to take swift and decisive action even in difficult situations, to outperform their competition, to take calculated risks and to persevere in the face of failure. Strong communication skills, self-confidence, the ability to manage others and a willingness to embrace change also characterize good leaders.

Leading Indicator

A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate.

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

Leveraged Buyout - LBO

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Liability

A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.

Liquidity

  1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
  2. The ability to convert an asset to cash quickly. Also known as "marketability".

There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.