Glossary of Terms
A
Abnormal Returns: Part of the return that is not due to market wide influences. In other words, abnormal returns are above those predicted by the market movement alone.
Accounting Exposure: The change in the value of a firm's foreign currency denominated accounts due to a change in exchange rates.
Accounting Earnings: Earnings of a firm as reported on its income statement.
Accounting Insolvency: Total liabilities exceed total assets. A firm with a negative net worth is insolvent.
Accounting Liquidity: The ease and quickness with which assets can be converted to cash.
Accounts Payable: Money owed to suppliers.
Accounts Receivable: Money owed by customers.
Accrued interest: The accumulated interest earned but not yet paid to the holder of a debt instrument.
Acquiree: A firm that is being acquired.
Acquirer: A firm or individual that is acquiring something.
Active Portfolio: A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly.
Alpha: A measure of selection risk of a fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk of the fund, instead of accepting the market return by investing broadly.
Analyst: Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on their shares. Often they specialise in a specific industry.
Annual Report: Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, its balance sheet and income statement. Exchange rules require that it be distributed to all shareholders.
Ask Price: This is the lowest price an investor will accept to sell a share. This is the quoted offer at which an investor can buy shares; also called the offer price.
Assets: A companies productive resources.
Auditor's Report: A section of an annual report containing the auditor's opinion about the veracity of the financial statements.
B
Back Office: Brokerage house clerical operations that supports the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory compliance.
Balance of Payments: All economic transactions between residents of that nation and residents of all other nations during a specified period of time, usually a calendar year.
Balance of Trade: Net flow of goods calculated by exports minus imports, between countries.
Balance Sheet: A statement of companies financial condition that is a summary of the assets, liabilities, and owners' equity.
Bear: An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices, usually by 20% or more.
Bear Market: Any market in which prices are in a declining trend.
Beta: The measure of a fund's or shares risk in relation to the market. A beta of 0.7 means the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.
Bid price: This is the quoted bid, or the highest price an investor is willing to pay to buy a share. This is the available price at which an investor can sell shares.
Bond: Bonds are debt and are issued for a period of more than one year. The government, local authorities, banks, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.
Book: A banker, brokerage firm's or trader's positions in the market.
Book Value: A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value.
Broker: An individual who is paid a commission for executing customer orders.
Bull: An investor who thinks the market will rise.
Bull Market: Any market in which prices are in an upward trend.
Buy Back: An agreement with a commitment by the company to buy a security back from shareholders at a specified price at a designated future date.
C
Call Option: An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.
Capital Note: A debt security that pays a fixed rate of interest for a specified time period. At maturity the investor is offered the option of investing for a further period or converting to ordinary shares, usually at a discount to the prevailing market price.
Capital Gain: When a share is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original cost. If a share is sold above cost, the difference is a capital gain.
Capital Loss: When a share is sold for a loss, it's the difference between the net sales price of securities and their net cost, or original cost. If a share is sold below cost, the difference is a capital loss.
Capital Markets: The market for trading long-term debt instruments (those that mature in more than one year).
Cash Market: Also called spot market, these are markets that involve the immediate delivery and settlement of a security or instrument
Certificate of Deposit(CD): A certificate issued by a bank or institution that indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.
Chartist: Analysts who use mechanical rules to detect changes in the supply of and demand for a share, currency or futures and capitalise on the expected change.
Close: The period at the end of the trading session. Sometimes used to refer to closing price.
Commercial Paper: Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.
Commission: The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value.
Commodity: A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts.
Common Stock: These are securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security.
Compound Interest: Interest paid on previously earned interest as well as on the principal.
Confirmation: The written statement that follows any "trade" in the securities markets. Confirmation is issued immediately after a trade is executed. It spells out settlement date, terms, commission, etc.
Consensus Forecast: The mean of all financial analysts' forecasts for a company.
Consumer Price Index: The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of inflation.
Contract: A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.
Control: 50% of the outstanding votes plus one vote.
Convertible Security: A security that can be converted into ordinary share at the option of the security holder, including convertible bonds and convertible preferred shares.
Coupon: The periodic interest payment made to the bondholders during the life of the bond.
Cross Rate: The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency, other than the USD.
Current Assets: Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year.
Current Liabilities: Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
D
Day order: An order to buy or sell a share that automatically expires if it can't be executed on the day it is entered.
Day Trading: Refers to establishing and liquidating the same position or positions within one day's trading.
Dead Cat Bounce: A small upmove in a bear market.
Dealer: An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price).
Debenture: An secured or unsecured bond whose holder has the claim of a general creditor on all assets of the issuer not pledged specifically to secure other debt.
Debt/Equity Ratio: Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.
Debt: Money borrowed
Debt Instrument: An asset requiring fixed dollar payments, such as a government or corporate bond.
Debt Ratio: Total debt divided by total assets.
Debt Securities: IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and other instruments.
Default: Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a loan.
Deficit: An excess of liabilities over assets, of losses over profits, or of expenditure over income.
Delivery Notice: The written notice given by the seller of his intention to make delivery against an open, short futures position on a particular date.
Delta: The ratio of the change in price of a call or put option to the change in price of the underlying share or futures contract.
Depreciation: A non-cash expense that provides a source of free cash flow. Amount allocated during the period to amortize the cost of acquiring long term assets over the useful life of the assets.
Derivative Instruments: Contracts such as options and futures whose price is derived from the price of the underlying financial asset.
Direct Placement: Selling a new issue not by offering it for sale publicly, but by placing it with one of several institutional investors.
Discount: Referring to the selling price of a bond, a price below its par value.
Discount Rate: The interest rate that the US Federal Reserve Bank charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited.
Discretionary Account: Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.
Diversification: Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
Dividend: A dividend is a portion of a company's profit paid to shareholders. A share selling for $10 with an annual dividend of $0.50 a share yields the investor 5%.
Dividend Reinvestment: Automatic reinvestment of shareholder dividends in more shares in the company, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. Dividend reinvestment plans allow shareholders to accumulate shares over the long term using dollar cost averaging. The reinvestment is usually administered by the company without charges to the holder.
Dividend Yield: Indicated yield represents annual dividends divided by current stock price.
Double-Tax Agreement: Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.
Dow Jones Industrial Average: This is the best known U.S.index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S.companies are performing.
E
Earnings: Net income for the company during the period.
Earnings Per Share (EPS): EPS, as it is called, is a company's profit divided by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.
EDGAR: The US Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.
Efficient Market: The degree to which the knowledge and expectations of all investors about companies are factored into the market prices of shares. The market is said to be efficient when prices reflect all the information available to investors. Rules and practices on company reporting and disclosure promote market efficiency as well as fairness.
Equities: Another word for shares, which represent part ownership in a company (or a share in a company’s “equity”).
Equity: Represents ownership interest in a firm.
Eurodollar: This is an American dollar that has been deposited in a European bank or an U.S. bank branch located in Europe. It got there as a result of payments made to overseas companies for merchandise.
Exchange: The marketplace in which shares, options and futures on stocks, bonds, commodities and indices are traded.
Exchange Rate: The price of one country's currency expressed in another country's currency.
Exercise: To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.
Expiration: The time when the option contract ceases to exist (expires).
Ex-Dividend: This literally means "without dividend." The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend.
Ex-Dividend Date: The first day of trading when the seller, rather than the buyer, of a share will be entitled to the most recently announced dividend payment.
F
FASTER: The electronic system used in all buying and selling of shares on NZX Markets. FASTER stands for Fully Automated Screen Trading and Electronic Registration System.
Fair Market Price: Amount at which an asset would change hands between two parties, both having knowledge of the relevant facts.
Federal Funds Rate: This is the interest rate that US banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction of U.S. interest rates.
Federal Reserve System (US): The central bank of the U.S., established in 1913, and governed by the Federal Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized to regulate monetary policy in the U.S. as well as to supervise Federal Reserve member banks, bank holding companies, international operations of U.S.banks, and U.S.operations of foreign banks.
Financial Intermediaries: Institutions that provide the market function of matching borrowers and lenders or traders.
Financial Leverage: Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity.
Financial Risk: The risk that the cash flow of an issuer will not be adequate to meet its financial obligations. Also referred to as the additional risk that a firm's shareholder bears when the firm utilises debt and equity.
Fixed Asset: Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.
Fixed-Income Market: The market for trading bonds and preferred shares.
Fixed-Rate Loan: A loan on which the rate paid by the borrower is fixed for the life of the loan.
Foreign Exchange: Currency from another country.
Forward Cover: Purchase or sale of forward foreign currency in order to offset a known future cash flow.
Forward Exchange Rate: Exchange rate fixed today for exchanging currency at some future date.
Fundamental Analysis: Security analysis that seeks to detect misvalued securities by an analysis of the firm's business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm.
Futures Contract: Agreement to buy or sell a fixed amount of a stock, commodity, financial instrument in a designated future month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures market. A futures contract is the promise to actually make a transaction.
Futures Market: A market in which contracts for future delivery of a commodity or a security are bought or sold.
Futures Price: The price at which the parties to a futures contract agree to transact on the settlement date.
G
Gamma:The ratio of a change in the option delta to a small change in the price of the asset on which the option is written.
Gilts:British and Irish government securities.
Globalization:Tendency toward a worldwide investment environment, and the integration of national capital markets.
Gross Domestic Product (GDP): The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in a country, but excluding the income of the country's residents and corporations overseas.
Gross National Product (GNP): Measures and economy's total income. It is equal to GDP plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.
Gross Profit Margin: Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold.
Growth Stock: Common stock of a company that has an opportunity to invest money and earn more than the opportunity cost of capital.
H
Hard Currency: A freely convertible currency that is not expected to depreciate in value in the foreseeable future.
Hedge Fund: A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks based on a valuation model.
Hedge: A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.
Hit: A dealer who agrees to sell at the bid price quoted by another dealer is said to "hit" that bid.
Holding Company: A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.
Hot Money: Money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears.
Human Capital: The unique capabilities and expertise of individuals in an organisation.
Hybrid Security: A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixed-income security and a common stock instrument.
I
Imputation Credits: A tax credit shareholders often receive along with dividend income. Dividends are paid out from profits on which the company has already paid tax – and imputation credits mean shareholders do not have to pay tax again on their share of the same profits.
Income Stock: Common stock with a high dividend yield and few profitable investment opportunities
Index Fund: A passive instrument strategy consisting of the construction of a portfolio of shares designed to track the total return performance of an index.
Industry: The category describing a company's primary business activity. This category is usually determined by the largest portion of revenue.
Initial Margin Requirement: When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash.
Initial Public Offering (IPO): A company's first sale of shares to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their shares.
Insider Trading: Trading by officers, directors, major shareholders, or others who hold private inside information allowing them to benefit from buying or selling shares.
Insolvent: A firm that is unable to pay debts and/or its liabilities are greater than its assets .
Institutional Investors: Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.
Instruments: Financial securities, such as money market instruments or capital market insturments.
Intangible Asset: A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.
In-the-Money: A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price.
Intrinsic Value: The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value.
L
Last Trading Day: The final day under an exchange's rules during which trading may take place in a particular futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of underlying physical commodities or financial instruments, or by agreement for monetary settlement depending upon futures contract specifications.
Lead Manager: The commercial or investment bank with the primary responsibility for organising syndicated bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.
Leveraged Buyout (LBO): A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade.
LIBOR: The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR.
Limit Order: An order to buy a stock at or below a specified price or to sell a stock at or above a specified price. The customer specifies a price and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.
Limited Partnership: A partnership that includes one or more partners who have limited liability.
Line of Credit: An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain.
Liquidation: When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders.
Liquidity Risk: The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.
Listed Company: A company whose shares are traded on an exchange.
Long: One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.
Long Liquidation: Any transaction that offsets or closes out a Long position.
Long-term: In accounting information, one year or greater.
M
Make a Market: A dealer is said to make a market when he quotes bid and offered prices at which he stands ready to buy and sell.
Margin: This 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 loan a broker makes.
Margin Account: A leverageable account in which shares can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the shares and, if the value of the share drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the shares. in the US margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
Margin Call: A demand for additional funds because of adverse price movement. Maintenance margin requirement, security deposit maintenance.
Mark-to-Market: The process whereby the book value or collateral value of a security is adjusted to reflect current market value.
Market Capitalisation: The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.
Market Order: This is an order to immediately buy or sell a security at the current trading price.
Maturity: For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.
Merchant Bank: A bank that specializes not in lending out its own funds, but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio management, etc.
Merger: Acquisition in which all assets and liabilities are absorbed by the buyer. More generally, any combination of two companies.
Money Center Banks: Banks that raise most of their funds from the domestic and international money markets , relying less on depositors for funds.
Money Market: Money markets are for borrowing and lending money for three years or less. The securities in a money market can be government bonds, treasury bills and commercial paper from banks and companies.
Moving Average: Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or as long as several years and showing trends for the latest interval. As each new variable is included in calculating the average, the last variable of the series is deleted.
Mutual Fund:Mutual funds are pools of money that are managed by an investment company. They offer investors a variety of goals, depending on the fund and its investment charter.
N
NASDAQ: National Association of Securities Dealers Automatic Quotation System. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included in the NASDAQ system.
Net Asset Value (NAV): The value of a fund's investments. For a managed fund, the net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may vary significantly from the net asset value.
Net Assets: The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.
Net Income: The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.
Net Present Value of Growth Opportunities: A model valuing a firm in which net present value of new investment opportunities is explicitly examined.
Notes to the Financial Statements: A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements.
O
Off-Balance-Sheet Financing: Financing that is not shown as a liability in a company's balance sheet.
Open Interest: The total number of derivative contracts traded that not yet been liquidated either by an offsetting derivative transaction or by delivery.
Open Position: A net long or short position whose value will change with a change in prices.
Open-Market Operation: Purchase or sale of government securities by the monetary authorities to increase or decrease the domestic money supply.
Operating Profit Margin: The ratio of operating margin to net sales
Operating Risk: The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage.
Opportunity Costs: The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up.
Option: Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of a class of securities called derivatives, so named because these securities derive their value from the worth of an underlying investment.
Option Price: Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future.
Out-of-the-Money Option: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Oversubscribed Issue: Investors are not able to buy all of the shares or bonds they want, so underwriters must allocate the shares or bonds among investors. This occurs when a new issue is underpriced or in great demand because of growth prospects.
Over-the-Counter Market (OTC): A decentralised market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a share or bond exchange. The NASDAQ market is an OTC market for U.S. stocks.
P
Paper Gain (loss): Unrealised capital gain (loss) on securities held in portfolio, based on a comparison of current market price to original cost.
Par Value: Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.
Passive Portfolio Strategy: A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities.
Portfolio: A collection of investments, real and/or financial.
Position: A market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity is said to have a short position.
Preferred Shares: Preferred shares give investors a fixed dividend from the company's earnings. And more importantly: preferred shareholders get paid before common shareholders.
Present Value: The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future.
Present Value of Growth Opportunities: (NPV) Net present value of investments the firm is expected to make in the future.
Price/Earnings Ratio (PE): Shows the "multiple" of earnings at which a stock sells. Determined by dividing current share price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher "multiple" means investors have higher expectations for future growth, and have bid up the stock's price.
Price/Sales Ratio: Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding.
Prospectus: Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.
Proxy: Document intended to provide shareholders with information necessary to vote in an informed manner on matters to be brought up at a stockholders' meeting. Includes information on closely held shares. Shareholders can and often do give management their proxy, representing the right and responsibility to vote their shares as specified in the proxy statement.
Put: An option granting the right to sell the underlying futures contract. Opposite of a call.
R
Rally: An upward movement of prices. Opposite of reaction.
Ratings: An evaluation of credit quality Moody's, Standard and Poors, and Fitch Investors Service give to companies used by investors and analysts.
Real Interest Rate: The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.
Rights Issue: A rights issue is when a company issues the right, to existing shareholders of a security, to buy more shares at a given price (usually at a discount to the market price) within a fixed period. Rights issues can be renounceable (the shareholder has the option of selling or transferring their right to buy more shares) or non-renounceable (the shareholder may not sell or transferring their right to buy shares. A non-renounceable rights issue is also called an entitlement.)
Risk: Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.
Risk Management: The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.
Round-Turn: Procedure by which the Long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.
S
Scalp:To trade for small gains. It normally involves establishing and liquidating a position quickly, usually within the same day.
Secondary Market: The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market. The New York stock Exchange, as well as all other stock exchanges, the bond markets, etc., are secondary markets. Seasoned securities are traded in the secondary market.
Sector: Refers to a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon.
Selling Short: If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you borrow 1000 shares of a company on 1st Mar and sells it for $9 per share. Then, on 1st May, you purchase 1000 shares of the company at $8 per share. You've made $1000 by selling short. You made a profit because you have bought at a lower price ($8) than the price ($9) you sold the shares for.
Settlement Date: The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently 3 business days after the trade. For mutual funds, settlement usually occurs in the U.S.the day following the trade. In some regional markets, foreign shares may require months to settle.
Shareholders' Equity: This is a company's total assets minus total liabilities. A company's net worth is the same thing.
Sharpe Ratio: A measure of a portfolio's excess return relative to the total variability of the portfolio.
Speculator: One, who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits. A speculator does not use the market in connection with the production, processing, marketing or handling of a product.
Split: Sometimes, companies split their outstanding shares into a larger number of shares. If a company with 1 million shares did a two-for-one split, the company would have 2 million shares. An investor with 100 shares before the split would hold 200 shares after the split. The investor's percentage of equity in the company remains the same, and the price of the stock he owns is one-half the price of the stock on the day prior to the split.
Spot Exchange Rate: A foreign exchange transaction to be delivered in two business days.
Spot Month: The nearest delivery month on a futures contract.
Spread: (1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money.
Subordinated Debt: Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debtholders receive payment only after senior debt claims are paid in full.
T
Takeover: General term referring to transfer of control of a firm from one group of shareholder's to another group of shareholders.
Tangible Asset: An asset whose value depends on particular physical properties. These i nclude reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art.
Target Firm: A firm that is the object of a takeover by another firm.
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 capitalize on the expected change.
Term Loan: A bank loan, typically with a floating interest rate, for a specified amount that matures in between one and ten years and requires a specified repayment schedule.
Theta: Also called time decay, the ratio of the change in an option price to the decrease in time to expiration.
Tick: Refers to the minimum change in price a security can have, either up or down.
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.
Trading Halt: Trading of a stock, bond, option or futures contract can be halted by an exchange while news is being broadcast about the security.
Treasury Bills: Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T-bills are usually 91 days, 182 days, or 52 weeks.
Treasury Bonds: Debt obligations of the U.S. Treasury that have maturities of 10 years or more.
Treasury Notes: Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years.
U
Underlying Asset: The asset that an option gives the option holder the right to buy or to sell.
Underlying Security: Options: the security subject to being purchased or sold upon exercise of an option contract.
Underperform: When a security is expected to appreciate at a slower rate than the overall market.
Underpricing: Issue of securities below their market value.
Underwrite: To guarantee, as to guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. To bring securities to market.
Unsecured Debt: Debt that does not identify specific assets that can be taken over by the debtholder in case of default.
V
Value Date: In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future date in the case of a forward foreign exchange trade.
Variable Cost: A cost that is directly proportional to the volume of output produced. When production is zero, the variable cost is equal to zero.
Variable Rate Loan: Loan made at an interest rate that fluctuates based on a base interest rate such as the OCR, US Prime Rate or LIBOR.
Venture Capital: An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
Volatility: A measure of risk based on the standard deviation of investment fund performance over 3 years. Scale is 1-9; higher rating indicates higher risk. Also, the standard deviation of changes in the logarithm of an asset price, expressed as a yearly rate. Also, volatility is a variable that appears in option pricing formulas. In the option pricing formula, it denotes the volatility of the underlying asset return from now to the expiration of the option.
Volume: This is the daily number of shares of a security that change hands between a buyer and a seller.
W
Wall Street: Generic term for firms that buy, sell, and underwrite securities.
Warrant: A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market. This "warrant" is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used as a "sweetener" bundled with another class of security to enhance the marketability of the latter. Warrants are like call options, but with much longer time spans -- sometimes years. In addition, warrants are offered by corporations whereas exchange traded call options are not issued by firms.
Watch List: A list of securities selected for special surveillance by a brokerage, exchange or regulatory organization; firms on the list are often takeover targets, companies planning to issue new securities or stocks showing unusual activity.
White Knight: A friendly potential acquirer of a firm sought out by a target firm that is threatened by a less welcome suitor.
Working Capital: Defined as the difference in current assets and current liabilities (excluding short-term debt). Current assets may or may not include cash and cash equivalents, depending on the company.
Write-Down: Decreasing the book value of an asset if its book value is overstated compared to current market values.
Y
Yield: The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.
Yield Curve: The graphical depiction of the relationship between the yield on money market instruments and bonds of the same credit quality but different maturities.
Z
Zero-Coupon Bond: A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date.
Zero-Sum Game: A type of game wherein one player can gain only at the expense of another player.