Glossary Group: Investment Terms

The Deutscher Aktien 30 Index, otherwise known as the DAX 30, is a German stock market index that tracks the top 30 high cap companies listed on the German Frankfurt Stock Exchange, and is a good figure for representing the market performance as a whole. Using the Xetra trading system, the DAX 30 is calculated in almost real time, updating every 60 seconds. They use a free float weighted system, meaning only companies that have stocks freely available for the public to trade are listed.

Like the S&P 500 and the FTSE 100 in the UK, the DAX 30 is considered a very important economic figure and is quoted by most analysts and financial news outlets, as a way of summarizing the entire Frankfurt Stock Exchange’s performance.

The DAX index was first created in 1988 with the standard base line of 1000 and past data to help. Today it represents around 75% of the entire Frankfurt Stock Exchange market capitalization.

To be included in the DAX 30, the company must have a valid listing on the Frankfurt Stock Exchange, have publicly traded stock with no limitations and must be within the top tier of total company capitalization.

Some of the companies listed on the DAX 30 as of 2009 include BMW, Adidas, Volkswagen Group and the Deutsche Bank

DATED DATE (OR ISSUE DATE)

The date of a bond issue from which a bond begins to accrue interest.

DEALER BANK

Department of commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.

DEBENTURE

Unsecured debt obligation, issued against the general credit of a corporation, rather than against a specific asset.

DEBT

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date. Bonds and other debt instruments have a defined life, a maturity date and normally pay a fixed interest rate or coupon.

DEBT SERVICE

Principal and interest.

DEBT SERVICE COVERAGE

The ratio of net revenues to the debt service requirements.

DEBT RATIO

The debt ratio is the ability to pay a property’s monthly mortgage payments from cash profits made from rental properties. This is a ratio that is used as a guide by banks and other lenders to understand wither a property they might lend money on will generate enough profit that the borrower will have the finances to repay the amount of the loan that has been borrowed from the financial institution.

Debt ratio is done, by calculating the annual net operating income of the property, along with the net annual debt; this will include the principal borrowed and the interest on the principal. The ratio does not include the escrow payments when these amounts are divided.

This is also done for one dwelling home buyers at some lending institutions by using their personal debts, along with their income. Personal debts include all expenses; credit card debt, child support, student loans, home owners insurance, vehicle loans and other loans. The other things that can be figured in are groceries, utilities, business expenses and any other kind of reoccurring debts. These are then divided by the gross monthly income. The usual standard debt ratio to income that a lender looks for is no higher than approximately 36% of the monthly gross income. Certain home loans will allow up to 40% of debt to income ratio – these are usually federal types of home mortgages.

DEBT-EQUITY RATIO

The Debt/Equity ratio is a measure of a company’s reliance on debt, otherwise known as its financial leverage. It is used as an indicator as to what proportion of equity and debt the company is using to fund its assets and is therefore calculated by:

Total Liabilities / Equity

Depending on the company they may not use every liability and stick only to long term loans that have a lot of added interest.

If a company has a high debt to equity ratio it simply means that they used a lot of outside financing (such as business loans) to finance their company, meaning a lot of the business’s expenses go towards repaying these loans.

A business that somehow got funding elsewhere and is relatively free of debt, will have a low debt to equity ratio and will therefore be able to utilize more of its revenue. However if a lot of debt was used to finance increased operations and output then the company could potentially make more revenue than it would have without this outside financing, meaning a middle line has to be found between using outside financing and getting in to debt, of finding funding gradually.

Debt to equity is very industry specific; and it also really depends on the company at hand and the way they chose about doing things. It must be noted that neither a company with a high debt to equity ratio or a company will a low ratio is necessarily better than each other; it all depends on how they operate.

Preferred stock can be classed as component of debt or equity, but the particulars of the preferred stock need to be taken in to account.

DEEP DISCOUNT

A discount greater than traditional market discounts of 3%.

DEFAULT

A failure by an issuer to: (I) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements, or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).

DEFAULT RISK

The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

DEFINED BENEFIT

A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Defined benefit plans are guaranteed by PBGC.

DEFINED CONTRIBUTION

A defined contribution plan does not promise a specific benefit at retirement, but does provide regular, set contributions to a pension fund. Defined contribution plans tend to be less expensive than defined benefit plans.

DEFLATION

A sustained drop in the prices of goods and services.

In economics refers to an increase in the spending power of a country’s currency. In other words after deflation $1 can buy more than it did a few years ago. This is reflected by a decrease in prices.
(the opposite of inflation)
It is misleading to suggest that deflation is simply when things get cheaper, because in a stable economy as products and services decrease in price, the level of wages also generally decrease in an equal ratio meaning consumers can still only buy the same amount of items, it just takes less physical money. For example:

A loaf of bread costs $1 and milk costs $2
Eric gets $5 a day and buys his bread and milk, leaving him with $2.
After deflation a loaf of bread costs $0.50
and milk costs $1 However Eric’s wage has been decreased to $2.50 per day.
After he buys his bread and milk he’s left with $1.
Eric is no better off than before deflation.

There is an overlap period. It takes a while for wages to catch up, meaning there may be a spike in consumer spending during this overlap period.

Deflation however is not necessarily a good or neutral thing. It often occurs after a reduction in the money supply and availability of credit, which in turn usually comes from a recession. The fall in prices is a natural way to get consumers spending again but this doesn’t happen right away. It is therefore fair to say that around the time of deflation consumer spending is down (there is less demand for products). So businesses output is down (they may downsize); this means more unemployment .So generally as prices fall so does everything else. Eventually after a period of deflation things will climb back up.

DERIVATIVE

A financial product that derives its value from an underlying security. In the tax-exempt market, there are primary and secondary derivative products.

DEPRECIATION

Depreciation (the opposite of appreciation) is an accounting term that refers to the decrease in value of an asset over time in comparison with its historical or purchase price, such as a home or building, although it is not directly linked to the market value of the asset and is more to do with its internal value to the business or person who owns it. One of the main reasons to calculate depreciation and use it in accounts is to simply “window dress” the business’ finances in order to decrease the tax on income, (this is neither illegal nor frowned upon).

It is explained that depreciation occurs over time due to general wear and tear on the building such as deterioration because of age, advances in technology or the depletion of its resources (land containing bon renewable resources). Using a hypothetical example, if you bought boat to export goods and then planes were invented your boat would have lost value because of technological advancement.

This depreciation amount is included in your financial records as a cost and therefore lowers your profit margin. This in turn means you have less tax to pay on the profits, meaning more retained profit (in theory) and less to pay to the tax man. To people outside of business this can seem quite a sly and unethical business practice, although if done by a qualified accountant and not blatantly exaggerated then depreciation is a legally and morally accepted practice that all business use and are entitled to use.

When calculating depreciation it is standard practice for accountants to make it an annual occurrence, rather than a monthly one, and when the calculation is undertaken it is compared with the original value of the asset. This historical value minus the deprecation amount is called the book value.

When calculating depreciation it is standard practice for accountants to make it an annual occurrence, rather than a monthly one, and when the calculation is undertaken it is compared with the original value of the asset. This historical value minus the deprecation amount is called the book value.

A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a “trustee to trustee” transfer. The transfer is made without any funds being sent directly to the plan participant.

DISCOUNT

The amount by which the par value of a security exceeds its purchase price. For example, a $1,000 par amount bond which is currently valued at $980 would be said to be trading at a two percent discount.

DISCOUNT BOND

A bond that is valued at less than its face amount.

DISCOUNTING

The opposite of compounding, discounting allows an investor to multiply an amount by a discount rate to compute the present or discounted value of an investment. As an example $1,000 compounded at an annual interest rate of 10% will be $1,610.51 in five years. The present value of $1,610.51 realized after five years of investment is $1,000, when discounted at an annual rate of 10%.

DISCOUNT MARGIN

The effective spread to maturity of a floating-rate security after discounting the yield value of a price other than par over the life of the security.

DISCOUNT RATE

The interest rate used in discounting future cash flows; also called the “capitalization rate.”

The key interest rates central banks charge on overnight loans to commercial and member banks.

In the U.S., the interest rate used by the Federal Reserve on loans to its member banks. Changes in the rate by the Federal Reserve generally indicate future changes in monetary policy.

In Europe, the European Central bank focuses on three key interest rates for the Euro area as its way to manage inflation and the economy: the main short term lending interest rate on the main refinancing operations (MRO); the rate on the deposit facility which banks may use to make overnight deposits; the rate on the marginal lending facility, which offers overnight credit to banks. The rates are closely watched by markets as setting these rates are a prime way for a central bank to manage inflation. Commercial banks use the discount rate as a benchmark for the interest rates they charge on other financial instruments and products, including commercial and consumer loans.

DISTRIBUTIONS AND WITHDRAWALS

When money is withdrawn from a 401k plan, the withdrawal is referred to as a distribution. 401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.

DIVERSIFICATION

A strategy by which an investor distributes investments among different asset classes and within each asset class among different types of instruments in order to protect the value of the overall portfolio in case of changes in market conditions or market downturn and reduce exposure to risk. For example, a diversified bond portfolio might include different types of bonds and/or bond funds with different maturities and coupons.

DIVIDEND

Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation’s directors decide to retain earnings to invest in business operations.

DIVIDEND YIELD

Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return

DOLLAR COST AVERAGING

Dollar Cost Averaging (abbreviated as DCA) is a concept and technique which suggests that investing a small fixed amount at regular intervals in to the same investment is safer than investing one large lump sum. It spreads the market fluctuations out over several years so the total investment is not subject to one downturn or one upswing, but several over the years, averaging out the risk.

The theory is that investing a lump sum at once puts it at risk to the current market conditions, whereas gradually building up the portfolio insulates that risk by buying shares when prices are low, as well as high. Investors claim that in the long run it works out that you end up buying more shares at a lower price than at a higher price.

Although many investors may use this strategy without noticing, the method of using Dollar Cost Averaging simply involves deciding how much in total that you want to invest and how many months you want to make regular payments in to the investment. You obviously have to research your choice of investment and whether you are looking to buy stock, bonds, open a savings account etc.

An example of DCA in action is shown below:

Eric has $10,000 to invest in Microsoft, which he can invest right now, or over a period of time. He opts to invest $500 a month, over 20 months.

Right now $10,000 worth of shares would have purchased 300 shares at $33.33 each.

However after a few months the share price may have decreased and you would have purchased several shares at a lower price utilizing dollar cost averaging. If the share price picked back up by the end of the year you would have had more holdings than if you invested all at once

DOUBLE AND TRIPLE TAX-EXEMPTION

Securities that are exempt from state and local as well as federal income taxes are said to have double or triple tax-exemption.

DOUBLE EXEMPTION

Securities that are exempt from state and federal income taxes.

DOUBLE TOP

A double top is a term used in technical analysis to describe a reversal pattern that occurs in a rising market. A double top has two prominent peaks on the price chart at about the same level. It signifies a major resistance area and is a strong signal that a rally is coming to an end and that a downturn is possible. A double bottom is a reversal pattern that occurs in a falling market and signifies a major support area and that a rally is possible. It has two troughs at about the same level.

DOW JONES

You cannot watch the news or read the paper without seeing a reference to things like the stock exchange, the NASDAQ or the Dow Jones. Despite this a good proportion of people have no idea what the Dow actually is. Well the Dow Jones and its various abbreviations and combinations (such as the DJIA, Dow 30, INDP or the Dow) is one of the very important North American stock market indices, technically known as the Dow Jones Industrial Average. Ok but what does this actually mean?

The Dow Jones Industrial Average is a measurement that simply refers to the average value of thirty large company’s industrial stocks, such as Microsoft, Coca-Cola, General Motors, IBM, Goodyear, General Electric and Exxon. These and several other companies make up the average and give an overall picture of how the stock exchange as a whole is doing. Somebody simply takes 30 top companies and does some math. Despite this simplicity Dow Jones is by far the most read index in the world. It dates back to 1896 when it was consisting of only 12 stocks. It is during times of economic crisis when investors and regular Joes take notice of the Dow Jones and it is fair to say if the economy is doing bad, so is the Dow and vice versa.

The Dow Jones has many critics that claim taking just 30 companies and plastering their success all over the news is not only misleading in regards to the whole market, but also dangerous for new investors that take it for gospel and think trading successfully is a lot simpler than it actually is.

DOWNGRADE RISK

Possibility that a bond’s rating will be lowered because the issuer’s financial condition, or the financial condition of a party to the financial transaction, deteriorates.

DUAL-CURRENCY BONDS

Dual-currency bonds are bonds in which principal payments are in one currency and coupon payments are in another currency. This type of bond is used for foreign bonds, when an issuer issues bonds in a foreign country and makes coupon payments in that country’s currency, but principal payments are made in the currency of the issuer’s country of residence.

DURATION

The effect that each 1% change in interest rates has on a bond’s market value. Duration takes into account a bond’s interest payments in measuring bond price volatility and is stated in years. As an example, a 5-year duration means that a bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%.

DURATION RISK

The duration of a bond is a measure of its price sensitivity to interest rates movements, based on the average time to maturity of its interest and principal cash flows. Duration enables investor to more easily compare bonds with different maturities and coupon rates by creating a simple rule: with every percentage change in interest rates, the bond’s value will decline by its modified duration, stated as a percentage. Modified duration is the approximate percentage change in a bond’s price for each 1% change in yield assuming yield changes do not change the expected cash flows. For example, an investment with a modified duration of 5 years will rise 5% in value for every 1% decline in interest rates and fall 5% in value for every 1% increase in interest rates.

Bond duration measurements help quantify and measure exposure to interest rate risks. Bond portfolio managers increase average duration when they expect rates to decline, to get the most benefit, and decrease average duration when they expect rates to rise, to minimize the negative impact. The most commonly used measure of interest rate risk is duration.

The CAC 40 (Continuous Assisted Quotation) is the major benchmark stock index for Euronext Paris (the French Stock Exchange). The index tracks the 40 most significant company stock values among the top tier of large cap public companies, making it an important figure that represents the value and performance of the stock exchange as a whole. Thus it is used and quoted by many financial news outlets and analysts alike, and is very important to investors on the French stock exchange.

Changes to the CAC 40 are instigated by an independent committee known as the Conseil Scientifique, which meet quarterly to update the index. It takes two weeks for changes to come in to affect. The selection process is a ranking of the market capitalization of freely and publicly traded stock and turnover, based on an annual basis. The top 100 companies are listed and then 40 are picked based on various economic factors, such as liquidity and the industry of the company, so that there is a wide enough selection to represent the whole of the stock exchange.

Like a lot of important indexes, the CAC 40 is used as a benchmark for other financial products and funds, to monitor performance and hopefully replicate. A lot of funds are displayed graphically, in relation to the CAC 40.

Large companies such as beauty product company L’Oreal, car manufacturer Renault and Michelin tires are commonly listed on the CAC 40 index.

The United States equivalent of the CAC 40 would be either the Dow Jones Industrial or the S&P 500 indexes.

CALL

Actions taken to pay the principal amount prior to the stated maturity date, in accordance with the provisions for “call” stated in the proceedings and the securities. Another term for call provisions is redemption provisions.

CALLABLE BONDS

Bonds that is redeemable by the issuer prior to the maturity date, at a specified price at or above par.

CALL DATE

The date some bonds are redeemable by the issuer prior to the maturity date. In the event of a refunded security, a prerefunded date will appear in place of any call date and will be indicated by an R = prerefunded; or an E = escrowed to maturity.

CALL PREMIUM

The dollar amount paid to the investor by the issuer for exercising a call provision that is usually stated as a percent of the principal amount called.

CALL PRICE

The specified price at which a bond will be redeemed (or called) prior to maturity, typically either at a premium (above par value) or at par.

CAPITAL

There are many definitions and branches to the word capital, but it is essentially just another word for money or cash, but more specifically related to a business.

To go more in depth it means the monetary value of everything in a business, including pure cash itself. Business profits are considered capital, more commonly when retained in the business for future use. A piece of machinery is also a capital because it can be sold.

Another definition is the value of everything involved with the production process, from buildings to machinery. In other words the cost of maintaining everything that is required to make the business run. A capital intensive business is one that requires a lot of money to keep it running and producing and is at risk of failure if it runs out of money before inventory can be sold. These are called cash flow problems and the business may seek an overdraft.

Working Capital is the value of a business’ current assets (assets such as stock, inventory and machinery that can be sold in a short term to make money) minus its current liabilities (money owed to suppliers, outstanding loans etc). It shows the business’ ability to make cash and how efficient it is when relying on sales.

Capital is often used flippantly and can mean lots of different things, but generally it is used to determine if a business has enough money to run efficiently. “Do I have enough capital to invest, starting up and running my own business?” That basically means do you have enough money, but is referring more specifically to the money needed to start production. Selling X number of products may make you a profit, but if you don’t have enough capital to finish production then you’ll run into cash flow problems.

CAPITAL MARKETS

Capital markets are the electronic and physical markets in which bonds and other financial instruments such as stocks and commodities are sold to investors. Institutions such as governments and corporations use the capital markets to raise money through public offerings of bonds and stocks or through private placements of securities to institutional investors such as pension funds and insurance companies.

CARRY

The cost of borrowing funds to finance an underwriting or trading position. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.

CERTIFICATE OF OWNERSHIP

Proof of ownership; a document issued to shareholders by a trustee of a unit investment trust.

CENTRAL BANK

A central bank is the major regulatory bank in a nation or group of nations’ monetary system. Its role normally includes control of the credit system, the issuing of notes and coins and supervision of commercial banks. It also manages its country’s foreign exchange reserves and acts as its government’s banker. Central banks in developed economies are also responsible for the conduct of monetary policy.

CHAPTER11

When a company or business can no longer pay off its debts, the business can voluntarily file for bankruptcy, or the creditors can enforce bankruptcy, both falling under either chapter 7 or chapter 13 of the Bankruptcy Code.

Whereas in chapter 7 of the code the business must cease operation and liquidate all of its assets to cover its debt, under chapter 11 of the code the debtor continues ownership, and is given the ability to reorganize or downsize the business and its operations. This allows the business to continue operations, albeit under a radical new structure.

Methods by which a debtor is allowed to restructure their business are granted by the courts, and may include the ability to obtain new loans and finance with more lenient terms, allowing them to cancel costly contracts and deals, and any further action against the debtor is put on hold until the current bankruptcy is processed.

If the company is in a state where a complete restructuring will leave the owners with nothing to operate with, the company is then given in its new clean state to the creditors, who assume ownership, either selling everything off, or running the business as a future investment.

The process of chapter 11 is worked on closely between the debtors and creditors through the courts. The creditors must agree on the proposed plan for restructuring before it goes ahead, to ensure that they get the best out of the situation, and hopefully get a good percentage of what they are owed in the end. Initially Debtors have the exclusive right to propose such a plan for restructuring for around 120 days before the debtors. Then after that time has passed, creditors may have their say.

If the reorganization process goes badly or cannot be agreed on, the courts may go in to the traditional complete liquidation process like in chapter 7 of the code.

CHICAGO BOARD OF TRADE

Located in Chicago, Illinois, the Chicago Board of Trade is an options and futures specific exchange, and the oldest of its kind in the world, first opening in 1848. The CBOT (its abbreviated form) uses both traditional trading floor (where traders use the outcry technique on the famous raised octagonal pit) and electronic eTrading methods for all round satisfaction and efficiency. It makes an estimated 454 million contract trades in volume (as of 2003), with data suggesting it is on the rise each year.

The exchange trades primarily in both traditional financial contracts and agricultural contracts for commodities such as wheat. Other commodities such as silver and gold are also becoming common on the exchange.

Although it still exists under a subsidiary, the Chicago Board of Trade is owned by the CME Group after a merger with the Chicago Mercantile Exchange in 2007. CME now also owns the New York Mercantile Exchange, altogether making it the largest future and option contract exchange in the world.

The CBOT is often known by its famous raised octagonal pits that look more like theatre stages than that of financial transaction areas. Traders use a language of hand signals to express transactions and typical outcry techniques.

CHURNING

The unethical and excessive trading of a client account in order to generate commissions for a broker, but which may not in the best interests of the client. Not only does the client pay high commissions, they also get stuck with a high tax bills due to the short-term holding of assets.

CLOSED-END MUTUAL FUND

A fund created with a fixed number of shares, which are traded as listed securities on a stock exchange.

CLOSING PRICE

The closing price of a bond is the last trading price before the exchange or market in which it is traded closes for the day. Given the existence of after-hours trading, the opening price at the start of the next trading day may be different from the closing price of the day before.

COLLAR

A collar is a way of limiting potential losses on an asset or security by buying a put option and selling a call option with the same expiry date. The strike price on the call option has to be above the strike price on the put option. Although potential losses are reduced so are potential profits.

COLLATERAL

Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, but may also encompass letters of credit, insurance policies, or other credit enhancements.

COLLATERALIZE

The process by which a borrower pledges securities or property (or other types of financial assets) in order to provide security or collateral toward repayment of a loan or debt.

COLLATERALIZED DEBT OBLIGATION (CDO)

A type of asset-backed security (ABS), CDOs are backed by fixed income assets such as bonds, receivables on loans—usually non-mortgage—or other debt that have different levels of risk. Shares of the pool are sold to investors, divided into the different risk classes or “tranches” enabling the isolation of credit risk to reduce the risk of loss due to default. Each tranche usually has different maturities and risks.

COLLATERALIZED MORTGAGE OBLIGATION (CMO)

A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See REMIC.

COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)

Commercial mortgage-backed securities (CMBS) have as underlying collateral loans on hotels, multifamily housing, retail properties, and office or industrial properties. Unlike residential mortgage loans, commercial loans tend to be “locked out” from prepayment for ten years and thus prepayment risk is reduced. However, default risk is greater on commercial loans.

COMMERCIAL PAPER

Short term, unsecured bond notes issued by a corporation or a bank to meet immediate short term needs for cash. Maturities typically range from 2 to 270 days. Commercial paper is usually issued by corporations with high credit ratings and sold at a discount from face value.

COMMISSION

The fee paid to a dealer when the dealer acts as agent in a transaction, as opposed to when the dealer acts as a principal in a transaction (see “net price”). Commissions differ in how they are calculated, such as a percentage of the value of a transaction or flat fee amount, and including whether the investor is using a bank, brokerage or online firm. Investors should be sure to ask and to understand what commission or other sales fees are charged by a broker or agent to make an investment transaction, including if such information is not provided in writing).

COMMODITIES

There are certain broad definitions of the term commodity, for example some people may consider a commodity as something you need in order to survive like water, but in business commodities have a very specific meaning.

A commodity is any product, item or resource that is in constant global demand, but doesn’t have quality characteristics or added value that can alter its perceived worth. For example salt is salt; it has never been changed and nobody wants it to be changed. We don’t have chocolate flavored salt or salt that gives us extra vitamins. The world over, salt is simply salt and is sold that way. This is a commodity. On the other hand desktop computers come in all different shapes and sizes, with all different functions, each with their own value based on its quality. The faster its processor the more it can be sold for. This is not a commodity.

So in the salt example, the price of salt is universal and fluctuates on a daily basis due to the amount of salt available and its global demand. If salt suddenly became scarce, its price would go up because the demand is still there.

One of the most sought after commodities on the earth, that has sparked war, political problems and is making some corporations very rich is oil. We’ve all seen price fluctuations at the gas pumps.

Other common commodities are iron ore, coal, ethanol, sugar, coffee beans, soybeans, aluminum, rice, wheat and everybody’s gold, silver and diamonds.

Despite this “salt is salt” theory, this of course doesn’t stop companies adding their own brand and marketing behind the commodity to help them sell it to their target audience.

COMMON SHARES

Also referred to as voting shares, typically gives the owner voting rights that may be exercised in the company’s decisions in which they are held. Most of the time, a shareholder gets one vote per share of stock owned to elect the directors of the company. Common shares may or may not offer this voting feature depending on what the company has predetermined. This is different from preferred stock which usually doesn’t carry voting rights but the owner is legally entitled to receive a certain level of dividends.

If a company is liquidated, holders of common shares have rights to the company’s assets. However, this is only after holders of preferred stock and other debtors have been satisfied. Therefore, we would deduce that a ‘share’ of stock actually represents part ownership in a corporation.

Shareholders of common stock often have the right to purchase more stock. Of course, there is no obligation to do this, but they have what is known as preemptive rights. Preemptive rights give the common stock shareholder the opportunity to buy as many shares of stock as it takes to maintain the portion of his ownership in the corporation.

The history of the offering of stock dates back many, many centuries – the Dutch East India Company was the first company to issue stock in 1606. Today we have stock exchanges, which are organizations that provide a place to trade shares of stocks from a wide range of companies. Investors, or buyers of stock, are represented by stock brokers at stock exchanges.

If you’re interested in investing in common stock, you may do so by contacting a stock broker or by trading online yourself. Before becoming an investor, be sure to research the company to make sure it’s a good investment or talk to your stock broker for advice.

COMPOUNDING

The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

COMPOUND INTEREST

COMPOUND INTEREST

CONCESSION

Fractional discount from the public offering of new securities at which the underwriter sells the bonds to dealers not in the syndicate.

CONFIRMATION

A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

CONSUMER DEBT

From a macroeconomic point of view, consumer debt is a loan borrowed to fund mainly consumption, not investment. Taking a loan in order to buy household appliances or furniture is an example of consumer debt.

Recently, consumer debt is regarded as a way to improve domestic production due to the fact that the growing demand for consumer goods boosts the level of production.

Still, the cultural prejudice against borrowing is understandable. Historic developments demonstrate that the risk had often outweighed the involved costs. You did not just declared bankruptcy if your expectations were wrong – you also lost your private business, family home, and belongings. For example, credit card borrowing is largely unknown in the Far East because of cultural taboos and beliefs about debt. American culture, on the contrary, overemphasizes consumption and encourages excessive spending which leads to higher levels of consumer debt.

Used reasonably, consumer debt generates economic activity and may be fairly useful; however, it can also become a source of trouble if not managed properly. In this case, individuals can accumulate consumer debt to an extent that they are unable to repay their dues. Therefore, a number of debt solution options exist which can be very helpful in such situations.

CONSUMER PRICE INDEX (CPI)

A measure of the average change in the prices of consumer goods and services over time. It is a statistical measure based on the prices of representative items, collected periodically. Sub-categories and sub-indexes are also calculated in order to produce the general index. The annual change in percentage of this index is used to compute the inflation rate in North America and other continents. The CPI is among the most important and closely observed economic statistics in the world.

Weighing data and price data are used to construct this index. The first comes as prognoses of the shares of various types of expenses in the total expenses covered by the index. They are generally based on expense data gathered from surveys for a sample of households. Price data is collected for a representative sample of goods and services from a sample of outlets in given locations for set periods of time. Some of the item sampling for collecting prices is done by means of a frame and methods based on probabilities. In this way, confidence intervals cannot be estimated, meaning that one cannot determine what percent of the items is exempt from the statistical rule. Usually, the index is calculated on a monthly basis. As it consists of sub-indexes, these are compared month by month, combined into higher levels and into the total index.

The weights of the index relate to the components of expenses over the current month and the price-reference month. This can be used to estimate the cost-of-living index and show how consumer expenses would have to move and make up for price changes, permitting consumers to sustain a constant standard of living. Estimates can only be computed in retrospect, while the index appears monthly and, ideally, as soon as possible.

The index coverage is limited in scope. For one, consumer expenses abroad cannot always be included for obvious reasons. The rural population is not always covered as well. Groups at the two extreme ends – the very poor and the very rich – are sometimes excluded. The CPI is thus primarily based on the consumption of the middle class.

CONVENTIONAL MORTGAGE LOAN

A mortgage loan that is based solely on real estate as security, is not insured or guaranteed by a government agency, and is eligible for purchase or insurance by Fannie Mae or Freddie Mac.

CONVERTIBLE BOND

A corporate bond that can be exchanged, at the option of the holder, for a specific number of shares of the company’s stock. Because a convertible bond is a bond with a stock option built into it, it will usually offer a lower than prevailing rate of return.

CONVEXITY

A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes.

COST OF CARRY

The cost of carrying or holding a position. In the capital markets it is the difference between the interest generated on a cash instrument such as a bond or a treasury bill and the cost of funds to finance the position. In commodity markets it is the cost of storage and insurance.

COUNTERPARTY

One of two entities in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker-dealer or a corporation.

CORPORATE BOND

Bonds issued by corporations. Corporations use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business. Corporate bonds (also called corporates) are debt obligations, or IOUs, issued by private and public corporations. They are typically issued in multiples of $1,000 and/or $5,000.

COUPON

A feature of a bond that denotes the amount of interest due and the date payment is to be made. Where the coupon is blank, it can indicate that the bond can be a “ zero-coupon,” a new issue, or that it is a variable-rate bond. In the case of registered coupons (see “Registered Bond”), the interest payment is mailed directly to the registered holder. Bearer coupons are presented to the issuer’s designated paying agent or deposited in a commercial bank for collection. Coupons are generally payable semiannually.

COUPON PAYMENT

The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its face value.

COUPON RATE

The interest rate on a bond, expressed as a percentage of the bond’s face value. Typically, it is expressed on a semi-annual basis.

COVERED BOND

Covered bonds, at their most basic, are debt securities backed by a guarantee from the issuing entity and secured by a dynamic pool of assets on that entity’s balance sheet. The issuer is typically a regulated financial institution. Germany introduced covered bonds, known as Pfandbriefe, in 1770—the bonds have continued to be a widely used funding tool for mortgage loans and public works projects across Europe for over 200 years.

CP INDEX

Usually the Federal Reserve Commercial Paper Composite, calculated each day by the Federal Reserve Bank of New York by averaging the rate at which the five major commercial paper dealers offer “AA” industrial commercial paper for various maturities. Most CP-based floating-rate notes are reset according to the 30- and 90-day CP composites.

CPI-U

The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS). The CPI-U was selected by the Treasury because it is the best known and most widely accepted measure of inflation.

CREDIT DEFAULT SWAP

A CDS or a credit default swap is a contract that aims to transfer the financial risk from one entity to another. In order for a company to pass on the risk to another entity, it buys a credit default swap from a seller. The latter gets premiums from the buyer for the whole duration of the contract, but runs the risk of paying the face value of the credit instrument in case the borrower defaults. This happens because the seller assumes the risk of default instead of the buyer.

A credit default swap is the simplest type of credit derivative. Basic CDS contracts are similar to insurance. They allow one party to buy protection against a company or country defaulting or restructuring their debt over a certain period of time. The buyer pays an annual fee in basis points based on a notional amount to the contract seller. If a default occurs the buyer can hand over the defaulted bonds to the contract seller and receive their par value. The contracts can also be cash settled with no transfer of bonds. CDS spreads are similar to regular corporate bond spreads in reflecting the market’s view of default risk. The most commonly traded contract is a five-year one, but maturities range from one year to 10 years.

Problems with CDS

The concept of CDS was developed by JP Morgan in the 1990’s as to allow financial institutions to transfer financial risks of credit instruments to other entities. Unlike insurance, CDS is largely unregulated and in the year 2008, many issues began to emerge. Because the contract is transferable, tracking it down to the person who is in possession can be a problem. If the borrower defaults, the contract has to be tracked down to the last person it has been transferred to. The seller of the CDS is not required to show a proof of ability to pay for the total amount of the insured debt, and there is a high chance that he may not be able to cover for it as well.

During the recent economic recession, many companies have faced the problem of selling CDS. Even corporate giants like AIG were unable to cover the amounts of their CDSs. Because of the hundreds and thousands of homeowners going into default, those who entered into CDS contracts were pressured by the catastrophic economic event.

CDS is not insurance

Technically, the credit default swap is not a type of insurance. Although it has been compared to insurance for a variety of reasons, the underlying concepts behind the two are simply quite different. For one thing, insurances are regulated while the CDS is not. Buyers don’t need to own the underlying security and don’t incur losses in case of default. Credit default swaps are not traded on the exchanges, and the reporting of transactions to governmental agencies is not required. In the US, CDSs are most often subject to mark-to-market accounting, with balance sheet volatility and income statement that are not present in insurance contracts. In addition, insurance comes with the disclosure of all potential risks, while none of these requirements is valid for CDSs.

CREDIT ENHANCEMENT

The use of the credit of a stronger entity to strengthen the credit of a weaker entity in bond or note financing. This term is used in the context of bond insurance, bank facilities and government programs.

CREDIT RATING AGENCY

A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.

CREDIT RATINGS

Designations used by ratings services to give relative indications of credit quality.

Credit ratings measure a borrower’s creditworthiness and provide an international framework for comparing the credit quality of issuers and rated bonds. Rating agencies allocate three kinds of ratings: for issuers, for long-term debt and for short-term debt. Of these, issuer credit ratings are the most widely watched. They measure the creditworthiness of the borrower including its capacity and willingness to meet its financial obligations. A top rating means there is thought to be almost no risk of the borrower failing to pay interest and principal. Ratings are derived from an examination of a company or a government’s past financial history, its current assets and liabilities and its future prospects. The higher the rating the less the borrower will need to pay for funds. The top credit rating issued by the main agencies, Standard & Poor’s, Moody’s and Fitch, is AAA or Aaa. This is reserved for a few sovereign and corporate issuers. The naming and designation of ratings varies according to each agency. They fall into two broad groups investment grade and speculative or junk

CREDIT RISK

The risk for bond investors that the issuer will default on its obligation (default risk) or that the bond value will decline and/or that the bond price performance will compare unfavorably to other bonds against which the investment is compared due either to perceived increase in the risk that an issuer will default (credit spread risk) or that a company’s credit rating will be lowered (downgrade risk).

CREDIT SPREAD

A yield difference, typically in relation to a comparable U.S. Treasury security, that reflects the issuer’s credit quality. Credit spread also refers to the difference between the value of two securities with similar interest rates and maturities when one is sold at a higher price than the other is purchased.

CURRENCY

Currency is the broad term used to define the form of money used in circulation in any given country. In the United States the currency is the US Dollar and in the UK it’s British Pounds and Sterling. Almost every country has their own currency, although most members of the European Union now use the Euro, allowing free trade. A typical currency contains physical notes and coins, as well as electronic representations of the money in the form of checks, credit cards etc.

The general structure of a country’s currency starts at the central bank, which controls the production of money and the money supply itself. Upon trading goods and currency between two different regions the currency has an exchange rate, which can be described as the value of a currency measured in how much foreign currency it can buy. In other words currency A’s worth in relation to currency B.

The general structure of a country’s currency starts at the central bank, which controls the production of money and the money supply itself. Upon trading goods and currency between two different regions the currency has an exchange rate, which can be described as the value of a currency measured in how much foreign currency it can buy. In other words currency A’s worth in relation to currency B.

CURRENCY TRADING

The purchase and sale of currencies on the foreign exchange (Forex or FX). With a volume of over two trillion USD, this market is considered the largest around the globe.

Small investment investors had limited access to currency trading until recently. Large multinational corporations and banking conglomerates were the major players on this market place. With the development of new technologies, different investors were allowed in.

Currency trading is also referred to as foreign exchange, with most people using FX or Forex as a shortcut. To understand currency exchange, it is important to note that every currency has a different value compared to others. Because of the constantly changing currency demands, these values shift from day to day. So, if a currency is bought low today and sold high tomorrow, the trader gains profit.

How Currency Trading Works

Currency trading always involves different currencies, for example, Euro and US dollars. Every currency has a fluctuating currency exchange rate. The latter determines the value of one currency when exchanged for another. The exchange rate changes due to several reasons including geopolitical events, inflation, industrial production, etc. These factors determine when to buy or sell certain currency in order to gain profit.

There are two major reasons for the fluctuation of relative currency values. First, outside investors and visitors of a country convert domestic currency to purchase goods and services in a foreign country. Second, there is speculation on the currency market. Investors buy or sell when they think that a foreign currency will become strong or weak. Such speculative trading can have drastic effects on national currencies and countries’ economies. During the 1997 crisis in East Asia, economic downturns followed after speculators realized huge profits through currency trading.

Due to the fluctuating nature of currency exchange rates, the Forex trader may have the opportunity to make huge profits. However, the risk of potential loss is high as well. Let’s say that a trader decides to buy Euros, believing that the currency value will go up against the US dollar. When the value of Euro increases, the trader sells the amount in that currency in exchange for dollars, making a profit. The exact opposite may happen if the value of Euro goes down instead.

Advantages

Any trader can participate in the buying and selling of currency at a time of his convenience. Due to the unlimited access to the market, the trader may carry out transactions whenever there is a chance to make profit.

No commissions, exchange, brokerage and government fees are involved in the trading process. The traders only get the difference between the buying and selling prices (which can be positive or negative depending on the exchange rates) without other costs involved.

Investors in currency exchange can leverage the invested amounts to make higher profits. Because the traded amount of money is controlled, the investor has the option of adding more anytime.

Unlike other types of trading, currency exchange has lighting speed liquidity. When a currency has been traded, the transaction takes place over a couple of seconds.

Disadvantages

Foreign exchange trading is not for everyone because this type of investment carries high risks of loss. Individuals with limited experience and persons who make hasty decisions are among the victims of high financial losses.

CURRENCY RISK OR EXCHANGE RATE RISK

Investors who invest in a government bond that is not in his/her home currency face currency or exchange rate risk since the value of his/her investment could go down as well as up depending on what happens to the currency exchange recurrent yield
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of par ($1,000) that pays eighty dollars ($80) per year in interest would have a current yield of eight percent.

CURRENT ASSETS

In business current assets are cash itself or assets owned by the business that can be turned into cash quickly (through sale). Stock is considered a current asset and so is outstanding money owed to the business. The time period of turning assets in to cash “quickly” is usually considered to be by time the next balance sheet is issued, or within the current financial year.

On a business’s balance sheet, assets will normally be categorized into current assets and long term assets. Current assets go towards funding the day to day operations in the business, aka its working capital.

The figures of a business’s current assets are used in many ratios, calculations and for analysis. It is one of the factors that go towards valuing a business and its financial stability.

Ratios like the current ratio and the quick ratio used current assets to determine whether a business is able to meet their current day to day expenses.

During times of liquidation a business’s current assets are sold and used to pay off debt and money owed to shareholders, so creditors and investors are actively interested in the value of a company’s current assets.

CURRENT RATIO

Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities, the greater the risk of credit failure.

CURRENT YIELD

Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

CUSTODIAN

The bank or trust company that maintains a retirement plan’s assets, including its portfolio of securities or some record of them. Provides safekeeping of securities, but has no role in portfolio management.

CYCLICAL INDUSTRY

An industry, such as automobiles, whose performance is closely, tied to the condition of the general economy. The company (and their stock) does well during good economic times, and not as well during poor economic times.

CUSIP

The Committee on Uniform Security Identification Procedures was established by the American Bankers Association to develop a uniform method of identifying securities. CUSIP numbers are unique nine-character alphanumeric identifiers assigned to each series of securities.

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.

BALANCE OF PAYMENTS

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.

BALANCE OF TRADE

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

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.

BASIS POINT

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).

BASIS PRICE

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.”

BEAR MARKET

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

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.

BELLWETHER

An instrument or indicator that is generally seen to be an indicator of the overall market, economy or sector’s performance.

BENCHMARK

A standard or point of reference against which other securities or companies may be compared or assessed.

BID

Price at which a buyer is willing to purchase a security.

BILL

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).

BLENDED YIELD TO MATURITY

The combination and average of two points on the yield curve to find a yield at the midpoint.

BOND

(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 BOND BUYER^™

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.

Bond Funds

HOW DO BOND FUNDS WORK?

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.

WHAT IS A BOND FUND?

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.

BOND FUNDS INVESTMENT

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.

TYPES OF BOND FUNDS

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 RETURNS

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

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.

BOND INSURANCE

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.

BROKER

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

BUDGET DEFICIT

The amount by which spending exceeds revenues. It usually refers to government spending and revenues.

BULL MARKET

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

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.

Accretion is the gradual process of growth by the addition of new parts. A company is said to be accretive if it increases in size either through organic growth or by acquisitions. An acquisition is said to be accretive if it adds to earnings per share; if the acquisition adds more value than it costs. Accretive can also refer to an increase in the notional principal amount of a financial instrument over its life. For example, the accumulation of capital gains on a bond, bought at a discount, in anticipation of receipt of its full par value at maturity. The opposite of amortization.

ADR

Abbreviation for American Depositary Receipt. The form in which shares of foreign companies are usually traded on U.S. stock markets. ADRs are issued by U.S. banks and represent a bundle of shares of a foreign company held in custody overseas. Trading in ADRs rather than the underlying shares reduces administration and trading costs, both for companies and for investors.

ALGORITHMIC TRADING

Algorithmic trading is a term which refers to the use of computers and advanced mathematics to make decisions about the timing, price and quantity of a market order. It is widely used by banks, hedge funds, pension funds and mutual funds. Large trades are broken down into smaller ones to minimize market impact and risk. Trades are made without human intervention using information received electronically. Millions of orders can be executed each second and dozens of public and private exchanges can be scanned simultaneously. As of 2009 algorithmic trading made up nearly 30 percent of stock trading volume in the U.S.

ADJUSTABLE-RATE MORTGAGE (ARM)

A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM’s interest rate is tied to an objective, published interest rate index.

AGENCY BOND

A bond issued by two types of entities—1) Government Sponsored Enterprises (GSEs), usually federally-chartered but privately-owned corporations; and 2) Federal Government agencies which may issue or guarantee these bonds—to finance activities related to public purposes, such as increasing home ownership or providing agricultural assistance. Agency bonds are issued in a variety of structures, coupon rates and maturities. Each GSE and Federal agency issues its own bonds, with sizes and terms appropriate to the needs and purposes of the financing.

AMORTIZATION

Liquidation of a debt through installment payments.

ANNUITY

A financial term that refers to a series of equal payments that are usually made at regular intervals for a set amount of years or for the person’s lifetime.

In a broad sense lots of payments are set up in annuity, including mortgages, regular payments in to a savings account, and others, but the term is generally used in regards to retirement funds or life insurance.

Investments in annuity accounts are tax deferred, meaning they are allowed to grow tax free. Tax is only charged when the account holder withdraws any funds or starts to get paid at the regular intervals agreed on.

Annuity investments are considered low in risk, but also low in return. They are generally used for convenience, rather than to make money. They can be compared to savings accounts.

ARBITRAGE

The action of profiting from the correction of price or yield anomalies and differentials in similar securities in different markets. It involves taking a position in one market and an offsetting position in another. As prices or yields move back into line positions may be profitably closed out. For example, a stock and its equivalent futures contract may be quoted at different prices; the cheaper one can be bought and sold to the higher priced market. An arbitrageur or arb is an individual or institution practicing arbitrage.

ASCENDING, OR POSITIVE, YIELD CURVE

The interest rate structure which exists when long-term interest rates exceed short-term interest rates.

ASK PRICE (OR OFFER PRICE)

The price at which a seller offers to sell a security.

ASK YIELD

The return an investor would receive on a Treasury security if he or she paid the ask price.

ASSET

In a broad sense an asset is simply another word for an item that is owned by somebody. Anything that is owned by a business, company, individual or government that can be sold to make cash is considered an asset. Your house is a valuable asset; your car is an asset although it loses its value. In a strict sense even your jogging shorts are an asset, in that you could probably sell them or use the material in some profitable manner. Generally though, assets refer to things that are actually worth selling as part of a business. For example a business in liquidation may “sell its assets” which may be its stock, machinery, buildings etc.

It’s not just tangible items that are considered assets, but intangible assets as well. These may include stocks and shares, contracts, agreements, futures, accounts and so on. In today’s age knowledge is a huge asset and can be sold, in information products or on your job CV.

In business and accounting there are several types of assets. Current Assets are a business’ cash, stock or other items that are expected to convert in to cash within a year. For example a shopkeeper’s till money and the products on the shelves are current assets.

Fixed Assets are assets that tend to be fixed in position and are needed for long term profit making, such as buildings, warehouses and machinery.

Other things that are considered assets are long term investments and things like copyrights and patents because they can be sold if a business venture goes bust.

For individuals assets that are really considered to be worth money are houses, vehicles, expensive jewelry and electronics. If bailiffs are sent to take items to cover somebody’s debts they will go straight to TV’s and other electronics.

ASSET ALLOCATION

is the overall term that describes how an investor spreads their cash for investing throughout different types of investment, such as savings accounts, stocks and bonds. The main purpose for people that actively look to asset allocation is to devise a strategy so their total investments are safe yet will make a reasonably return.

For example putting all of your money in a savings account is safe, but returns are low. Using other investments working together minimizes the risk and allow for more consistent returns.

ASSET-BACKED BONDS OR SECURITIES (ABS)

Asset-backed securities, called ABS, are bonds or notes backed by financial assets other than residential or commercial mortgages—an investor is purchasing an interest in pools of loans or other financial assets. Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans and consumer loans. As the underlying loans are paid off by the borrowers, the investors in ABS receive payments of interest and principal over time. The ABS market is for institutional investors and is not suitable for individual investors.

ASSET CLASS

A category or type of investment which has similar characteristics and behaves similarly when subject to particular market forces. Broad financial asset classes are stocks (or equity), bonds (fixed income) and cash. Real estate, precious metals and commodities can also be viewed as asset classes.

AUCTION RATE BONDS

Floating-rate tax-exempt bonds where the rate is periodically reset by a Dutch auction.

AUTHORITY

A separate state or local governmental issuer expressly created to issue bonds or run an enterprise, or to do both. Certain authorities issue bonds on their own behalf, such as transportation or power authorities. Authorities that issue bonds on the behalf of qualified nongovernmental issuers include health facilities and industrial development authorities.

AVERAGE ANNUAL YIELD

Average annual yield is the average yearly income on an investment, such as a bond, expressed in percentage terms. To calculate average annual yield, add all the income from an investment and divide that total amount by the number of years in which the money was invested. For example, if you receive $10 interest on a $1,000 bond each year for ten years, the average annual yield is 1% ($10 ÷ $1,000 = 0.01 or 1%).