Discover what various financial terms mean, from Short Selling to Stock Options.
Short-selling
This means selling securities or other assets that the seller does not own in anticipation that those asset prices will fall. Short-sellers borrow shares from other shareholders, usually for a very small fee, and sell them. If their hunch is right and the price falls, the short-sellers buy the same number of shares in the market at the lower price and return them to the original lending shareholder.
The profit for short-sellers is the difference between the proceeds from the shares they sold and the cost of the shares they bought later. If they guess wrong and the share price rises, they make a loss.
Stock markets
Stock markets (or exchanges) are where shares are traded. The most well-known markets in the US are the New York Stock Exchange, where some of the world's biggest firms such as Bank of America and ExxonMobil are quoted, and the Nasdaq, where many technology firms such as Apple, Google and Microsoft are listed.
There is intense competition between the main exchanges in New York and London to persuade companies to list with them. Until the 'credit crunch', the London Stock Exchange enjoyed particular success in wooing companies from Russia and China.
Stock options
In addition to their regular salaries, top executives frequently receive share or stock options – the right to buy shares in the company at some point in the future at a favourable price – if they hit specific performance targets. The idea is to give executives an incentive to do their best to drive up the value of the company.
This system has been heavily criticised. The targets that the executives need to hit are often not especially hard to achieve and the terms for buying the shares so advantageous that they can make enormous profits for mediocre performance.
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