Backwardation is where the cash or nearby delivery price of a commodity rises above the price for forward delivery. Usually, forward prices are higher than cash prices to reflect the costs of storage and insurance for stocks deliverable at a later date. This situation is known as contango. Backwardation can be the result of a shortage of near term supplies; spot prices rise as a result but if increased supplies are expected in the future forward prices will stay steady.
The balance of payments is a summary of the transactions of an economy with the rest of the world in a given period. It is made up of the current account and the financial and capital account. The current account comprises the balance of trade in visible goods such as manufactured items or commodities, in invisible goods such as tourism, insurance and other services, net income flows such as wages and investment income and net transfers such as international aid. The financial account includes net investment from abroad, long-term capital flows from the purchase or sale of foreign assets such as land or investments in foreign companies. It also includes short-term capital flows such as money moved from one country to another by multinational companies and profits or losses from investments in foreign currencies by speculators.
The difference between the value of a region’s imports and exports during a specific period of time. If the United States imports more than it exports, it has a trade deficit; if the U.S. exports more than it imports it has a trade surplus.
Barbell strategy is used as a way to earn more interest without taking more risk when investing in bonds. In a barbell strategy, an investor invests in short-term bonds, say perhaps some maturing in one to two years and long-term bonds such as those maturing in 30 years. When shorter-term bonds come due, the investor replaces them with other short-term bonds, thus keeping a balance between short and long term bonds. The goal is to earn more interest without taking more risk than having a portfolio of intermediate term bonds only.
One one-hundredth (.01) of a percentage point. For example, eight percent would be equal to 800 basis points. Yield differences are often quoted in basis points (bps).
The price of a security expressed in yield, or percentage of return on the investment. Price differentials in municipal bonds are usually expressed in multiples of 5/100 of 1%, or “05.”
Market trend where the market place is on a negative downward spiral. It is the opposite of a bull market which is a rapid boom in the market. The term is mostly applied to the stock market and other similar financial markets.
Typical features of a bear market include financial securities losing their value, lots of negative speculation and panic, a lack of trust and a general cynicism in the air. Lots of people rush to sell their shares and securities to save what little value they have left. This may start with just a small value drop and a few people “chasing out” which sparks a huge wave as everybody else panics and follows suit.
The famous Wall Street Crash in the late 20’s early 30’s is probably the most well known bear market occurrence.
There are no strict parameters for what constitutes a bear market, although some analysts suggest that if the market sees a decrease of around 20% from a broad range of companies on the stock market, that remains this way for two months or more, should be considered the start of a bear market.
A bear market is usually considered a long term downturn. A short term downturn is more commonly known as a correction, which has a total duration of two months or less, rather than two months or more.
A bear market will normally happen when the economy itself is in some form of recession or economic crisis, with other downturns like falling house prices, high inflation, lots of unemployment and banking panic.
Some went as far as to call the 2008 economic crisis a bear market.
Behavioral finance is the study of why investors act the way they do and how such behavior affects the markets. Behavioral finance theorists use the disciplines of economics and psychology to suggest that the investor behavior that affects market prices may be not be based on such “rational” factors as analysis of the strength or performance of a company.
An instrument or indicator that is generally seen to be an indicator of the overall market, economy or sector’s performance.
A standard or point of reference against which other securities or companies may be compared or assessed.
Price at which a buyer is willing to purchase a security.
A short-term direct obligation of the U.S. Treasury that has a maturity of not more than one year (for example, 13-, 26- or 52-week maturity).
The combination and average of two points on the yield curve to find a yield at the midpoint.
(1) The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. A municipal bond issue is usually comprised of many bonds that mature over a period of years; (2) For purposes of computations tied in to “per bond,” a $1,000 increment of an issue (no matter what the actual denominations are); (3) Bonds are long-term securities with a maturity of greater than one year.
The daily newspaper of the municipal bond market. The Bond Buyer publishes news stories, new-issuer calendars, and results of bond sales, notices of redemptions and other items of interest to the market. The Bond Buyer also publishes weekly indexes of bond yields that are widely followed by the market.
A bond fund is a type of mutual fund that invests in bonds instead of stocks. This investment instrument is suitable for individuals who wish to avoid investing in the stock market and for those who prefer to have a steady source of income. Most mutual fund companies offer this type of investment scheme. Here is how it works.
This type of mutual fund invests only in bonds. The company that handles bond funds pools money from several investors – big or small – in order to collect one large sum of money. These funds are then used for the purchase of bonds from different sources such as corporations or the authorities.
A company will have a manager who is in charge of the investments of the fund. His responsibilities include in-depth research on the many different types of bonds as well as the interest rates on a number of them. The manager then chooses which bonds to purchase. In fact, at work is the same process that involves a lender and borrower. The mutual fund company acts as the lender and the corporation or authorities from which the bond is bought stand for the borrower. The government or corporate entity pays the mutual fund on a regular basis, including interest on payments. The mutual fund gains profits in the form of interest that several corporations and the government bodies pay each month. This profit is then distributed equally among the shareholders.
There are bond funds that invest only in government bonds, such as the municipal bond fund. This type of bond fund is preferred by the investors because the profit is non-taxable. Other types of bond funds invest in corporate bonds. These can be categorized into investment-grade bonds and junk bonds. Although considered a high risk investment, junk bonds promise greater returns if managed well.
Investment in stocks comes with greater returns for the investor, but the risk is higher as well. In addition, the returns from bond funds stand at around 4-10 percent of the investment value. For example, if the bond fund has consistently returned at least 8-10 percent in a given year, the investment could double the money for the year. The higher the investment amount, the bigger the return is.
Book value, often called carrying value is an accounting term that refers to the value of an asset, going by the data on its corresponding balance sheet. The value of an asset is based on its original purchase costs, minus depreciation, amortization and other similar devaluing costs.
Book value of a company may also refer to its total net asset value. It is calculated by taking the total value of the company’s assets minus its intangible assets and liabilities.
A company’s asset Book value can be an annual or quarterly accounting record. When an asset is first purchased its value is the purchase cost, but over time its value and usefulness decreases and is calculated by depreciation. Each quarter this loss in value is factored in to the assets recorded book value. The depreciation, amortization and depletion itself can be calculated on a monthly basis.
Investors and other stakeholders in a company will be interested in the book value of the assets because if worst comes to the worst and the company goes under due to debt problems, during the liquidation process it is the assets that are sold off to cover debts and pay shareholders what is owed to them. So if a company has a lot of valuable assets it gives an investor that added piece of security, as they are more likely to get their money back in the case of a financial disaster.
When looking at a company’s balance sheet, book value is one of the factors that go in to determining how financially stable and successful a business is. For example if a company is making little profit and has a low book value, the overall value of the business would be low, whereas a company that makes millions in profit and has loads of valuable assets would be a very valuable business.
A legal commitment by insurance company to make scheduled payments of interest and principal of a bond issue in the event that the issuer is unable to make those payments on time. The cost of insurance is usually paid by the issuer in case of a new issue of bonds, and the insurance is not purchased unless the cost is far more than offset by the lower interest rate that can be incurred by the use of the insurance. Individual investors cannot buy bond insurance.
The broad term that refers to an individual or company that acts as a middle man between a company with a product or service, and the buyer. They make their profit on fees from the buyer and commission from the company for referring the buyer. To prevent wrongdoing most countries have regulations that broker’s must adhere to. The most important being, that if advice given by the broker is inappropriate to the borrower or the financial institution because they just want to make a quick sale, they can be held liable for giving poor advice.
Other common brokers include insurance brokers that sell insurance policies, stockbrokers that act as intermediaries between investors and the stock market, real estate brokers or estate agents, which are the middleman between buying and selling property, and list brokers, who aid the marketing process with targeted mailing lists.
Against common belief those that execute the sale or purchase of securities or commodities on the trading floor are not brokers, they are simply sales staff. They do not actually broker any deal between the parties, just execute the transaction
The amount by which spending exceeds revenues. It usually refers to government spending and revenues.
Although it is usually applied to the stock market, the term Bull Market can be applied to any widely traded bond, currency, commodity or financial security. It essentially means the group of securities or market in question is forecasted to rise or is in the middle of an upswing, with prices and overall market value rising. Think of it like a bull all of a sudden charging forwards and thrusting its horns in to the air. Bull Market is most commonly used by analysts, financial experts, investors and news outlets to refer to the direction of the stock market, and it will generally be discussed during an economic growth period.
There are various factors that will cause a bull market, but it usually begins with a combination of investor confidence (lots of money is being put in), general economic optimism (the general public are pleased with the economy), and positive forecasts that the market is strong and will continue to be strong in the coming months. It is best for an investor to buy shares prior to a bull market so their value goes up. Buying during a bull market or at the tail end may end up causing a loss in stock value for the investor as the market goes back down.
Because a lot of what feeds the stock market is speculation, hype and “sheep following” (everyone jumping on the bandwagon), a bull market doesn’t necessarily mean things are good, just that the majority of people think it is good. Like a bull that stops, starts and changes direction, the fluctuation in a bull market can be quick, and things can come crashing down just as fast as they went up.
The most recognized bull market to date was during the 1990s when the United States stock market grew at an exponential rate.
Bull Market is the opposite of Bear Market, both of which are metaphors for animal characteristics.
Buyback is a stock related term that refers to the buying back of stocks or bonds by the issuing company, therefore reducing the amount of shares in the market place and increasing the percentage of ownership that all the other shareholders have, as the total amount has been reduced. Think of it as dividing the pie between less people.
A company may do this when they feel financially solid and do not need to raise any more finance through shares, or when they feel share price is undervalued. By removing shares from the market place it raises their value because of the lack of availability rule. Other reasons may be to regain more control of the business (the more shareholders the less power a company has), or to put shares and stock options aside for employees as part of their contracts or as bonuses.
There are other less used terms for Buyback, including the process of making a long term investment, to balance out a failing short term investment. Think of this as “buying back” your financial position in the long run. An example of this might be that a company you held shares in went bankrupt, costing you $20,000, so you buy a house and rent it out, making back that $20,000 in the long run.
Buyback may also refer to the process by which a seller of an item (usually financial securities) agrees to buy them back at a certain price at a certain time in the future. This is comparable to the pawn shop system, where those in need of immediate cash can sell items to the store and buy them back later. If they don’t come back within the period given the store sells the items for a higher price.