Glossary

Accounting– A system of rules for tracing the flow of money in business activities.

Active investing– The practice of buying and selling investments to reap profits quickly from price fluctuations.  (see Passive investing).  Chosing individual financial assets within an asset class that are judged superior to the competing assets in terms of potential returns.

Active investors– People who seek high returns from investment as compared to a stated value or the fluctuating value of a market index.  ‘Actives’ typically trade more frequently and incur a higher risk of loss compared to other investors.

Active management– A style of management of a client’s investment portfolio that seeks high returns from investment.  Managers of large investment funds typically hire expensive research teams to select high-return investments.

American Depository Receipt (ADR)– a stock that represents a basket of shares issued by a foreign company.

Annual return–  A financial term used to describe the rate of change in value of an investment expressed as a time-weighted annual percentage.  The compound annual growth rate (CAGR) is an annual return.

Annualized- A time-sensitive value converted to one year as-if the change in value occurred in one year.  Used to standardize the investment returns among different time periods for the purpose of comparison.  The compound annual growth rate (CAGR) is an annualized value.

Annualized internal rate of return (AIRR)- the internal (‘hidden’) rate of return  among a finite series of cash flows as if the same rate of return occurred every year.

Arbitrage– the simultaneous purchase and sale of an asset in order to pocket the difference in price.

Asset-Any item of economic value owned by an individual or corporation. See ‘financial asset’

Asset class- a group of financial assets that have the same financial structure and exposure to market forces.  Among the available asset classes are bonds, stocks, derivatives, precious metals, commodities, and real estate.

Asset allocation– the process of investing in 2 0r more asset classes according to the investor’s distribution rule.

Authorized participant– an institutional investor selected by management to obtain the underlying assets needed to create an ETF portfolio.2

Basis point– There are 100 basis points in 1%.  One basis point is written as 0.01%.

Bear market–  An unmistakable downtrend in market prices (see Bull market).

Beating the market- earning an investment return that exceeds the return of an appropriate market index.

Book value (of a company)– the liquidation value of the company.  The value of all tangible assets that remain after the intangible assets and total liabilities are deducted from the total assets.

Bond– the debt of a company that pays a fixed amount of interest on the principal and returns the principal at maturity.

Bull market–  An unmistakable uptrend in market prices.

Call price-  the price of a bond that can be redeemed at specified dates before the maturity date.

Call risk– loss of income from early payment of callable bonds coupled with the risk of reinvesting in bonds with lower interest rates.

Capital– the cash or goods used to generate income.

Capital Gain (of Loss)- the increase (or decrease) in cash value of an asset.

Capital market- a market concerned with exchanging capital for securities.

Carry trade- the investment strategy of borrowing money from a country that charges lower interest rates to lend money to a country that pays higher interest rates.

Closed-end fund (CEF)– A publicly-traded investment company that raises a fixed amount of capital through an initial public offering of shares.3

Collateralised-debt obligation- a security whose payments flow to investors in the order of their position in the payment hierarchy.15

Commodity poolA fund that collects investor contributions for use in trading commodity futures and commodity futures options.

Common stock– A security that entitles its owner to vote, collect cash returns from the company (dividends), and earn returns from the market (capital appreciation).

Compound, Compounded– The accumulated value of an investment consisting of the initial value plus any additional growth (or loss) in value due to various cash rewards and price-change.  It’s customary to annualize the compounded return in order to compare investment outcomes.  (see Compound Annual Growth Rate (CAGR)).

Compound Annual Growth Rate (CAGR)– 1) A number used by analysts to summarize the time course of financial gains or losses.  2) The yearly growth rate of an investment derived from the change in value over a specified period of time.  CAGR = (VN/V1)(1/N) -1, where VN  is the final value, V1 is the first value, N is the time period in years, and the result is a decimal number convertible to percent by the factor of 100.  CAGR converts the fluctuating changes over time to a smooth, steady change.

Compound interest- the interest paid on previously earned interest plus the principal.  Compound interest is the most reliable method of growing wealth.

Compound return–  A term used in the finance world to describe the rate of return from a series of gains or losses based on an initial investment.  (Compound Annual Growth Rate (CAGR) is an example of annualized compound return).

‘Compounding returns’–  The strategy of reinvesting dividends and other cash returns for the purpose of multiplying the market value of an investment.

Contangothe price of a futures contract unexpectedly falls toward the spot price of a commodity near the expiration date of the contract, tending to lower the net asset value of an investment portfolio.

Conversion ratio– the number of shares of common stock per share of a convertible security.

Cost basis– the total cost of an investment.  The original cost basis at the time of purchase is the amount paid for an investment that includes the market value (i.e., principal) and relevant fees  — think of the cost basis as an out-of-pocket payment–.  The adjusted cost basis at the time of sale is a revision of the original cost basis by dividends, relevant adjustments of capital (return of capital; wash sale), and relevant corporate actions (splits; acquisitions; mergers).  The cost basis is a required item in tax reports of investment returns.

Cost of capital- the price of acquiring money through loans, which require payments of interest, and various forms of cash payments to shareholders.

Creation Unit– an aggregate unit of ETF shares which an authorized participant receives from management in exchange for a predefined basket of underlying assets [see ‘Authorized participant’].  Authorized participants engaging in the creation and redemption process will typically be charged a creation or redemption fee that varies from fund to fund.

Credit-default swap–  a type of insurance policy that pays out when an issuer defaults.15

Credit risk– the possibility that a borrower fails to pay interest, or the principal, on time.

Default– the failure to make timely payments of principal or interest.

Deleverage– Repayment or reduction of debt.   

Depression–  A severe and prolonged Recession (investopedia).  An uncommonly widespread economic hardship of the population characterized by high unemployment and increased poverty.

Derivatives risk– derivative contracts (e.g., futures, options, swaps) may be more sensitive than conventional securities to changes in interest rates and market prices. Losses from derivatives may exceed losses from the conventional securities.

Discount (see ‘Premium’)– A lower price as determined in one of two ways: 1) the existing price difference between 2 markets; or, 2) the present value of an item compared to its future value.   With respect to ETF shares, ‘discount’ is the lower market price compared to higher net asset value of one share.

Distribution yield– most often refers to the 12-month historical cash flow relative to principal amount invested in a mutual fund. [reflects the annual rate of shareholder distributions by ETFs and mutual funds.]

Dollar cost averaging– an investment strategy of paying a fixed amount of money for the same security at regular time intervals.

Downside risk– an unfavorable opinion that a security will lose value.

ETF– acronym for “exchange-trade fund” 5

ETN– acronym for “exchange-traded note” 5

ETP– acronym for “exchange-traded product” or “exchange-traded portfolio” 5

ETV– acronym for “exchange-traded vehicle” 5

Exchange-traded fund- an investment company authorized to collect capital, manage an investment portfolio, and issue securities to investors for the purpose of sharing the profits and losses of the portfolio.  The securities are traded in the stock exchange. ; a basket of securities that tracks and index is listed on an exchange.15

Exchange-traded Note (ETN)– a type of debt security issued by a financial institution for exchange-trading in which the returns are based on the performance of a market index, no period coupons are distributed, and no principal protection exits.  Investors may hold the debt to maturity and receive a payout of the NAV.  The share price is vulnerable to downgrades in the issuer’s credit rating.3,6

Exchange-traded Product (or Portfolio)– a derivatively-priced security which is traded intra-day on a national stock exchange 7; types of exchange-traded products that include ETFs, ETVs, ETNs, & certificates 5

Financial asset– an asset that is traded in financial markets; an account, loan, or marketable security that is convertible to cash (see ‘assets’).

Financial health- a description of how well the business is performing.

Financial portfolio- a personal or institutional collection of financial assets that are selected on the basis of an investment goal; the combined holdings of financial assets owned by an individual or organization.

Financial statement– A summary of all business transactions.

Formula (formulated) investing- the systematic use of criteria to select securities for investment.  The typical criteria are valuation ratios (P/E, P/E, P/S, other).  Other criteria may include a time plan for buying and selling securities

Fundamental analysis– The investigation of a company’s financial statements, prospectus, annual report, credit rating, and market position with intent to place a market value on its stock or bond.  An assessment of the company’s ‘intrinsic value’ in terms of its business prospects, net worth, and methods of rewarding shareholders.

Fundamentals– measurements that relate the price of a security to the wealth, performance, and growth of the company.

General partners-  The group who controls the investments and decisions of a limited partnership.

Grantor Trust– A trust in which the grantor has a reversionary interest in at least 5% of the trust assets at the time of transfer of assets to the trust.  The income is taxed to the grantor, not to the trust.3

Growth stock- A share of common stock that is priced according to the future value of the company’s earnings.

High-frequency trading-  an ultra-fast algorithmic trading strategy. 15

iNAV– acronym for the within-the-day (“intraday”) net asset value of an ETP and published about every 15 seconds during trading hours (s.a. NAV).

IPO- acronym for the initial public offering of a stock in the secondary (public) market.

Inception- the commencement of operations or trading.

Index- A measurement of the value of a market (or the economy) that is subject to change by dynamic market forces.  In securities markets, the index is an imaginary portfolio of securities representing the entire market or market segment.

Indexing– investing in passively managed, broadly diversified, low-cost, stock and bond index funds.16

Index investing– see indexing

Inflation– the upward trend of prices for goods and services in an economy.

Interest rate risk– the chance that increases in interest rate will decrease the value of an investment such as a bond portfolio.  Bond prices fall when interest rates increase and the depreciation of bond value increases with time to maturity.

Issuer risk– a decline of the borrower’s credit rating may reduce bond prices, causing a decline in the net asset value of a bond portfolio.

Investors (Capitalists)– People who buy shares of ownership or lend cash in expectation of future cash rewards (“returns”).  Most cash rewards come from sales of shares (“capital gains”), cash distributions to shareholders (“dividends”), and promised payments (“interest”).

Investment- the payment of capital in order to earn a profit.

Investment company– a company (corporation, business trust, partnership, or limited liability company) that issues securities and is primarily engaged in the business of investing in securities.8,12

Investment goal- the expected financial outcome of an investment.  Examples: capital appreciation, wealth protection.

Investment portfolio– see “Financial portfolio”

Investment strategy- a plan for allocating capital to choices of financial assets.

Leverage– The use of borrowed cash for investment.  The many ways of borrowing include loans, bond sales, and purchases of derivatives.  Leverage magnifies an investor’s gains and losses.

Limited liability-  the right to participate in sharing of profits with protection from any obligation to pay the company’s debts.

Limited partnership– A business jointly owned by at least 2 partners in which at least 1 partner (‘limited partner’) is liable only to the extent of personal investment in the partnership.  A limited partner is not liable for the debts of the business.  Limited partners don’t receive dividends, but do have access to cash flow.3

Liquidity– The availability of cash or ease of converting an asset to cash; the degree to which an asset or security can be traded in the market without affecting the market price; the ability to convert an asset to cash.3

Liquidity risk– the asset may be difficult to purchase or sell for cash.

Liquidity swap–  a transaction to swap illiquid assets for liquid ones.15

Long term– beyond 1 year for U.S. tax purposes.

Longevity swap- a transaction to lay off the risk of unexpected changes in life expectancy.15

Market cap (market capitalization) – The total market value of the company’s shares outstanding.  Market cap = share price x shares outstanding.

Market maker– A trader or firm who buys and sells assets on behalf of a client.

Mechanical trading system- the hardware and software needed for program trading, generally including high-speed connections to brokerage firms.

Mortgage backed securities risk– the early or delayed payment of debt and hypersensitivity to changes of interest rate

Municipal securities risk– the regulatory, legal, or financial risk of delayed, terminated, or diminished payments by issuers of municipal bonds.

Mutual fund– a basket of investments shared by many investors.  Each mutual fund share has an equal portion of the fund’s net asset value at the end of the business day.

NAV– acronym for “net asset value” of an ETF, or other investment fund, and typically used to denote the end-of-day net asset value of the ETF (s.a. iNAV).

Net asset value– the difference between the total assets and total liabilities of the fund divided by the total number of outstanding shares; a measure of the fund’s wealth.

Net interest margin– the difference between investment income and debt as a percentage of the invested capital; =  (Investment income – Debt) / Average Invested Assets.  Alternatively, the difference in interest rates charged for lending and borrowing money.

Open-end investment company– an investment company that does not have restrictions on the amount of shares it will issue.3

Passive investing– the practice of buying investments to hold them for a long period of time, despite price fluctuations, in order to earn a profit slowly from long-term price appreciation.

Passive management (“Indexing”)– the management of a client’s investment portfolio by selecting investments that match the investment returns reported by a market index.

Penny stock- A common stock that is cheaply priced and sold outside of the major stock exchanges.  Originally priced below $1 and now, in 2011, priced below $5.

Portfolio– see ‘investment portfolio’

Portfolio turnover rate– when expressed as a percentage, it signifies what portion of securities (stocks, bonds, or both) in a fund’s portfolio are bought and sold during the course of a year; the annual replacement rate of portfolio assets and equals the total sales or purchases, whichever is less and excluding cash, divided by average monthly assets during the year.  The rate can be inflated or deflated by changes in the denominator due to market fluctuation of the assets.

Position–  the number of securities held in a portfolio.  Owned securities are called the long position and borrowed securities are called the short position.

Preferred stock– a security that entitles the owner to receive dividends before owners of common stock, but does not provide voting rights.

Premium (see ‘Discount’)– A higher price as determined in one of two ways: 1) the existing price difference between 2 markets; or, 2) the present value of an item compared to its future value.   With respect to ETF shares, ‘premium’ is the higher market price compared to lower net asset value of one share.

Primary market– The market (usually a private marketplace) where a security is sold for the first time.

Primary risk– one of more events that could produce a loss on investment.

Principal– the amount of money invested.

Program (programmed; systematic; mechanical) investing- the use of a computer program to trade securities based on buy and sell signals; models are often tested with historical data; essential for high-speed trading; see Mechanical trading system.

R-squared– A statistical measure that represents the percentage of a security’s movements that can be explained by movements in a benchmark index. Values range from 0 to 100. A high R-squared (between 85 and 100 indicates the fund’s performance patterns have been in line with the index 3.

Recession–  A widespread decline in business activity lasting longer than several months. Two consecutive quarters of negative economic growth as measured by the country’s gross domestic product (GDP)3.

Repo-  a (typically) short term funding transaction in which the borrower sells a security for cash and agrees to buy it back at a later date.15

Retail investor– an individual who commits capital for their personal account rather than on behalf of another person.10

Return–  The loss or gain in value of an investment.

Risk– Any of several different meanings: 1) A statement of one or more factors capable of producing a loss on investment or deterioration of company operations.  2) The chance of a loss.  3) The variance of market value as measured by an appropriate statistic (e.g., standard deviation).  (see also downside risk and upside risk).

Screen- A computer program that selects a desired group of securities from a universe of securities listed in a financial market. Brokerage firms, financial institutions, and financial websites provide screens that allow the individual investor to set inclusion and exclusion criteria for the selection process.

Secondary market- The market (usually a public market) where a security is resold.  A market where traders buy assets from other traders, as opposed to buying assets from an original issuer18.

Securities are investment contracts that require an investment of money, are issued by a common enterprise, and generate profits solely by the efforts of other people.  Stocks, bonds, derivatives, ETFs, and REITs are examples of securities.

Settlement date– when the trade is completed (e.g., securities are exchanged for cash; see “trading date”).

Shares–  ETF shares represent an undivided interest in the portfolio (s.a. undivided interest).

Shares outstanding– Shares of common stock that are authorized by regulators, issued by the company, and owned by shareholders.

Short term– less than 1 year for U.S. tax purposes.

Social impact bond-  an instrument to finance social programs that links investors’ returns to the program outcomes.15

Solvency- The ability of a corporation to meet its long-term fixed expenses and accomplish long-term growth.3

speculator– an investor who engages in speculation to earn high returns at the risk of losing principal.

Speculation- Investing for quick (i.e., short-term) returns by timing the market to capture swings in valuation, using leverage (e.g., derivatives), selecting individual securities (e.g., stock-picking), or relying on intuition (e.g., gambling).  By comparison, see traditional investing.

Stock– see common stock, preferred stock.

Strategic investing– Setting an allocation of assets that are designed to meet long-term financial needs.17

Systematic trading– see Program trading and Formula trading.

Swap-data repository-  an entity designed to collect data on derivative transactions and make the information available to regulators.15

Tactical investing–  Short-term shifting of assets to make a profit or minimize loss.17

Technical analysis– the fascinating game of price, volume, and time analysis with intent to forecast the market trend of a stock or other security.  The player hopes to determine buy and sell signals for the security.  The assessment of a security’s price and trading volume with respect to time.

Time horizon– the length of time that you can part with money before needing it again.

Total return– the total capital gain, or loss, and total cash distributions  earned from an investment.

Total net return– The shareholder’s total net return is comprised of personal earnings from fund or corporate distributions, realized capital gains from trades, and unrealized capital gains from holdings after adjustment for the costs of investment.

Tracking error– the gap in performance between a portfolio and its benchmark index.

Trading date (transaction date)– when the buyer and seller agree to trade assets (e.g., securities in exchange for cash; see “settlement date”).

Traditional investing (e.g., indexing)– the investment goal is to capture dividends and earnings growth.16

Treasury Bill (T-bill)–  A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million.  The fixed return (i.e., interest) is the difference between the purchase price and face value.    

Trust– a three-party relationship in which the trustor gives the trustee the right to hold title to property or assets for the benefit of the beneficiary.3

Underlying assets– pooled financial assets that are turned into tradable securities.3

Undervalued- a stock price below the company’s liquidation value or below the stock’s estimated future value.

Undivided interest– the right of ownership is shared among co-owners in which each partner has an unrestricted claim to ownership of the total assets, but no partner has an exclusive claim to any specific portion of the assets.

Unit investment trust (UIT)– An investment company that offers a fixed, and therefore unmanaged, portfolio of securities in redeemable units to investors for a specific period of time.  The UIT is designed to earn capital appreciation and/or dividend income.3,6

Upside potential– a favorable opinion about the chance of earning income or capital gain from a security.

Upside risk- Sometimes upside for short. The extent to which the value of a security or other investment may increase beyond forecast levels. The opposite of downside risk 14.

Value stock- A share of common stock that is priced according to the liquidation value of the company.

VIX- a measure of the expected volatility of the S&P 500, known as the ‘fear index’.15

Volatility- the measure of a security’s price stability.  Volatility is directly measured by the standard deviation of return over a period of time.13

Volume– The number of shares or contracts traded in a security or an entire market during a given period of time. The number of asset units (e.g., shares of stock, barrels of oil, bond certificates, houses) held or traded by an owner.

Wall Street”- the financial district in Manhattan, NY, where exchanges (including the New York Stock Exchange) , investment banks, and brokerage firms are located in close proximity to each other.

Wash sale is a transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. Wash sales are a method investors employ to try and recognize a tax loss without actually changing their position.  The effectiveness of this strategy has been greatly diminished with the implementation of the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale)3.

REFERENCES

1.  Investorwords.com.  ©2011 by WebFinance Inc.  www.investorwords.com

2.  ETFs glossary.  http://www.amex.com/etf/Glossary/Gloss.htm

3.  Investopedia, financial terms. www.investopedia.com/terms/

4.  Babylon. Free online Dictionary.  © 1997-2011, Babylon Ltd. http://www.babylon.com/definition/DISTRIBUTION_YIELD/

5.   Exchange Traded Products- Education.  ®2011 NYSE Euronext.  http://www.nyse.com/about/listed/1266318204096.html.

6.   Weinberg, Ari I. Exchange-Traded Funds. Is an ETF Really a Fund? Maybe Not., Wall Street Journal, 12/6/2010.

7.  Exchange-traded Product. Wikipedia, the Free Encyclopedia, February 6, 2011.  http://en.wikipedia.org/wiki/Exchange-traded_product

8.  Investment companies.  U.S. Securities and Exchange Commission.  Modified 3/29/2010.  http://www.sec.gov/answers/mfinvco.htm

9.  Course 2008, Examining a stock fund’s portfolio. Turnover rates. Funds 200. Investing classroom. http://www.morningstar.com/news-classroom-course-13/2945/6.shtml

10.  City Index Glossary. http://www.cityindex.co.uk/learn-to-trade/glossary.aspx

11.  investment-company terms, http://taft.law.uc.edu/CCL/InvCoAct/sec2.html

12.  investment company, http://taft.law.uc.edu/CCL/InvCoAct/sec3.html

13.  the free dictionary, http://financial-dictionary.thefreedictionary.com/

14.  Financial times lexicon, © THE FINANCIAL TIMES LTD 2012, http://lexicon.ft.com/Term?term=upside-risk

15.  The Economist.  Special report on financial innovation.  February 25, 2012.

16.  John C. Bogle, The Little Book of Common Sense Investing.  John Wiley & Sons, Inc. Hoboken, 2007.

17.  Murray Coleman. Jittery investors toy with short-term needs.  The Wall Street Journal, April 26, 2013.

18.  Lodewijk Otto Petram, The World’s First Stock Exchange.  ACADEMISCH PROEFSCHRIFT, Amsterdam University, January 28, 2011.

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