Discover what various financial terms mean, from Joint Stock Company to Liquidity.
Joint stock company
A joint stock company raises money through trading shares on the stock market. Through shareholding, a company benefits from the financial protection of limited liability. Most modern companies are joint stock companies, but one notable exception in the UK is the retail group Arcadia, which is privately owned by the billionaire Philip Green.
Leverage
Leverage, or gearing, is using borrowed money to boost the returns of an investment. A 'leveraged buyout', for example, is the use of borrowed money ('other people's money', as in the 1991 film of the same name) in a takeover. The company executing the takeover makes money by making the target company more profitable – cost cutting by laying off people is one method – and uses the profits to pay off the debt.
A 'highly geared' company – a company with high debts – can be very vulnerable or fail completely during a liquidity crisis (when it's hard to borrow money), especially if most of its borrowing is short term. There's no substitute for cash in the bank in a financial crisis.
Limited liability
As the term implies, limited liability means a person's financial liability is limited to a fixed sum. Shareholders in a limited company are not personally liable for any of the debts of the company, other than for the value of their investment in that company. Sole proprietors and partners in general partnerships, however, are each liable for all the debts of the business (unlimited liability).
Liquidity
This is the amount of capital, or money, that's available for investment. The most liquid of assets is cash. In a crisis, be it political or economic, monetary authorities seek to ensure that there's plenty of liquidity, to prevent the financial system from seizing up. After the 9/11 attacks, the US Federal Reserve lent banks money to ensure high liquidity, and during 2007-08, the world's central banks cut interest rates to maintain it.
However, a liquidity glut can develop if there's too much money sloshing around. Low interest rates in the 1990s helped create the 2008 crisis: housing bubbles developed in the US and the UK partly because of low borrowing costs.
Some policy makers have suggested that liquidity is simply confidence.
