Discover what various financial terms mean, from Bonds to Bull and Bear Markets.
Bonds
A bond is an IOU, an agreement under which a sum is borrowed from an investor at a set rate of interest and repaid after an agreed period of time. Unlike shares, a bond normally repays the investor a fixed rate of interest – or yield – over a specified time, and then the original sum is repaid in full when the bond matures.
The safest bonds are issued by either governments (gilt-edged bonds) or blue-chip companies (corporate bonds). Riskier bonds offering higher interest rates – also known as 'junk bonds' – are issued by less sound companies.
Building societies and savings & loans
The building societies that first appeared in 19th-century Britain offered financial services – and especially mortgages – to their members so that they could buy their own homes. Building societies today are still owned by their members and have no external shareholders. Many of them did 'demutualise', or convert into banks, to compete with the bigger banks, and six of those, including Northern Rock and Bradford & Bingley, have been taken over or declared bankruptcy in the current financial crisis.
Savings & loans, or 'thrifts', are the American equivalents of building societies. Deregulated in the 1980s, many of them saddled themselves with bad debts through ill-advised investments and had to be rescued at a cost of $200 billion.
Bull and bear markets
Share prices soar in a bull market. The US stock market enjoyed an extraordinary bull market after 1982 as share prices increased 14-fold in value. This prompted Alan Greenspan, former chairman of the US central bank, the Federal Reserve, to warn of 'irrational exuberance'. That bull market ended with the bursting of the 'dotcom' technology bubble, and share prices plunged by almost 50% between 2000 and 2002.
The world is now experiencing a bear market – when shares fall steeply – that's being compared to the infamous one that followed the Wall Street crash of 1929. However, the biggest one-day drop on the US stock market occurred on 19 October 1987, when the Dow Jones plunged by more than 22% – a total of 508 points.
