Glossary of Financial Terms
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GIC
GIC is from Guaranteed Investment Certificate. It is an investment instrument offered by banks, insurance companies and trust companies. A GIC term can range from six months to five years. “Term” refers to the length of time you would like to lock your money in. For example, a two-year, 3% GIC of $1,000 means you deposit $1,000 today, you will get $30 interest each year in the next two years, and you will also get the $1,000 back at the end of year two. The 3% interest rate is guaranteed. Naturally, the longer the term, the higher the rate. Banks frequently require a minimum amount of deposit, typically $1,000. It should be noted that the rate on GIC’s is usually much higher than the rate you can get from your savings or checking account. A drawback of GIC’s is that once you lock your money in, you are not allowed to get it back before the term ends. That is basically why the rates on GIC’s are usually higher than those on similar instruments such as term deposits.
GIC’s are safely insured under the CDIC.
See also “Index-linked GIC” and “CDIC.”
Glass-Steagall Act
Also widely known as the Banking Act of 1933, the Glass-Steagall Act was passed in the U.S. in response to the large number of bank runs following the market crash of 1929. The Act was sponsored by Senator Carter Glass as well as Representative Henry B. Steagall, giving it such name. As it is a banking act, it naturally covered a wide range of initiatives. Specifically, the Act mandated the creation of the Federal Deposit Insurance Corporation (FDIC) in a bid to shore up depositors’ confidence.
The better identified element of the Glass-Steagall Act was the separation of commercial banking and security trading or investment banking in general. Prior to the 1929 market crash and the ensuing Great Depression, several commercial banks in the U.S. established investment banking affiliates that engaged in such practices as underwriting bonds and stocks. Since depositors of commercial banks expected their banks to engage in loan making businesses instead of dealing securities, a conflict of interest became apparent. The 1929 market crash and the large number of bank failures basically alerted people to this conflict. Thus, the legislated separation of commercial banking and investment banking in the Glass-Steagall Act. Deposit taking institutions were not permitted to deal securities; institutions dealing/underwriting securities were not allowed to take deposits.
Despite its apparent appeal, the Act had been subject to criticisms. For instance, some argued that the deals underwritten by commercial banks in fact fared better than those done by pure investment banks (perhaps due to commercial banks’ wider networks?). Another negative observation would be that, non-bank identities such as financing companies of an automaker, which were not subject to the same restrictions as banks, gradually chipped away commercial banks businesses, leaving the latter disadvantaged. At the same time, some commercial banks crept into investment banking activities de facto through creative maneuvers that got around the Glass-Steagall restrictions (e.g., in the late 1970s, Merrill Lynch offered something referred to as Cash Management Account which accepted deposits but whose funds could be used to trade securities).
Facing the pressure from the industry, the Reagan and Bush administrations actually approved several high-profile mergers between commercial banks and investment banks in the 1980s and early 1990s (e.g., Bank of America acquired Charles Schwab in 1983). Now that the provisions of the Glass-Steagall Act regarding the separation of commercial banking and investment banking was defanged de facto, the Act was successfully repealed by the Clinton administration in 1999 through the so-called Gramm-Leach-Bliley Act.
Several people think that the repeal of the Glass-Steagall Act was partly responsible for the 2007 financial crisis. This belief gained political currency in that the Volcker Rule (which prohibits commercial banks from proprietary trading) was greatly motivated by it.
See “Federal Deposit Insurance Corporation (FDIC),” “Commercial Banking,” “Investment Banking,” “Financial Crisis of 2007” and “Volker Rule.”
Going Public
When a closely held company sells shares to the public extensively for the first time, the company is said to “go public.” The offer of shares to the public in this case is referred to as “initial public offering.” The common reason for going public is to have access to the capital market for more funds. Going public indicates that the company must now satisfy certain conditions and regulations. For instance, the company must report accounting information regularly to the exchange that lists its stock.
See also “IPO.”
Gold
It is, as we all know, the yellowish metal that is worth a lot of money! But believe it or not, gold is not the champion in terms of being precious as an investment metal.
See “Precious Metals” for details.
Golden Parachute
A term that began in the early 1960s and widely used and practiced in the wave of mergers and acquisitions in the 1980s. Generally speaking, a golden parachute is part of an employment contract (typically for upper executives) which stipulates a sizeable amount of compensation should the employee lose his/her job due to unforeseen events such as a takeover or an M&A (and for this reason, golden parachutes were popular during the M&A wave in the 1980s). Hence, a golden parachute is a way of attracting and retaining top executives. When the compensation amount is large, a golden parachute can also act as a deterrent to hostile takeovers just as a poison pill.
One of the more popular cases of golden parachute is the $40 million payout to Carly Fiorina in 2005 when she was fired by the HP’s board of directors (the main reason being the merger deal with Compaq in 2002 which was rammed through with a lot of opposition and which turned out to be unsuccessful). Several people considered the severance pay to be too extravagant and some lawsuits ensued.
Golden parachutes have been subject to a lot of criticism since they first appeared partly because they were sometimes used to justify unreasonably large severance packages. The criticism culminated amidst the 2007 financial crisis when some CEOs received severance packages worth almost $100 million. The issue received such great attention that the 2010 Dodd-Frank Act stipulates that any future adoption of a golden parachute provision by public firms must be voted on by shareholders.
As for the term itself, the intended metaphor should be obvious by now: when an executive is ejected from his/her job, a precious golden parachute is provided so that he/she could land elsewhere, softly.
See also “Mergers and Acquisitions (M&A),” “Takeover,” “Hostile Takeover,”
“Poison Pill,” “Financial Crisis of 2007” and “Dodd-Frank Act.”
Gross Working Capital
It simply means the current assets on a firm’s balance sheet.
Please see the explanation of “Current Assets.”
Growth Stock
Stock of a company that has yet to make money or is barely making money but nevertheless has a great deal of potential. The P/E ratio of such stocks is either really high or not defined (earnings is zero or negative). In the prime of the dotcom craze, a few stocks’ P/E ratios were in hundreds or thousands, whereas the usual P/E ratio hovered at low two-digit numbers. Growth stocks typically don’t pay dividends even if the companies are already making money. Alternatively, the earnings are plowed back for further growth. Most of the technology stocks, particularly in their early stages, are considered growth stocks.
Since growth stocks are naturally more risky and exciting to play with, they are usually favored by day-traders and those who bet on higher returns.