The Savvy Wallet

Sovereign Debt (National, Government or Public Debt) Explained in One Minute: From Meaning to Crisis Sovereign debt is the amount of money that a country’s government owes to its creditors, such as other countries, international organizations, or private investors. Sovereign debt can be used to finance public spending, such as infrastructure, education, health, or social welfare. Sovereign debt can also help stimulate the economy during recessions or crises by providing fiscal stimulus or tax relief. However, sovereign debt also comes with risks and challenges. If a country borrows too much, it may face difficulties in repaying its debt obligations, especially if its economic growth slows down, its tax revenues decline, or its interest rates rise. This can lead to a sovereign debt crisis, which is a situation where a country is unable to pay its bills or meet its debt repayments. A sovereign debt crisis can have serious consequences for the country and its people, as well as for the gl...

Online Brokers Explained: From Stock Certificates to Full-Service and Discount Brokerage Services If you want to invest in the stock market, you need a broker. A broker is a person or a company that acts as an intermediary between you and the exchange, where stocks are bought and sold. Brokers provide you with access to the financial markets and help you execute your trades. But not all brokers are the same. Depending on your needs and preferences, you can choose between different types of brokers, such as full-service brokers and discount brokers. In this post, we will explain what these terms mean and how they differ from each other. What are stock certificates? Before we dive into the types of brokers, let’s first understand what stock certificates are. A stock certificate is a physical document that proves your ownership of a certain number of shares in a company. It usually contains information such as the name of the shareholder, the number of shares, the date of purchase, an ide...

Market Makers (Liquidity Providers) and the Bid-Ask Spread Explained If you have ever traded stocks, options, futures, or other securities, you may have noticed that the prices at which you can buy and sell are not always the same. This difference is known as the bid-ask spread, and it is one of the key factors that affect the profitability and liquidity of your trades. In this blog post, we will explain what the bid-ask spread is, how it is determined, and what role market makers play in providing liquidity to the market. What is the bid-ask spread? The bid-ask spread is the difference between the highest price that a buyer is willing to pay for a security (the bid) and the lowest price that a seller is willing to accept for the same security (the ask). For example, if the bid price for a stock is $10 and the ask price is $10.05, the bid-ask spread is $0.05. The bid-ask spread represents the cost of trading, as it reflects the difference between the price you can sell at and the price...

Over-The-Counter (OTC) Trading and Broker-Dealers Explained in One Minute If you are interested in investing in stocks, you may have heard of the terms over-the-counter (OTC) trading and broker-dealers. But what do they mean and how do they work? Here is a quick overview of these concepts and some of the platforms that facilitate OTC trading. OTC trading is the exchange of securities between two parties without the involvement of a formal exchange or a central clearinghouse. OTC trading can involve various types of securities, such as stocks, bonds, currencies, derivatives, and more. OTC trading is usually done through a network of brokers and dealers who communicate and negotiate directly with each other, either electronically or over the phone. Broker-dealers are individuals or firms that act as both brokers and dealers in the OTC market. As brokers, they execute orders on behalf of their clients, who may be individual investors, institutions, or other broker-dealers. As dealers, the...

The Economics Behind Cartels Explained in One Minute: From Drugs to Oil (OPEC), Diamonds, and More What is a cartel? A cartel is a group of independent producers of a good or service who agree to limit competition and increase prices by controlling supply, output, market share, or bidding. 1 Cartels are usually illegal and harmful to consumers, who have to pay higher prices and face lower quality or quantity 1 Why do cartels form? Cartels form when producers face high competition, low demand, or falling prices in their industry. By colluding with each other, they can reduce uncertainty, increase profits, and gain market power. 2 However, cartels are unstable and prone to cheating, as each member has an incentive to secretly undercut the agreed price or increase their output to gain more market share 2 What are some examples of cartels? Cartels exist in various industries, both legal and illegal. Here are some of the most famous ones: Drug cartels: These are criminal organizations tha...

To Collude, or Not to Collude: The Economics Behind Collusion Explained Collusion is a term that often has negative connotations in the business world. It refers to a secret or illegal agreement between two or more firms to coordinate their actions in order to gain an unfair advantage over their competitors. Collusion can take many forms, such as fixing prices, dividing markets, limiting output, or sharing confidential information. Collusion can also occur at different levels of the supply chain, such as between suppliers and retailers, or between buyers and sellers. But why do firms collude in the first place? And what are the consequences of collusion for consumers, producers, and society as a whole? In this blog post, we will explore the economics behind collusion and its pros and cons. The Incentive to Collude The main reason why firms collude is to increase their profits by reducing competition and increasing their market power. By colluding, firms can act as if they were a monopo...

Pandemic Economics: Virus/Disease-Related Market Crashes Explained The COVID-19 pandemic has been one of the most disruptive events in modern history, affecting not only the health and well-being of millions of people, but also the global economy and financial markets. The pandemic triggered a sharp and sudden recession in 2020, as lockdowns, travel restrictions, and social distancing measures disrupted economic activity and consumer spending. Stock markets around the world plunged in February and March 2020, wiping out trillions of dollars of wealth and creating panic among investors. How did the pandemic cause such a severe market crash, and what can we learn from previous virus/disease-related market crashes? The Impact of the Pandemic on the Stock Market The stock market is a place where investors buy and sell shares of companies, which represent ownership stakes in those businesses. The price of a share reflects the expected future earnings and growth prospects of the company, as ...

Antitrust Laws Explained in One Minute: The Sherman Antitrust Act, FTC Act, etc. Have you ever wondered why some companies are so big and powerful, while others are struggling to survive? Or why some products are so expensive, while others are so cheap? Or why some industries are dominated by a few players, while others are more diverse and competitive? These questions have a lot to do with antitrust laws, which are regulations that aim to protect and promote fair competition in the market. Antitrust laws prevent businesses from engaging in practices that harm consumers, such as forming monopolies, fixing prices, dividing markets, or rigging bids. The history of antitrust laws in the United States dates back to the late 19th century, when the rapid growth of industrialization and urbanization led to the emergence of powerful corporations that controlled large sectors of the economy, such as railroads, oil, steel, and banking. These corporations were often accused of abusing their marke...

Order Books and Spoofing (Crypto’s “Spoofy”) Explained in One Minute: Definition, Legal Issues, etc. If you are a crypto trader, you may have heard of terms like order books and spoofing. But what do they mean and how do they affect the market? In this post, we will explain these concepts in one minute and help you understand the risks and opportunities they present. What Are Order Books? Order books are simply records of all the buy and sell orders that are placed on a crypto exchange for a specific asset. They show the price and quantity of each order, as well as the time and date they were placed. Order books are useful for traders because they provide information about the supply and demand of the market, as well as the liquidity and volatility of the asset. For example, if you want to buy Bitcoin, you can look at the order book and see how many sellers are willing to sell at different prices. You can also see how many buyers are competing with you for the same asset. This can help...

Broad Types of Debt Levels Countries Have Explained in One Minute: Household, National & Corporate Debt is a common and sometimes unavoidable part of life. But not all debt is created equal. There are different types of debt levels that countries have, and they can affect their economic performance and stability in different ways. Here are the broad types of debt levels that countries have, explained in one minute: Household debt: This is the debt that individuals and families owe to lenders, such as mortgages, credit cards, student loans, and car loans. Household debt can be a sign of consumer confidence and spending, but it can also pose risks if households become over-indebted and unable to repay their loans. Household debt can affect the demand for goods and services, the savings rate, and the financial stability of the banking system. According to the World Bank, the average household debt-to-GDP ratio for 43 countries was 57.5% in 2020 1 . National debt: This is the debt that...

Mortgage-Backed Securities (MBS) Explained in One Minute: Did We Learn Our Lesson? Mortgage-backed securities, or MBS, are bonds that are backed by a pool of mortgages, usually residential ones. They are created by banks and other financial institutions that originate and service the mortgages, and then sell them to investors who receive the interest and principal payments from the borrowers 1 MBS are attractive to investors because they offer higher returns than other fixed-income securities, such as government bonds or corporate bonds. They also diversify the risk of default, since a single borrower’s failure to pay does not affect the entire pool of mortgages 2 However, MBS also have some drawbacks and risks. One of them is the uncertainty of the cash flows, since borrowers can prepay or refinance their mortgages at any time, reducing the expected maturity and yield of the MBS. Another risk is the credit risk, which is the possibility that borrowers will default on their mortgages, ...

The “Big Three” Credit Rating Agencies in One Minute: Standard & Poor’s/S&P, Moody’s and Fitch Group If you are an investor, a borrower, or a financial enthusiast, you have probably heard of the “Big Three” credit rating agencies. These are the companies that assess the creditworthiness and financial stability of various entities, such as governments, corporations, and financial institutions. They assign ratings to the debts issued by these entities, indicating the likelihood of default or repayment. The ratings can influence the interest rates, borrowing costs, and investment decisions of millions of people around the world. But who are these “Big Three” credit rating agencies, and how did they become so influential? The “Big Three” are S&P Global Ratings (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch). They are all based in the United States, except for Fitch, which is dual-headquartered in New York and London. Together, they control about 95% of...

Collateralized Debt Obligations (CDOs) Explained in One Minute: Definition, Risk, Tranches, etc. If you are interested in the world of finance, you may have heard of collateralized debt obligations, or CDOs for short. But what are they exactly, and how do they work? In this blog post, I will try to explain CDOs in one minute, using simple terms and examples. What are CDOs? A CDO is a type of financial product that is backed by a pool of loans and other assets, such as mortgages, bonds, or credit card debt. These assets generate cash flows from the borrowers, who pay interest and principal on their loans. A CDO is created by a special entity, called a special purpose vehicle (SPV), that buys these assets from banks or other lenders, and issues securities to investors. These securities are called tranches, and they have different levels of risk and return, depending on the priority of payment. How do CDOs work? The SPV collects the cash flows from the underlying assets, and distributes t...

Collateralized Loan Obligations (CLOs) Explained in One Minute: Mortgage-Backed Securities 2.0? If you have heard of mortgage-backed securities (MBS), you might be familiar with the concept of securitization, which is the process of pooling different types of debt and selling them as a single security to investors. CLOs are a type of securitization, but instead of mortgages, they are backed by corporate loans, often with low credit ratings or high leverage. CLOs work like this: A CLO manager buys a portfolio of loans from various banks and bundles them into a special purpose vehicle (SPV), which is a legal entity created for this purpose. The SPV then issues different tranches of CLOs to investors, each with a different level of risk and return. The tranches are ranked by seniority, meaning that the senior tranches get paid first from the interest and principal payments of the underlying loans, while the junior tranches get paid last and bear the most risk of default. The CLO manager a...

Profiteering, Price Fixing and Price Gouging Defined, Explained and Compared Have you ever wondered why some products or services become so expensive during a crisis or an emergency? Or why some companies seem to collude with each other to keep prices high and limit competition? Or why some sellers charge outrageous prices for essential goods that people need to survive? If you have, then you may have encountered some examples of profiteering, price fixing and price gouging. These are three terms that describe different ways of manipulating prices to make unfair or excessive profits. In this blog post, we will define, explain and compare these three concepts and how they affect consumers and markets. What is Profiteering? Profiteering is the act of making a large or unfair profit by sketchy means. An example of profiteering is pay-day loans, which typically come with exorbitant interest rates that make them difficult to pay back. The company offering the loan then makes an unfair profi...

Financial crisis and economic crisis are two terms that are often used interchangeably, but they have different meanings and implications. A financial crisis is a situation where one or more significant financial assets, such as stocks, real estate, or oil, suddenly lose a large part of their value. A financial crisis can be caused by various factors, such as irrational speculation, excessive leverage, fraud, contagion, or policy mistakes. A financial crisis can affect the banking and finance sector, the currency and capital markets, and the confidence and trust of investors and consumers. Some well-known financial crises include: Tulip Mania (1637), an asset bubble that burst, hurting the economy of the Dutch Republic 1 . Stock Crash of 1929, a market crash that triggered the Great Depression in the United States and other countries 1 . Asian Crisis of 1997–1998, a currency and debt crisis that spread across several Asian countries and led to severe recessions and social unrest 1 . Th...