What Does Credit Crisis Mean?
What Does Credit Crisis Mean?
For example, banks will charge teaser rates on loans, but when the initial low payments change, they
become too high for borrowers to pay. The borrowers default on the loans, and the loan's collateral value
simultaneously drops. If enough lending institutions reduce the number of new loans issued, the economy
will slow down, making it even harder for other borrowers to pay their loans.
Unitary Thrift
Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer
segments, as prices are lowered over time.
Similar to consumer credit, businesses have a variety of lending products to choose from. A line of credit,
term loans and unsecured loans are just a few examples. However, small businesses should shop around
at different institutions to determine which lender offers the best terms for the loan.
deral Savings and Loan
The size of financial cooperatives can vary from only a handful of branches to being widespread with
thousands of locations. Many financial cooperatives offer products and services that are comparable to
those offered by the major diversified banks.
Mortgage-Backed Security (MBS)
This type of security is also commonly used to redirect the interest and principal payments from the pool
of mortgages to shareholders. These payments can be further broken down into different classes of
securities, depending on the riskiness of different mortgages as they are classified under the MBS.
Thrift Bank
There are hundreds of chartered CDFIs operating in the United States, each with the goal of fostering
economic growth within the local community through innovative (and often less stringent) lending
practices, educational efforts and small business lending.
CDFIs can be considered a form of microfinance. They measure their progress not only by dollars earned
but also by how the community is growing economically. There are several different structures aCDFIcan
take, including community development banks, community development loan funds, microenterprise
funds and venture funds.CDFIs tend to be controlled locally, without interference from the federal
government or national corporate hierarchy.
Microenterprise
What Does Microenterprise Mean?
A small business that employs a small number of employees. A microenterprise will usually operate
with fewer than 10 people and is started with a small amount of capital. Most microenterprises specialize
in providing goods or services for their local areas.
Investopedia explains Microenterprise
Microenterprises serve a vital purpose in improving the quality of life for people in developing countries.
Microfinance seeks to help microenterprises by loaning small amounts of capital to these businesses.
This allows poor individuals or families to start their own businesses, earn income and benefit their
communities.
For example, a woman in a developing country may use microcredit to take out a loan and purchase
a sewing machine. She could use the machine to establish a microenterprise that specializes in tailoring.
The woman would increase her wealth and help her community by providing a service.
Microinsurance
What Does Microinsurance Mean?
Insurance products that offer coverage to low-income households. A microinsurance plan provides
protection to individuals who have little savings and is tailored specifically for lower valued assets and
compensation for illness, injury or death.
Investopedia explains Microinsurance
As a division of microfinance, microinsurance looks to aid poor families by offering insurance plans
tailored to their needs. Microinsurance is often found in developing countries, where the current insurance
markets are inefficient or non-existent. Because the coverage value is lower than a usual insurance plan,
the insured people pay considerably smaller premiums.
Microfinance
What Does Microfinance Mean?
A type of banking service that is provided to unemployed or low-income individuals or groups who would
otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give
low income people an opportunity to become self-sufficient by providing a means of saving money,
borrowing money and insurance.
Investopedia explains Microfinance
Microfinancing is not a new concept. Small microcredit operations have existed since the mid 1700s.
Although most modern microfinance institutions operate in developing countries, the rate of payment
default for loans is surprisingly low - more than 90% of loans are repaid.
The World Bank estimates that there are more than 500 million people who have directly or indirectly
benefited from microfinance-related operations.
Microsavings
What Does Microsavings Mean?
A branch of microfinance, consisting of a small deposit account offered to lower income families or
individuals as an incentive to store funds for future use. Microsavings accounts work similar to a normal
savings account, however, are designed around smaller amounts of money. The minimum balance
requirements are often waived, or very low, allowing users to save small amounts of money and not be
charged for the service.
Investopedia explains Microsavings
Microsavings plans are usually offered in developing countries as a way to encourage saving for
education or other future investment. People who invest in these plans are better prepared to cope with
any unforeseen expenses, which would usually harm lower income individuals
Microcredit
What Does Microcredit Mean?
An extremely small loan given to impoverished people to help them become self employed.
Investopedia explains Microcredit
Renee Loth wrote an article in 2002 for the Boston Globe entitled "Women Entrepreneurs,"
which explores how this type of loan possibly originated. In the article Loth suggests the system started in
Bangladesh in 1976, when an economics professor loaned a group of women $27 to finance their own
small business. Amazingly the women repaid the loan and were able to sustain the business.
Socially Responsible Investment - SRI
Just because an investment touts itself as socially responsible doesn't mean that it will provide investors
with a good return.
Ethical Investing
Ethical investing is sometimes used interchangeably with socially conscious investing, but socially
conscious funds typically have one overarching set of guidelines that is used to select the portfolio,
whereas ethical investing brings about a more personalized result.
A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as
where you want to see your money invested. From there you can come up with an asset allocation plan
and begin researching individual securities and funds.
Fair Trade Investing
Based on performance, it is not yet clear whether green funds and socially responsible investing can
consistently create better returns for investors. But they do represent a proactive step toward
environmental consciousness, which many investors appreciate.
Socially conscious investing is on the rise, which is due largely to increased worldwide exposure to the
issue, as well as increased federal funding for alternative energy and other programs.
Marginal Social Cost - MSC
What Does Marginal Social Cost - MSC Mean?
The total cost to society as a whole for producing one further unit, or taking one further action, in an
economy. This total cost of producing one extra unit of something is not simply the direct cost borne by
the producer, but also must include the costs to the external environment and other stakeholders.
Calculated as:
Where:
MSC = Marginal Social Cost
MPC = Marginal Private Cost
MEC = Marginal External Cost
While marginal social cost represents a powerful economic principle, it can rarely be expressed in
tangible dollars. We know that there are costs incurred by certain acts of production, although their far-
reaching effects make them difficult to quantify. The theory helps legislators and economists come up with
a framework to "incentivize" companies to reduce the marginal social costs of their actions.
Protest Divestment
The attention the protest garnered put the issue of apartheid in the national spotlight and Congress
passed a series of economic sanctions as a result. This economic pressure created social change
as South Africa's government was forced to end racial segregation and give non-whites the right to vote.
Sinful Stock
The fund has been in operation since 2002 and focuses on so-called "vices" that are considered by many
to be socially irresponsible investments, or "sin stocks".
The Vice Fund stands in stark contrast to the many socially conscious or responsible mutual funds on the
market, but it is based on the philosophy that sectors like gaming and alcohol have inherently solid
demand; therefore, companies that are leaders in these sectors should produce good returns for
shareholders.
Target Risk Fund
This allows investors who are considered highly risk averse to identify and select a fund of funds that has
a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk
exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on
target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned
within the target risk fund) is compensation for the value-added service.
Country Risk
The United States is generally considered the benchmark for low country risk and most nations can have
their risk measured as compared to the U.S. Country risk is higher with longer term investments and
direct investments, which are investments not made through a regulated market or exchange.
Fund Manager
The whole point of investing in a fund is to leave the investment management function to the
professionals. Therefore, the quality of the fund manager is one of the key factors to consider when
analyzing the investment quality of any particular fund.
Fund Of Funds
Political risk is also known as "geopolitical risk", and becomes more of a factor as the time horizon of an
investment gets longer.
The outcome of a political risk could drag down investment returns or even go so far as to remove the
ability to withdraw capital from an investment.
Risk Averse
This allows investors who are considered highly risk averse to identify and select a fund of funds that has
a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk
exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on
target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned
within the target risk fund) is compensation for the value-added service.
Committed Capital
Also known as "commitments".
The private equity market can be viewed as riskier than the public equity market, as returns in the private
market tend to have higher dispersion of returns than the public market. Therefore, investing in the right
business ventures can offer substantial rewards for top tier funds.