Learning Business Terms

When I first started watching the news about business and the stock market, I had trouble understanding some of the terminology that the news anchors were using. These business programs on television expect their audience to be adults who have prior knowledge of business. However, I started with just an interest and curiosity about the world of finance. I didn’t take any business courses nor did I have a mentor to teach me. Instead I bought books and used the internet to look up definitions. Moreover, I constantly watched these programs to familiarize myself with the way they talk and the terminology they use. However, after reading this post I hope that you will have a better understanding of what these news anchors are talking about.



This is a snapshot of Maria Bartiromo from CNBC. She is one of the leading reporters for business news.


There are hundreds of business terms that will take years to learn; however, this post will teach you the meaning of the terms that are used more often. In business, there are a lot of definitions that can be used for many different aspect of business. Therefore, try to remember and understand the context that the term is being used for. For example, the term “interest rate” can mean a good and a bad thing for regular consumers. If the bank raises interest rates, borrowing money will cost more. However, if interest rates are higher for your savings account, it is beneficial for the consumer. Knowing the context in which the term is used is essential to understanding the bigger picture of what the broadcaster is talking about.

Here are some few terms that I personally think are important and used often by business news programs:

1. P/E Ratio- This stands for Price-to-Earnings ratio. This term is used to evaluate if a stock is undervalued or overvalued. Its equation is the Price per Share/ Annual Earnings per Share. The Price per Share is basically the price that is currently listed for a certain stock. The Annual Earnings per Shares is how much the stock actually made divided by the number of outstanding shares. The Earnings per Shares shows the actual price that the stock is making and the Price per Share shows how investors (market) is pricing the stock. P/E Ratio typically trade around 10-20. However, if the P/E Ratio is overly high, it means that the stock is overvalued because the market price is higher than the annual earnings per share. If the P/E ratio is low, it means that the stock is undervalued and it is a good time to buy because the company is making a lot more money than what the market price should be at.




2. Leverage- This simply means “borrow money”. For example, if Company A uses leverage to buy Company B, it means that the Company A “borrowed money” to buy Company B. Companies use leverage so that they can capitalize on the amount of cash that they have. Instead of using all their funds to buy one company, they will use leverage to buy five companies. However, leverage may be risky because companies must be able to pay back their interest rates. Moreover, some companies may spread themselves too thin to a point where they are unable to manage their own leverage.



3. M&A/ Private Equity- Private Equity firms are companies that essentially acquire other smaller companies, specifically in the private industry. These companies are not listed on the stock exchange market which means that they usually only have a few investors. M&A and Private Equity are used interchangeably because Private Equity firms practice merger and acquisitions. For example you may hear reports talk about how M&A have been slowing down because of the credit crunch. This has the same meaning if the news said private equity has been slowing down because of the credit crunch.



4. Market- This simply refers to the stock markets. However, when you hear reporters say that the market is up or down, they are specifically referring to the Dow Jones Industrial Average. The DJIA is the weighted index of 30 companies. It is only a sample of the larger market, but it is a good indicator of the direction of the market.



5. Mortgage-backed Securities- This is a recent term that you might be hearing a lot until we get through this economic crisis. Mortgage-backed securities are essentially a group of mortgages that have been sold to banks who then resells them to investors. For example, Countrywide, who gives loans to homeowners, will sell a group of mortgages to Fannie Mae, a mortgage bank, who then sell this group of mortgages to individual investors telling them that these group of mortgages (houses) are worth X amount of money and still continuing to rise. Investors will then invest in these MBS because the value of the homes keeps going up. However, when the value of these homes starts falling, like the current market, then these mortgages are worth nothing. This is one of the main reasons why we are in an economic crisis. A lot of these MBS were subprime mortgages, which means that the owners of the home did not have good credit but still able to buy a home.



Learning the terminologies for business news is not difficult. However, it will take time and patience to learn the different terms and context that they are used for. One way to learn these terms quicker is to write down the terms that you do not understand and then look it up on the internet later. I recommend websites such as Investopedia.com and BusinessDictionary.com. These definitions are used over and over again so understanding these terms are essential to understanding what broadcasters are talking about. Moreover, you must constantly watch the news to learn new terms. The market changes everyday; therefore, knowing the terminology for recent news is essential to understanding the concept of the topic. I hope that these definitions and explanations have helped you understand some terms of business.