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Financial Glossary

Financial and investing terms defined, by Self Directed Investor

Accredited investor

In general, accredited investor refers to an individual whose net worth, or joint net worth with a spouse exceeds million; or whose individual income exceeded ,000 or whose joint income with a spouse exceeded ,000 in each of the 2 most recent years and can be expected to meet that income in the current year. See http://www.sec.gov/answers/accred.htm.

 

Accrual basis

Accounting practice where expenses and income are accounted for as they are earned or incurred, regardless of whether or not obligations have been received or paid.

 

Advance-Decline Ratio (A-D)

The Advance-Decline ratio indicator is the number of stocks trading higher than previous closing prices subtracted from the number of stocks trading lower than their previous closing prices. The result is usually expressed on a daily basis.

 

Agencies or Agency bond

Bonds issued by government-sponsored agencies such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and other federally chartered institutions.

 

All-Ordinaries Index

An index of stocks listed on the Australian stock market.

 

Alpha

Alpha is a technical measure of a fund's risk-adjusted return measuring the value added or not by active management and based on performance against a market index with a similar market risk profile. Most fund's compare themselves to the S&P 500 Index. An alpha of 1.0 means the fund produced a return 1% higher than its beta (market risk) would predict. An alpha of -1.0 means the fund produced a return that is 1% lower than predicted.

 

American depositary receipts (ADR)

ADRs are shares of non-U.S. companies that trade in the U.S. stock market. In general, ADRs are required to report financial details of their operations in accordance with generally accepted accounting principles.

 

Amortization

An accounting concept and procedure similar to depreciation for fixed assets. Amortization is used to write off intangible rights or assets (goodwill, patents or copyrights. Depreciation and amortization expenses are subtracted from a company's operating revenues to calculate net income and EBITDA calculation.

 

Analyst

An analyst follows publicly traded companies, analyzes them, and makes buy/sell/hold recommendations regarding the companies.

 

Annual report

An annual report for a publicly held company provides a year's record of financial information. The firm's operations are described using a balance sheet, income statement, and cash flow statement. A 10k is a more detailed version of an annual report.

 

Annuitant

This is someone who receives benefits from an annuity.

 

Annuity

An annuity is a regular periodic payment for a period of time in exchange something of value - usually a lump sum payment.

 

Arbitrage

An arbitrage is an effort to profit by taking advantage of price differences of similar financial instruments from different markets - buying low in one market and selling higher in another market.

Asset

An asset is property that provides value in an exchange.

 

Asset Allocation

An investment strategy that divides investments among different kinds of assets including stocks, bonds, real estate and cash or risk classification within an asset class such as small cap, mid-cap, and large cap stocks. The goal of asset allocation is to achieve the best possible risk/reward tradeoff based on an individual situation and goals.

 

Balance of payments

Balance of payments is a measure of payments flowing into and out of a single country with its trading partners. It measures saving and investment flows among national economies over a year, quarter, or month.

 

Balance of trade

Balance of trade is the net flow of goods between two countries equal to the money value of exports minus imports.

 

Balance sheet

The balance sheet is the statement of financial condition summarizing a company's assets, liabilities, and owners' equity. The balance in “balance statement” is that assets are equal to liabilities and owners equity.

 

Basis

Basis is the price an investor pays for a security plus any transaction costs. Basis is a concept used for calculating capital gains or losses when filing tax returns.

 

Bear market

A bear market generally means broad markets fall by 20% or more over a year or less.

 

Bearish

Investor bias for lower future prices for a stock or a market.

 

Beta

Beta is a measure of an investment's historical volatility compared to a chosen benchmark such as the S&P 500 index. The beta of the benchmark is always 1.00. So a stock with a beta of 1.00 has similar price movements as the benchmark. An asset with a beta of 1.2 is expected to do 20% better in an up market and 20% worse in a down market than the benchmark. An asset with a beta of 0 means that its price is not correlated and is independent of the benchmark.

 

Bid

An offer made by an investor based on the price the investor is willing to pay for a security. In an auction or stock market, the bid is the highest price any buyer is willing to pay at a given point in time.

 

Black-Scholes option-pricing model

A model used to calculate the value of an option using the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the expected standard deviation of the stock return. The model was developed by Fischer Black and Myron Scholes in 1973.

 

Blue-chip stocks

Stocks of large, national or international companies that sell at a premium based on investor confidence due to a long record of steady revenue, earnings, and dividend payments.

 

Bond

Bonds are debt instruments used by business and governments to raise capital by borrowing. There are three major types of bonds: corporate, government and municipal. A corporate bond with a low credit rating is called a high-yield or junk bond. When investors buy a bond, they are lending money to borrowers.

 

Bond rating

A bond rating is a measure of the quality and safety of a bond based on the possibility of default by a bond issuer. Bond ratings are assigned by independent agencies, such as Moody's Investors Service, Standard & Poor's, and Fitch. Ratings range from AAA or Aaa (highest) to D (in default).

 

Book value

This is a company's total assets minus intangible assets and liabilities. Book value is what would be left over for shareholders if the company was sold at a given point in time and its debt retired.

 

Bottom-Up investing

Bottom-Up investing uses fundamental analysis based on research reports, financial statements, press releases, company strategy, management execution record, and other company-specific information to identify companies with the best comparative prospects for future increases in valuation.

 

Bourse

French term for a stock market.

 

Breakout

Breakout is a technical analysis method for identifying substantial upside or downside movements based on the price of a stock as it emerges from a previous trading pattern.

 

Broker

This is a person who acts as an agent on behalf of a client to buy or sell stocks, bonds, commodities and options. Brokers also provide market information and give advice and can work for both full-service and discount brokerage firms.

 

Brokerage firm

When you buy or sell a security, brokerage firms are licensed to complete the transaction. There are generally two types of brokerage firms: full-service brokers and discount brokers. Discount brokers charge lower commissions than full-service brokers and also provide little investment advice. Full-service brokers have much more comprehensive services and products including identifying investments and developing a financial plan.

 

Bubble

A temporary market condition created through excessive speculation resulting in an unsustainable run-up in prices. Bubbles can arise from many sources including government policies.

 

Bullion coins

Metal coins consisting of gold, silver, platinum, or palladium that are actively traded. Some examples include the American eagle and the Canadian maple leaf. Their price is directly connected to the underlying price of their metal.

 

Bullish

Investor bias to higher future prices for a stock or a market.

 

Bull market

A bull market is a period of time where stock markets or specific sectors have prices trending higher.

 

Business cycle

A predictable pattern of repeating cycles of economy-wide expansion and contraction.

 

Buy-and-hold strategy

Buy-and-hold is a passive investment strategy characterized by no active buying or selling of stocks over a period of time despite market fluctuations.

 

Buying on Margin

This is a form of leverage where an investor borrows money from a broker to purchase a stock. Margin buying allows the investor to buy more shares in a stock than current assets owned would purchase. Investors on margin believe the stock price will rise and are trying to maximize gains by margin leverage.

 

Buy order

This is an order to a broker to buy a specific quantity of a security.

 

Buy-side analyst

A financial analyst employed by a money management firm to research investment opportunities. This research is typically unavailable outside of the firm employing the analyst.

Call

For buyers, a call is an option that gives the owner the right to buy a certain security at the strike price on or before the expiration date of the call option. For call writers, the seller incurs an obligation to sell a certain security at the strike price on or before the expiration date if the call is exercised by buyers.

 

CAC 40

This is an index of the 40 largest stocks on the Paris bourse (stock market).

 

Capital asset

A long-term tangible asset (land, buildings, machinery, etc.), not purchased or sold in the normal course of business. They are generally illiquid assets used to produce revenue for the business and subject to depreciation for tax purposes.

 

Capital gain

This is a profit resulting from the sale of securities, property, or other assets that exceeds the purchase price, resulting in a financial gain to the seller.

 

Capital gains tax

The tax levied on profits from the sale of capital assets. Gains held for at least 12 months, are taxed at a maximum rate of 20% (taxpayers in 28% tax bracket) and 10% (taxpayers in 15% tax bracket). Assets held for less than 12 months are taxed at regular income tax levels as high as 35%. , and, since January 1, 2000, assets held for at least five years are taxed at 18% and 8%.

 

Capital formation

In economics, this is an expansion of capital or capital goods through savings, which generally leads to economic growth.

 

Capital loss

This is a loss resulting from the sales of securities, property, or other assets that is lower than the purchase price. Capital losses can be used to offset capital gains when filing taxes.

 

Capital structure

The combination equity, debt, or other securities used to finance a corporation's assets.

 

Cash

In financial accounting, the value of assets reported by a company that can be converted into cash immediately.

 

Cash basis

In accounting, the method that immediately recognizes revenues and expenses when cash is received or disbursed.

Capital expenditure (capex)

Expenditures that are made to create future revenue. Capital expenditures are incurred when a business spends money to buy fixed assets or to add to the value of an existing asset.

 

Cash costs

In the mining industry, cash costs include site costs, processing, and operations. They do not include royalties, production taxes, amortization, general & administration, capital improvements and exploration costs.

 

Certificate of deposit (CD)

A certificate of deposit or CD is a time deposit offered by a bank, thrift, or credit union that represents an asset to the depositor for a specified sum of money. The certificate guarantees to repay principal with interest paid on a specific maturity date. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to ,000.

 

Certified financial planner (CFP)

A recognized financial planning designation earned by qualifying financial advisors by the CFP Board of Standards in Denver, Colorado.

 

Channel

A range of prices characterized by support and resistance lines where the price of a security moves up and down.

 

Chicago Board Options Exchange

An exchange set up by the Chicago Board of Trade to trade stock options, foreign currency options and index options for the S&P 500 index and other benchmark indices.

 

 

CBOE

An exchange set up by the Chicago Board of Trade to trade stock options, foreign currency options and index options for the S&P 500 index and other benchmark indices.

 

Closing price

This is the final daily trading price of a stock after a market closes.

 

Coincident economic indicators

These are economic indicators that occur at the same time as an economy's general pace of economic activity. See Lagging economic indicators and Leading economic indicators.

 

Collateralized mortgage obligations (CMO)

These are mortgage-backed securities that are carved into an array of bonds of varying maturity, coupon and risk. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus.

 

Commodities

Raw materials such as grains, metals, livestock, oil, cotton, coffee, sugar and cocoa. Commodities are viewed as a hedge against inflation because commodity prices rise and fall with the consumer price index.

 

Common stock

Represents part ownership of a company. Holders of common stock have voting rights but no guarantee of dividend payments. In the event that a corporation is liquidated, the claims of owners of bonds and preferred stock take precedence over those who own common stock. For the most part, however, common stock has more potential for appreciation.

 

Compounding

Financial advisers love to talk about the magic of compounding. What magic? If your investments make 10% a year for five years, you earn not 50% but 61.1%. Here's the reason: As time goes on, you make money not only on your original investment but also on your accumulated gains from earlier years.

 

Cyclical Stocks

Company stocks that show higher sensitivity to the performance of the economy than other non-cyclical stocks. Generally, cyclical stock prices perform well when the economy is growing and fall in price when the economy contracts. Chemicals, transport, automobile manufacturing, paper, base metal mining, and steel manufacturing represent a few cyclical industries.

 

Day Trading

This is a style of buying and selling shares in a stock during the same trading day. It is also referred to as intraday trading.

 

Debt

In finance, a debt is created when money is borrowed with an expectation of repayment.

 

Deflation (price)

A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. It is the opposite of inflation.

 

Depletion

This is the decrease in quantity of a physical resource (oil, metals) in a deposit or property resulting from extraction or production.

Depreciation

Definition 1

A noncash reduction in the value of an asset as a result of usage, wear and tear, age, decay, or obsolescence. Most assets lose their value (depreciate ) over time and must be replaced. There are different methods of accounting used for writing off an asset's depreciation cost over the period of a useful life. Depreciation lowers the company's reported earnings while increasing free cash flow because it is a non-cash expense.

 

Dividend

Payments declared by a company's board of directors and paid out to the shareholders from a company's current or retained earnings. They are generally paid out quarterly and sometimes monthly. Dividends are usually paid in cash, but are also distributed as stock Companies are not required by law to pay dividends.

 

Due Diligence

The term used to describe the process of investigating of a business or person performed by investors to verify and evaluate material facts regarding a company.

 

Earnings

This is revenue minus cost of sales, operating expenses, and taxes, over a given period of time. Earnings are income and regarded by investors as the most important valuation factor for the price of a stock.

 

Earnings per share (EPS)

This is a company's net earnings divided by the number of shares outstanding. If a company earning million in one year had 4 million shares of stock outstanding, the EPS is per share.

 

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company's operating cash flow based on data from the company's income statement.

 

Economics

The study of how resources are allocated. Microeconomics examines the behavior of firms, consumers and the impact of government actions on the efficiency of markets. Macroeconomics, analyzes inflation, employment, industrial production, and the role fiscal and monetary policies.

 

Entrepreneur

A person starting a new company who is accountable for the risks and results associated with starting a new business.

 

Equity

Shareholders' equity is the remainder of assets minus liabilities in a company.

 

Exchange

A market in which securities, commodities, options, or futures are traded. Principal U.S. stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and National Association of Securities Dealers Automatic Quotation System (NASDAQS).

 

Exchange rate

The price of one country's currency expressed in another country's currency.

 

Exchange traded funds

These are funds that can be traded intraday on an exchange just like stocks. Many ETFs track many industries and sectors offering investors a chance to buy a basket of stocks in a particular area. Other ETFs track a single commodity or basket of commodities. Inverse ETFs are negatively correlated with sectors or commodities, providing an “inverse” relationship to a reference sector or commodity.

 

ETFs

These are funds that can be traded intraday on an exchange just like stocks. Many ETFs track many industries and sectors offering investors a chance to buy a basket of stocks in a particular area. Other ETFs track a single commodity or basket of commodities. Inverse ETFs are negatively correlated with sectors or commodities, providing an “inverse” relationship to a reference sector or commodity.

 

Federal Reserve Bank (the Fed)

The Federal Reserve Bank is the central banking system in the United States. It was created in 1913 by the Federal Reserve Act, in response to a series of financial panics or bank runs, especially a severe bank panic in 1907. Duties of the Fed include:

  • conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
  • supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
  • maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
  • providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

 

Federal funds market

This is a market where banks can borrow or lend money overnight to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.

 

Finance

A discipline concerned with determining value and making decisions. The finance function allocates resources, including the acquiring, investing, and managing of resources.

 

Financial analysis

This is analysis of a company's financial statement, often conducted by financial analysts and investors.

 

Financial analysts

Also called securities analysts and investment analysts,. Pofessionals who analyze financial statements, interview corporate executives, and attend trade shows, in order to write reports recommending either purchasing, selling, or holding various stocks.

 

Fiscal policy

This is the result of government spending and taxation for the purpose of stabilizing an economy.

 

Fiscal year (FY)

Any twelve month period designated by the company as a reporting period for determines earnings and profits. The fiscal year serves as a period of reference for the company and does not usually correspond to the calendar year.

 

Fixed Exchange Rate

This is an exchange rate regime where a currency's value is “fixed” to the value of another currency, basket of currencies or to gold.

 

Footsie (FTSE 100 Index)

An index of 100 companies on the London Stock Exchange representing about 80% of the market capitalization of the Exchange. The index is maintained by the FTSE Group, an independent company which originated as a joint venture between the Financial Times and the London Stock Exchange.

 

Force majeure

This is a common contract clause that frees both parties from liability when extraordinary events outside the control of signatories (war, riot, crime, fire, flood, storm, etc.) prevent one or both parties from fulfilling obligations under the contract.

 

Foreign exchange

This is the currency of another country. Traders refer to the shorthand term Forex to mean foreign exchange.

 

Fundamental Analysis

This is the process of examining income statements, balance sheets, and cash flow statements to reveal positive or negative traits that may not be factored into the price of a stock.

 

Futures

A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity exchange.

 

Future value (FV)

This is the amount of cash at a specified date in the future (FV) that is equivalent in value to a specified amount today, or present value (PV), based on the time value of money using a discount rate .

 

Generally Accepted Accounting Principles (GAAP)

Accounting rules and procedures established by the Financial Accounting Standards Board, an independent self-regulation organization.

 

Gold bullion

Investment-grade, pure gold in bulk form, and can be cast into gold bars or minted into gold coins.

 

Gold standard

This was a fixed exchange rate system adopted in the Bretton Woods agreement after World War II. It required the United States. to peg the dollar to gold and other countries to peg their currencies to the dollar.

 

Gross domestic product (GDP)

This is a basic aggregate measure of an economy's performance based on the market value of goods and services produced in a nation in a year.

 

Growth stock

Common stock of a company that is expected to enjoy better than average growth or earn more than the opportunity cost of capital.

 

Growth investor

This describes an investor who invests in growth stocks.

 

Hedging

This is the use of instruments like futures, options, or inverse ETFs to protect an investor portfolio without actually selling the portfolio holdings.

 

Income investor

This describes an investor who invests in income stocks.

 

Income statement

This is also called the profit and loss statement or statement of operations. It is a statement showing how a company's revenue and expenses are combined to determine the net income over some period of time.

 

Income stock

This generally refers to common or preferred stock paying a relatively high dividend yield with expected steady net asset growth.

 

Income Tax

A tax on any money earned during a fiscal year, usually filed on a yearly basis. All businesses except partnerships must file an annual income tax return. Partnerships file an information return.

 

Indicator

A value derived from a stock's price or volume for an investor to anticipate future price movements. Indicators are divided into two groups: trend following or lagging and momentum or leading. Lagging indicators tell you what prices are doing now, or in the recent past, so they are useful when stocks are trending such as moving averages. Leading indicators anticipate future price action.

 

Industrial Metals

Metals used in the manufacture of goods including aluminum, copper, and zinc.

 

Industry

This refers to a grouping of companies in the same line of business. Industry groupings are a subset of sector groupings. For example, the transportation sector includes airfreight, airline, railroad, shipping, and trucking groups.

 

Inflation

Definition 1: Price inflation is the rate at which the general level of prices for goods and services is rising.

Definition 2: Monetary inflation is the rate of growth in money provided in an economic system.

 

Inflation risk

Also called purchasing power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

 

Initial Public Offering (IPO)

This refers to the first offering of common stock to the public by a corporation.

 

Insiders

Any person who is a director or senior officer of a company, has access to non-public information concerning the company, or who owns more than 10% of the voting shares of a company.

 

iShares

Developed by Barclays Global Investors, iShares are index funds that trade like stocks. These shares can be bought or sold like normal stocks and are designed to track:

 

Institutional broker

These brokers buy and sell securities for institutional investors such as banks, and mutual funds, pensions.

 

Institutional investors

These are non-bank organizations that trade shares in large enough quantities that they qualify for preferential access to company officials and lower commissions on trades. Institutional investors are typically insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

 

Insurance

This involves the payment of a premium to an insurance company as a way of guarding against property loss or damage in exchange for an agreed-upon sum to the insured in the event of loss.

 

Intrinsic Value

This is a term used in fundamental analysis to determine the “actual” value of a company as distinct from its current market value. Intrinsic value requires the use of subjective assumptions that, if wrong, can render the intrinsic value amount inaccurate.

 

Investment Advisers Act

Legislation passed in 1940 that requires financial advisers to register with the Securities and Exchange Commission. The measure was enacted to protect the public from fraud or misrepresentation by investment advisers.

 

Investment strategy

A plan that investors use when deciding how to allocate capital among several options including stocks, bonds, cash equivalents, commodities, and real estate. The strategy takes into account the investor's tolerance for risk as well as future needs for capital.

 

Investor relations

This includes the business unit and the process that corporations use to communicate with investors.

 

IRA

A tax-deferred custodial account or trust in which individuals may set aside earned income for retirement.

 

Laddering

This refers to a bond portfolio strategy that invests equal amounts over different terms (time periods) so that the entire term structure strikes the optimal balance between portfolio liquidity and yield.

 

Laggard

This refers to an industry or company that is under performing the market.

 

Lagging economic indicators

These are economic indicators that follow rather than lead a nation's overall pace of economic activity. See Leading economic indicators and coincident economic indicators.

 

Leader

This refers to an industry or company that is outperforming the market.

 

Leading economic indicators

These are economic series that tend to rise or fall in advance of the rest of the economy. See Lagging economic indicators and coincident economic indicators.

 

Limit Order

This is an order to buy or sell a security at a specific price. As opposed to a market order, limit orders might not be filled immediately if the market moves away from the specified price.

 

Liquid

This refers to stocks characterized by a large volume of trading and a large pool of interested buyers and sellers that make it easy to buy or sell a particular stock.

 

Long-term debt

These are debt obligations repayable in more than one year.

 

MACD (Moving Average Convergence/Divergence)

MACD is an indicator developed by Gerald Appel that displays momentum characteristics in a security or market. It is calculated by subtracting a 26-period exponential moving average of a given security from the 12-period exponential moving average.

 

Margin

This feature allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the broker loan.

Margin call

This is a demand for additional funds by brokers from investors who have borrowed on margin as a result of adverse price movement.

 

Market Capitalization

Also known as market cap, it is the total market value of a company (number of shares outstanding multiplied by the price of the stock). A company with 100 million shares outstanding and a stock price of would have a market capitalization of million.

 

Market Order

These are orders to buy or sell a security at the current market price. They are also referred to as "at the market" and are generally filled immediately by market makers. Sell “market orders” are usually filled at the bid price and a buy “market orders” are usually filled at the ask price.

 

Market value

Definition 1: The price at which a security is trading and could presumably be purchased or sold.

Definition 2: What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.

 

Markowitz, Harry

He is the 1990 winner of the Nobel Prize in economics and best known as the father of modern portfolio theory (MPT). MPT studies the effect of asset risk, return, correlation, and diversification on expected investment portfolio returns.

 

Markowitz diversification

A strategy that seeks to combine in a portfolio assets with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return.

 

Markowitz efficient portfolio

This is a portfolio for which no added diversification can lower the portfolio's risk for a given return expectation, and on the flip side, no additional expected return can be gained without increasing the risk of the portfolio.

 

Modern portfolio theory

A theory introduced by Harry Markowitz based on the principle that investors can construct portfolios along an efficient frontier balancing the risk-return trade-offs through diversification of investments.

 

Momentum trading

Generally, this is a technique used by intraday traders to buy stocks when they are rising on high volume and sell short stocks that are declining on high volume.

 

Monetary policy

Actions taken by central bankers, such as the Board of Governors of the Federal Reserve System in the U.S., to influence the money supply through interest rates and other adjustments.

 

Monetize the debt

A policy undertaken by central bankers to finance the national debt by sharply increasing the supply of money and creating higher inflation that reduces the value of debt obligations.

 

Money

A medium of exchange authorized by government as a monetary unit (paper notes and metal coin) recognized as legal tender by the government.

 

Mortgage REIT

A company classified for tax purposes as a real estate investment trust (REIT) that invests in loans secured by real estate and receives income from mortgage interest. Mortgage REITs generally borrow short term at low interest rates and invest in longer maturity mortgage backed notes at higher interest rates.

 

Mutual fund

Pools of money collected from a large number of investors and managed by a money management company regulated by the Investment Company Act of 1940. These funds offer investors several strategies, depending on the fund investment charter. They provide small investors the opportunity to diversify their holdings in exchange for expenses to manage the fund. Funds impose a load, or sales charge, on investors as shares are bought and sold. No-load funds impose no sales charge.

 

National Association of Securities Dealers Automatic Quotation System

An electronic stock quote system created in 1971 that provides price quotations on more than 5,000 common stocks. The NASDAQ is known for attracting high technology companies such as Microsoft, Cisco, Dell, and Apple.

 

NASDAQ

An electronic stock quote system created in 1971 that provides price quotations on more than 5,000 common stocks. The NASDAQ is known for attracting high technology companies such as Microsoft, Cisco, Dell, and Apple.

 

New York Stock Exchange (NYSE)

The NYSE was founded in 1792 and the largest in the United States by market capitalization. It is known as the Exchange or the Big Board and located on Wall Street in New York City.

 

Net income (NI)

This is the company's total earnings or profits. Net income reflects revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. It is the most common net flow of funds measure used by investors. Earnings per share (EPS) are net income divided by the number of shares outstanding.

 

Normal Retirement Age (NRA)

The age after which a pension plan or Social Security beneficiary can retire and receive immediate unreduced benefits.

 

Odd lot

This is a trading order for less than 100 shares of stock.

 

Off-balance-sheet financing

This is financing not recorded as a liability on a company's published balance sheet.

 

Opportunity cost

Opportunity cost is the cost of forgoing the next best investment opportunity available to an investor.

 

Option

This instrument is a financial derivative that gives a buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors issue options. Companies do not issue options. Options are called derivatives because the securities obtain their worth from the value of an underlying investment.

 

Option account

This is a brokerage account that is approved to hold option positions or allow trades by account holders.

 

Over The Counter (OTC)

The OTC is a securities market that is not a physical place where trades are conducted like the NYSE trading floor. OTC securities are traded by telephone or computer network.

 

Overbought

A technical situation when prices are considered too high and susceptible to a decline. In technical analysis, overbought conditions are when an oscillator has reached its upper bound.

 

Overbought-oversold indicator

In technical analysis, this is an indicator that defines when prices have moved too far and too fast in either direction and can be expected to correct in the other direction.

 

Oversold

A technical situation when prices are considered too low and likely to rise. In technical analysis, oversold conditions are when an oscillator has reached its lower bound.

 

Par

Generally, a value equal to the nominal or face value of a bond. A bond selling at par is worth its original issue value or value when redeemed at maturity - typically ,000 for corporate and ,000 for government bonds.

 

Pay Out Ratio

The percentage of net income or earnings paid out in dividends.

 

Penny Stock

This is a stock that usually trades at less than per share. Many of these stocks are listed on the over-the-counter (OTC) market. Penny stocks are considered speculative due to their lack of available information and lack of volume traded.

 

Position Trading

This is a style of trading characterized by holding open positions for several days to several months depending on whether or not the investment hits a specific objective, usually price.

 

Price/Earnings Ratio (PE Ratio)

This ratio is derived by dividing the current share price by a company's earnings per share. For example, a stock selling at , and earnings of glossary.pl.50 per share for the year, has a PE ratio of 10 (5/.50 = 10).

 

Prospectus

This is the official legal document that describes a fund, its goals and strategies, and offers shares for sale. Prospectus' are generally required to be made available to all investors before they invest or with their purchase confirmation.

 

Public offering price

This is the purchase price of a new issue of securities when the issue is offered to the public.

 

Puke

This is a slang term for a trader who is selling, generally, a losing position, usually a losing position.

 

Put Option

For sellers, a put gives the owner the right, but not the obligation, to sell a certain security at a set price within a specified time. The buyer of a put option is speculating that the price of the stock will go down.

 

Rate of return

This is the rate of profit (positive or negative) on an investment relative to the original investment over a period of time.

 

Recession

This is a temporary downturn in economic activity, usually lasting at least two consecutive quarters by negative GDP growth.

Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of settling of intergovernmental claims. It is generally the primary reference currency for commodity transactions in global trade.

 

Resistance

Resistance is a price level where there are enough shares available at the ask price to cause a rising stock price to plateau and reverse the price trend downwards.

 

Retracement

This is a shift in the movement of share price that runs counter to the existing trend. Retracements typically shift one-third to two-thirds of prior price trend movements. Price trend movements that cover more than two-thirds of a prior price trend movement are said to signal a trend reversal.

 

Return on equity (ROE)

ROE is the amount of annual net income returned as a share of shareholder equity. ROE is calculated by dividing net income for a 12 month period by common stockholder equity. The result is expressed as a percentage.

 

Return on investment (ROI)

ROI is the amount of total net income returned as a share of shareholder equity over several periods of time. ROE is calculated by dividing net income since the inception of the investment by the cost of the investment. The result is expressed as a percentage or ratio.

 

Reversal Pattern

This is a shift in the movement of share price that runs counter to the existing trend. Reversals typically move more than two-thirds the gain or loss of prior price trend movements.

 

Risk

Risk has several dimensions and is defined in different ways. It is used by financial analysts to express the volatility of a stock or standard deviation of price over time. A more common usage is the degree of possibility of losing a portion or all of an investment. Other dimensions include political risk and management execution risk.

 

Risk-adjusted return

This is generally a benchmarked measure showing how much risk is being undertaken to produce a return on an investment.

 

Risk-averse

This describes an investor who, with two investment opportunities and the same expected return but different levels of risk, will generally prefer the lower risk investment.

 

Risk Free Asset

An asset with certainty in future returns. The standard for a risk-free investment includes treasury bills, notes, and bonds issued by the U.S. government.

 

Russell 3000 Index

This index tracks the 3000 largest publicly traded companies by market capitalization in the United States.

 

S&P 500 Composite Index

An index of 500 widely held common stocks chosen by market capitalization, liquidity, and other factors. The index is designed to measure the general performance of the market.

 

Scale in


This is the process of gradually taking a position in a security over time, ideally at lower share prices than the current price.

 

Scale out

This is the process of gradually selling a portion of shares in a larger position in a security over time, ideally at higher prices than when the shares were purchased.

 

Secondary market

This is a market where investors buy securities after they are initially offered for sale in what is called the primary market. Most trading occurs in the secondary market. The New York Stock Exchange, NASDAQ, the Toronto Exchange are secondary markets.

 

Sector rotation

This is an active asset management approach that tactically shifts from one sector of the economy to another depending on expected future performance.

 

Sector

This is a group of companies that generate revenue from similar products or services. Sectors are comprised of smaller groups called industries. The S&P 500 Index has sector categories as follows: Basic Industries, Consumer Services, Consumer Staples, Energy, Financials, Industrials, Technology, Transport/Cyclicals, and Utilities.

 

Sell order

This is an order from an investor to a broker to sell a security.

 

Selling short

This occurs when an investor sells a stock that is not owned, but borrowed. The investor is betting that the share price will decline within a specified time period.

 

Sell-side analyst

This is a financial analyst who works for a brokerage firms that sell securities and make recommendations to the brokerage firm clients.

 

Senior debt

A debt (bond) that in the event of bankruptcy, takes priority payment before other debt (subordinated debt).

Sentiment Indicators

These are popular indicators used by technical analysis that attempt to describe bullish or bearish attitudes by investors.

 

Short

This is the process of an investor selling a borrowed security, currency, or commodity at current prices. The intent of the investor is to make money when the instrument falls in price over a time period when the investor buys it back at a lower price to deliver to the buyer.

 

Size

This refers to the relative magnitude of shares in an offering, order, or trade.

 

Smart money

This refers, generally, to large institutional investors on Wall Street with the contacts and knowledge to consistently make profits in the equity and debt markets.

 

Stock

This is an interest in a corporation specified in shares of ownership, entitling the holder to a piece of the corporation's assets and earnings.

 

Stock split

This is when a firm divides existing shares of stock into multiple shares. The share price is also divided by the multiple to maintain the previous market capitalization.

 

Stock ticker (symbol)

A series of letters assigned to securities and funds trading on financial exchanges.

 

Stop-loss order

This is an order to sell a stock when the price falls to a specified level.

 

Subordinated debt

Debt that is junior, or second in line, to senior debt.

 

Subsidiary

This is a wholly or partially owned company that is part of a larger company.

 

Support

In technical analysis, this is the price level where there is sufficient demand for a stock to stop a downward price trend and turn the trend up.

 

Swing Trading

A style of trading characterized by buying a stock, index, or commodity at or near opposite cycle swings caused by daily or weekly price volatility.

 

Systemic risk

This is the risk of a collapse of an entire financial system or market rather than a more narrow company or country risk. Characteristics include risk that cannot be diversified away because every asset class declines sharply in price.

 

 

Technical Analysis (TA)

TA is a security analysis discipline seeking to indentify and interpret price and volume patterns in past security prices.

 

Technical analysts

Also called chartists or technicians, analysts who use mechanical rules to detect changes in the supply of and demand for a stock, and to capitalize on the expected change.

 

TED Spread

This is the difference between 3-month US Treasury rates and the 3-month Euro Dollar contract. This indicator is used to measure the strength of the credit markets and a measure of investor/trader anxiety or credit quality.

 

Thin market

This is a market that is infrequently traded with low volume resulting in bid and asked quotes that are wide. The instrument traded is not liquid.

 

TICK

This is a market indicator based on the number of stocks where the last trade was an uptick versus a downtick. It is used by technical analysts as an indicator of market sentiment for predicting future trends in markets.

 

Tight market

A market characterized by high volume and active trading. As a result, spreads between the bid and ask prices are relatively narrow.

 

Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

 

Top-Down investing

An approach to investing that first looks at global economic and market trends before looking at sectors, industries and companies. Strong and weak sectors/industries are identified before looking at individual stocks within sectors or industries.

 

Toronto Stock Exchange

This is Canada's largest stock exchange and is dominated by resource based companies. There are about 1,200 company stocks on the TSE.

 

TSE

This is Canada's largest stock exchange and is dominated by resource based companies. There are about 1,200 company stocks on the TSE.

 

Treasury Bills (T –Bills)

Also called T - Bills, they are short-term debt securities issued by the U.S. government. Maturities are generally less than a year and typically have maturities that are 13, 26 and 52 weeks. The 13 week T- Bill is commonly viewed as a benchmark interest rate by bond traders.

 

Treasury Bonds (T- Bonds)

T- Bonds are long-term debt securities issued by the U.S. government with maturities generally running 15, 30, and recently 40 years. The 30 year T- Bonds is commonly viewed as a benchmark interest rate by bond traders.

 

Treasury Notes (T- Notes)

T- Notes are medium-term debt securities issued by the U.S. government with maturities generally running 2, 5 and 10 years. The 2- and 10- year T- Notes are commonly viewed as a benchmark interest rates by bond traders.

 

Trend

This refers to the direction of prices. Up trends are characterized by lines rising along the y-axis of a chart. Downtrends are characterized by lines declining along the y-axis of a chart. Trends are generally classified as major if longer than a year, intermediate if lasting from one to six months, or minor if lasting less than one month.

 

Trading range

A price channel where a security or commodity has price rises and falls within an upper and lower boundary.

 

Value investor

Value investors seek stocks at a discount to their "fair value" and to eventually sell them at or in excess of that value. The most celebrated value investors include Benjamin Graham and Warren Buffet. Value stocks are generally those with a low price-to-book value ratio.

 

Volatility Index (VIX)

The Market Volatility Index or VIX measures the implied volatility of the Standard & Poor's 500 index options . A high value means a more volatile S&P 500 and more costly options. A low value means a less volatile S&P 500 and less costly options. The VIX is described by traders as the options market's gauge of investor fear or “fear index.” The VIX indicator was created in 1993 and is updated intraday by the Chicago Board Options Exchange (CBOE) based on the Standard & Poor's 500 Index (SPX) bid/ask quotes.

 

Volume

The number of shares traded in a security over a period of time.

 

Yield

The percentage rate of return paid on a share of stock based on the dividend payout or the effective rate of return paid on a bond or note.

 

Yield curve

In financial jargon, the yield curve is the relative position between the interest rate among several U.S. government bond term structures (time to maturity). If the yield on bonds with shorter maturities is higher than longer maturities, that is called an inverted yield curve.

 

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