Investment Dictionary

A

2007-05-15T12:02:00.003-07:00

Abandonment
The act of surrendering a claim to, or interest in, a particular asset.
The permitted withdrawal from a forward contract that is made for the purchase of deliverable securities.
The act of allowing an option to expire unexercised.

Abandonment Option
A clause granting parties the option of withdrawing from the contract before the fulfillment or completion of all contractual duties. This clause adds value by giving the parties the ability to end the obligation if it is unprofitable. A type of "real option"

Abandonment Value
The value of a project or asset if it were immediately liquidated. Also referred to as the liquidation value.

Abatement
In general, a decrease in the amount of taxation faced by an individual or company.

Accretion
Asset growth through addition or expansion. In reference to discount bonds, it describes the accumulation of value until maturity.

Accounting Rate of Return - ARR
ARR provides a quick estimate of a project's worth over its useful life. ARR is derived by finding profits before taxes and interest.

Accruals
Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense.

Accumulated Dividend
A dividend which is due to holders of cumulative preference shares but which has not yet been paid. The amount is carried forward on the company's books as a liability until it is paid.

Acid-Test Ratio (Quick Ratio)
A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Calculated by: (Current Assets - Closing Stock)/Current Liabilities

Acquisition
When one company purchases a majority interest in the acquired. The acquiring of control of one corporation by another. In "unfriendly" takeover attempts, the potential buying company may offer a price well above current market values, new securities and other inducements to stockholders. The management of the subject company might ask for a better price or try to join up with a third company

Active Bond
A term used to describe fixed-income securities that trade frequently on the floor of the NYSE.

Actuary
A professional statistician working for an insurance company. They evaluate your application and medical records to project how long you will live.

Adjusted Earnings
If a company's earnings figures are distorted either positively or negatively by exceptional one-off occurrences in the year, its directors can choose to clarify the performance by releasing adjusted earnings. In other words, earnings with the exceptional items stripped out which they believe are more representative of its underlying performance.

Affidavit
A written statement signed on oath and witnessed by a commissioner for oaths, usually a qualified solicitor

Aging
A method used by accountants and investors to evaluate and identify any irregularities within a company's account receivables. Aging is achieved by sorting and inspecting the accounts according to their length outstanding.

Allotment
The distribution of shares to applicants in a new issue. Applicants may get all the shares they applied for or, if the new issue is oversubscribed, the allotment will be scaled down either pro rata to the amount which each person applied for or, in some cases, using a random ballot.

Amortisation
The process of gradual liquidation of a future obligation or capital outlay, such as paying off a mortgage with periodic payments.
Annual Report
A statement of results issued by a company to its shareholders at the end of the fiscal year (the company's year-end) containing reports on company operations and formal audited financial statements.

Arbitrage
The process by which investors exploit the price difference between two exactly alike securities by simultaneously buying one at a lower price and selling the other at a higher price (therby avoiding risk). This action locks in a risk-free profit for the arbitrageur (arb) (person engaging in arbitrage) and brings the prices back into equilibrium.

Asset
A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. A balance sheet item representing what a firm owns.

Averaging Down
Buying more of a security at a lower price than the original investment. This is usually done to reduce the average cost per unit of the investment. For example if the initial purchase happens at 75 cents per share and the stock drops to 25 cents per share and you purchase the same amount at that price as your original purchase then your average cost for the stock is only 50 cents per share.

B

2007-05-15T12:02:00.001-07:00

Bear Call Spread
A type of options strategy used when a decline in the price of the underlying asset is expected. It is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option.

Bear Put Spread
A type of options strategy used when an option trader expects a decline in the price of the underlying asset. Bear Put Spread is achieved by purchasing put options at a specific strike price while also selling the same number of puts at a lower strike price. The maximum profit to be gained using this strategy is equal to the difference between the two strike prices, minus the net cost of the options.

Bond
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.

Broker Dealer
A person or firm in the business of buying and selling securities operating as both a broker and a dealer depending on the transaction.

Bull Call Spread
A type of options strategy used when a moderate rise in the price of the underlying asset is expected. It is achieved by purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options. Most often, bull call spreads are vertical spreads.

Bull Put Spread
A type of options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. This strategy is constructed by purchasing one put option while simultaneously selling another put option with a higher strike price. The goal of this strategy is realized when the price of the underlying stays above the higher strike price, which causes the short option to expire worthless, resulting in the trader keeping the premium.

C

2007-05-15T12:01:00.006-07:00

Call
The period of time between the opening and closing of some future markets wherein the prices are established through an auction process. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.

Conversion Price
The price per share at which a convertible security, such as corporate bonds or preferred shares, can be converted into common stock.

Commodity
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. Any good exchanged during commerce, which includes goods traded on a commodity exchange.

Commodity Exchange
A swap where exchanged cash flows are dependent on the price of an underlying commodity. This is usually used to hedge against the
price of a commodity.

Convertible Bond
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs".

Corporate Bond
A debt security issued by a corporation, as opposed to those issued by the government.

Credit Spread
The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security.

Cum Dividend
When a buyer of a security is entitled to receive a dividend that has been declared, but not paid.

D

2007-05-15T12:01:00.005-07:00

Death Benefit
The amount on a life insurance policy or pension that is payable to the beneficiary when the annuitant passes away. Also known as "survivor benefit".

Deferred Share
A share that does not have any rights to the assets of a company undergoing bankruptcy until all common and preferred shareholders are paid. A method of stock payment to directors and executives of a company through the deposit of shares into a locked account. The value of these shares fluctuate with the market and cannot be accessed by the beneficiary for the purpose of liquidation until they are no longer employees of the company. A share generally issued to company founders that restricts their receipt of dividends until dividends have been distributed to all other classes of shareholders.

Derivative
In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

E

2007-05-15T12:01:00.003-07:00

Exercise
An action by a stockholder taking advantage of a privilege offered by a company or other financial institution. This includes warrants, options and other exotic financial instruments

Ex-Dividend
The trading of shares when a declared dividend belongs to the seller rather than the buyer.

Equity
Stock or any other security representing an ownership interest. On the balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholder's equity". In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. Thus, it is the amount, if any, the owner would receive after selling a property and paying off the mortgage.

F

2007-05-15T12:01:00.001-07:00

Fixed Annuity
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.

FOREX
The foreign exchange (also known as "forex" or "FX") market is the place where currencies are traded. The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

Foreign Currency Effect
The gain or loss on foreign investments due to changes in the relative value of assets denominated in a currency other than the principal currency with which a company normally conducts business. A rising domestic currency means foreign investments will result in lower returns when converted back to the domestic currency. The opposite is true for a declining domestic currency.

Foward Contract
A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date.

Foward Price
The predetermined delivery price for an underlying commodity, currency or financial asset decided upon by the long (the buyer) and the short (the seller) to be paid at predetermined date in the future.At the inception of a forward contract, the forward price makes the value of the contract zero. The Forward Price can be determined by the following formula:
F0 = S0 * erT
where: S0 represents the current spot price of the asset ;F0 represents the forward price of the asset at time T; er represents a mathematical exponential function

Fugit
The amount of time that an investor believes is left until it would no longer be beneficial to exercise an option early. The likelihood that an American-style option will be used before it expires.

Future Contract
A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

G

2007-05-15T12:00:00.005-07:00

Gain
The amount chargeable to capital gains tax (CGT) from gains made on the disposal of an asset. In the case of stocks and shares, your gain is the difference between the proceeds of selling the shares and the amount you paid for them adjusted for indexation In calculating the acquisition cost, you can include including broker commissions and stamp duty. Depending on when you bought the shares, the base cost can be increased through the indexation allowance - a good thing from a tax point of view because the higher your acquisition cost, the lower your chargeable gain. In calculating the disposal proceeds, you can deduct commissions and other charges incurred in the process of selling. Whether you have to pay Capital Gains Tax on the chargeable gain will depend on whether you have already used up your annual exemption (the amount of gains you can make in any one year without paying CGT), and on the level of your other gains or losses in the tax year. Taper relief, which reduces the rate of tax you pay on gains, may also be available, depending on how long you have held the shares at the time you sell them.

Gearing Ratio
A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

H

2007-05-15T12:00:00.003-07:00

Hedge
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

Hedge Fund
An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for a minimum period of at least one year.

Hedging
A strategy employed in the futures, options and warrants markets to reduce risk. Traditionally a commodity producer (say, a cocoa grower) would agree to sell his goods at a stated price at a stated time in the future, and the user of the commodity (say, a chocolate manufacturer) would agree to buy them. By agreeing on a price, quantity and delivery date, they introduce certainty into their operations and reduce risk. For the producer, the risk would be that prices drop, and for the processor that they would rise. The same strategy carries over into the financial markets. Options and warrants can be used to hedge a portfolio position. In the case where shares have been sold, for example, the purchase of equivalent call options (the option to buy shares) means that if the shares rise in price, a corresponding rise in the value of the option will offset the notional loss expected on the underlying shares.

Hybrid Security
A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible. Often referred to as "hybrids".

I

2007-05-15T12:00:00.001-07:00

Indenture
A contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be repaid.

Intangible Asset
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

J

2007-05-15T11:59:00.006-07:00

K

2007-05-15T11:59:00.005-07:00

L

2007-05-15T11:59:00.003-07:00

Leverage
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.

Life Annuity
An insurance product that features a predetermined periodic payout amount until the death of the annuitant. These products are most frequently used to help retirees budget their money after retirement. Typically, the annuitant pays into the annuity on a periodic basis when he or she is still working. However, annuitants may also buy the annuity product in one large purchase. When the annuitant retires, the annuity makes periodic (usually monthly) payouts to the annuitant, providing a reliable source of income. When a triggering event (such as death) occurs, the periodic payments from the annuity usually cease.

Life Insurance
A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.

Liquidation
When a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders. Any transaction that offsets or closes out a long or short position.

M

2007-05-15T11:59:00.001-07:00

Market Maker
A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.

Maturity Date
The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.

N

2007-05-15T11:58:00.006-07:00

O

2007-05-15T11:58:00.005-07:00

One-way Market
A market which only can quote a firm price on either the bid or the ask side. This can be caused by temporary market inefficiencies or by regulatory controls, as can be found in some foreign countries. A one-way market also can be created when there are only buyers, or only sellers, interested in a particular asset or security at a specific point in time. A slang term to describe a market that is moving strongly in one direction with little resistance.

Option
A financial derivative which represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (excercise date).

P

2007-05-15T11:58:00.003-07:00

Put
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

Q

2007-05-15T11:58:00.001-07:00

Qualified plan
A tax deferred pension plan set up by an employer to enable employees to accumulate tax free savings for retirement benefits. Usually, contributions are made by employer and employee and when income is taken at retirement it is taxable.

Qualified stock option
A US stock option, given to executives and employees, which complies with the requirements of the Internal Revenue Service. A qualified stock option is not subject to tax at the grant date or when exercised.

Qualifying annuity
An annuity which is purchased within a qualified plan.

Qualitative Analysis
Securities analysis that uses subjective judgment based on nonquantifiable information, such as management expertise, industry cycles, strength of research and development, and labor relations. This type of analysis technique is different than quantitative analysis, which focuses on numbers. The two techniques, however, will often be used together.

Quantitative Analysis
A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically. Quantitative analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price.

Quant Fund
An investment fund that selects securities based on quantitative analysis. In such funds, the managers build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model.

Quartile
The investment industry ranks the performance of collective funds on the total returns (income + growth) they have produced for investors. The rankings divide the funds into sectors, so that growth funds are compared together, income funds are compared together, and balanced funds are compared together. The rankings list the funds in descending order, and the list is divided into four 'quartiles'. The best performing 25% are in in the '1st quartile' The next best performing 25% are in in the '2nd quartile' The next best performing 25% are in in the '3rd quartile' The worst performing 25% are in in the '4th quartile' So, if a sector contains 36 trusts, each quartile will contain 9 trusts. Trusts often advertise their performance over various periods by indicating, say, a first quartile ranking. In the above case that would indicate a position in the top 9. Investors need to be aware that when unit trusts advertise their past performance, they invariably select statistics that show them in a good light. Specific examples: Showing performance between two carefully selected dates. Look in the small print where they have to show a five year figure. Portraying the fund as a top performer, but only comparing growth figures with a small selection of rival firms. Failing to compare the figures with those of any rivals at all. Claims like 'leading ISA provider', 'top performer' and 'ranked first' which have ambiguous meanings. 'Ranked first', for instance, could mean that it was in the first quartile of performers which, in a field of 400, could mean that it was the 100th best performing fund.

Quick ratio
A financial ratio which is similar to the current ratio, but more stringent. It is defined as: current assets minus stocks, divided by current liabilities. It shows whether a company would be able to pay its debts if its creditors were hammering at the door AND it had no time to sell any of its stock. If the acid test is 1 or higher, a company passes the test.

Quotation
The highest bid price and the lowest offer price of a security available at any particular time.

Quote
The highest bid to buy and the lowest offer to sell a security in a given market at a given time. If you ask your Financial Advisor for a "quote" on a stock, he or she may come back with something like "45 1/4 to 45 1/2." This means that $45.25 is the highest price any buyer wanted to pay at the time the quote was given on the floor of the exchange and that $45.50 was the lowest price that any seller would take at the same time.

R

2007-05-15T11:57:00.001-07:00

Repatriation
The process of converting a foreign currency into the currency of one's own country. The amount that the investor will receive depends on the exchange rate between the two currencies being traded at the settlement time.

S

2007-05-15T11:53:00.001-07:00

Spread
The difference between the bid and the ask price of a security or asset. An options position established by purchasing one option and selling another option of the same class but of a different series.

Strike Price
The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract.

T

2007-05-15T11:52:00.003-07:00

U

2007-05-15T11:52:00.001-07:00

V

2007-05-15T11:51:00.003-07:00

Variance
A measure of the dispersion of a set of data points around their mean value. It is a mathematical expectation of the average squared deviations from the mean.

Volatility
A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. A variable in option-pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.

W

2007-05-15T11:51:00.001-07:00

X

2007-05-15T11:50:00.002-07:00

Y

2007-05-15T11:50:00.001-07:00

Year end dividend
An additional dividend paid at the end of the trading year and based on company profits.

Z

2007-05-15T11:49:00.001-07:00

ZAR
This is the abbreviation for the South African Rand (currency)

Zero coupon bond
A bond which pays no interest through its life and which pays a capital gain by being issued at a substantial discount to the maturity value. If it is a deep discounted bond, the gain is subject to income tax.

Zero rated
A term relating to value added tax (VAT). It refers to goods (for example, food and books) which are taxable but at a zero rate. The significance of this rating is that businesses selling such goods may claim back their input tax (the VAT which they have paid to their suppliers). Businesses which provide goods and services which are VAT exempt (for example, stamps and postal services) are not able to reclaim input tax.

Zero dividend preference shares (zeros)
Preference shares which receive no dividends throughout their lives. Instead a fixed known amount is paid at maturity.