Discover what various financial terms mean, from Recession to Stocks.
Recession and depression
The textbook definition of a recession is two consecutive quarters (that is, six months) of declining economic activity. Recessions can be short – for instance, the one following the bursting of the 'dotcom' bubble in 2000 in the US.
If it is deep and prolonged, a recession turns into a depression, when mass unemployment takes hold. Policy makers are haunted by the Great Depression of the 1930s, when the US fell into a long recession following the 1929 Wall Street crash. The US economy shrank by a third and unemployment reached 13 million, or 25%. That depression, portrayed in John Steinbeck's novel The Grapes of Wrath, only ended with the run-up to the World War II.
Reflation
Policies designed to stimulate, or 'reflate', the economy. That stimulus can come through low interest rates or tax cuts or both. After the stock market crash of 2002, the US Federal Reserve cut interest rates aggressively, well below those of the Eurozone, prompting retired International Monetary Fund chief economist Kenneth Rogoff to joke that the US was enjoying 'the best economic recovery money can buy'. But if policy makers pursue expansionary policies for too long, an economy overheats, inflation picks up and speculative bubbles develop.
Shares, stocks and equities
Shares grant their owners a stake in a company and those owners normally receive a proportion of the company's profits in the form of a 'dividend'. Other names for shares are 'stocks' and 'equities'; what are called 'ordinary shares' in the UK are known as 'common stock' in the US. All these items are traded on the stock market.
The price of equities can rise and fall, and an original investment can rise steeply in a bull market and fall dramatically in a bear market. So share owners have to be prepared for capital losses as well as capital gains. In 2008, shareholders nursed big losses when the world's stock market went into free-fall as the global economy headed for recession.
