Inflation

Inflation is a very common business term.  It refers to the increase in the price of the same thing over a time period.  For example, a house today might cost 1 million dollars, but the same house would have only cost $200 thousand dollars 20 years ago.  This is because of inflation.  Tomatoes are more expensive now then they were 50 years ago.  This is also inflation.  The fact that people get higher salaries for the same job then years ago is also inflation.  This is called “wage inflation”.

The opposite of inflation is “deflation”.  This is when the price of something goes down over time.  Computer electronics always go through deflation because of competition and the fact that they keep learning how to make better stuff cheaper.

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Commodity

In the business and financial world, “commodities” are often things like oil, sugar, corn, and cotton.  They are things that are needed for many business but you can get them in nature.  Business use commodities to make more advanced products.  Investors can invest in commodities if they think there will be a large demand (many people want to buy them) for them.  For example, because of the growth of China and India, many investors believe that commodities are a good investment because these fast crowing countries will need a lot of commodities to fuel their economy.  This means high demand and in turn higher commodity prices.

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Book Value

A Company’s “Book Value” is the amount of money it would be worth if you added up all the money it has and the estimated value if you sold all of the company’s assets (things it owns that have value).

The “Market Price” in contrast is the amount of money that the stock market thinks a company is worth.  This is the number of shares times the market value (amount of money one share is currently trading for on the stock market).

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Market Capitalization

Market Capitalization is the “market value” of a company.  This is often referred to as a company’s “Market Cap”.  These terms mean the same thing.  The “market value” of a company is the “share price” times the total number of “shares”.  Large companies, “sometimes small” are divided up into shares.  This allows more than one investor to buy a part of the company.  A company’s “Market Cap” goes up and down a lot depending on many different things such as how much money the company profits as well as how the stock market view the future outlook of the company.

The company with the second biggest “Market Cap” in the world is Apple.   (Between 300 and 400 Billion USD)

Facebook’s “Market Cap” is around 50 Billion USD to give you an idea.

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Outsourcing

Outsourcing is a very common business practice in the modern business world.  It basically means to pay people from outside of your company, often outside your country, to do work for you.

For example, labor is relatively cheap in Vietnam and China, so many companies will set up factories in these two countries to get a lot of their goods produced.  They will then ship these goods to their own country to sell.  The labor is often so cheap, that even when they add all the shipping costs, the whole thing is still much cheaper.  Many American manufacturing jobs are being lost because of outsourcing.

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Governemt Stimulus

When the economy goes bad, ie. many people are out of work (high unemployment rate) and the growth of the economy is slow, the government often does something to help the economy recover quickly.  This economic stimulation is called a “government stimulus” or a stimulus package.

A stimulus package could come in many forms.  The government could give people “tax breaks” which means that the people would have more money to spend.  When people spend more money, the businesses make more money and the economy gets going again.

Another form of a stimulus is when the government invests money in infrastructure like building new roads and bridges.  This creates a lot of new jobs and also indirectly benefits anyone who will use these new roads and bridges.  The new roads could prevent heavy traffic and save time and money for many companies.

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Protectionism

Protectionism is when the government makes laws to benefit the companies in their own country.

An example of protectionism would be when a government makes an “import tax” on all imported cars.  This makes cars from other countries artificially expensive.  This means that those imported cars would cost more money than they should.  This obviously provides a big advantage to domestic car companies because these laws make their cars relatively cheaper.

The problem with protectionism is that it hurts the foreign companies.  If one country makes a lot of these laws against another country, then the other country is likely to do the same against your country.  Your country will be able to sell cars easily in it’s own market but will have great difficulty selling them internationally.

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Business Model

A company’s “business model” is the way that it makes money.  Examples are often the easiest way to truly understand a new term.

The business model of most TV stations is to provide free shows to the audience and make their money through television commercials.

Google’s business model is to provide free search to it’s users and earn money through sponsored advertising.

The business model of many movie theaters is to charge some money for the movie tickets, and then charge a lot of money on snacks like popcorn.  They hope that many people will pay a lot of money for these snacks.

The business model for amusement parks is to make people pay an entrance fee, and then give them unlimited free access to the park after that.

Some cell phone companies use the business model of giving a “free” cell phone to users if they sign a one or two year contract where they must pay a minimum monthly fee.

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Viral Marketing

Having a successful viral marketing campaign is the dream of any marketer or business person.  It is also called word of mouth advertising.  This is when a product is so good that people tell their friends about it.  These friends tell their other friends and so on.  It is cheap and very effective.  The only problem with it is that it is not easy to do.

The reason that it is called “viral” is because it spreads around a population like a virus (disease).  Google and Facebook successfully used viral marketing strategies.  They did not have to spend a lot of money on advertising because everyone told their friends and family about this new awesome product.  Obviously, most viral marketing campaigns fail.

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Leverage

Leverage is a really interesting and exciting concept in business.

Using leverage makes work a lot easier.  It basically means to use something to your advantage in a good way.  A couple examples will make this easier to understand.

Imagine Michael Jordan wrote a book.  It would sell well because he could leverage his fame.  He is not a famous author but he is a famous person.  He could easily go on TV and tell millions of people about his new book.  Going on TV is another form of leverage.  You can tell everyone who is watching TV about your book instead of going to each of those people’s houses and telling them.  It is a lot easier of course and it is called using leverage.  It is so important to use leverage in your business.  Imagine a normal person wrote a really good book but they had no fame and used no leverage.  It would never sell.  You need to used leverage in marketing to stand a chance in this tough business world.

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