Day Trading Terms of Glossary
Day Trading
Terms of Glossary
An investment
objective that aims to generate positive returns, regardless of the overall
direction of markets/asset classes etc. Absolute Return is distinct from
traditional fund managers, who benchmark their returns to an Index/Sector or
even a Factor.
An ADR allows US
investors easier access to ownership of foreign public companies. They are also
beneficial for foreign companies as they enhance investor interest in their
shares beyond their own domestic market.
Alpha is a
measure of the performance of an investment in relation to a benchmark index.
Often specified as a percentage, an alpha of 1% means that the return on
investment was 1% better than the benchmark.
The Alternative
Investment Market (AIM) was first established in 1995 by the London Stock
Exchange as a way for newer firms to gain access to public funds.
Devised in the 1960s
by Edward Altman, the Altman Z-Score indicates the probability of a company
entering bankruptcy within the next two years.
Amortisation has two
distinct meanings: (1) In one sense, it is the practice of reducing the value
of assets to properly reflect their value over time. (2) In another, it can
mean the servicing of debt in regular increments.
An annuity is a
product that can provide you with a lifetime income, typically on
retirement. Annuities are viewed as a way to hedge against longevity risk,
or the potential for one to outlive one’s invested assets. Social Security
and/or defined pension benefits are prominent examples of annuities.
An investment
strategy that weights different assets in a portfolio according to an agreed
investment policy that balances risks and returns. Percentages are allocated to
each asset grouping according to a pre-determined investment strategy dependant
on the investors’ risk tolerance. The allocation could be described as
Cautious, Balanced or Aggressive.
The law requires an
independent person (an 'Auditor') to sign off that a firm’s financial
statements are “true and fair” and have been prepared using the relevant
legislation.
Companies
occasionally hand cash back to shareholders by issuing new types of shares,
typically called B shares and C shares, and hence deemed a B/C share scheme.
Each shareholder has the choice of which type of share they wish to receive.
If the current cash
price for an asset slips above the price for forward delivery, that’s known as
‘backwardation’.
The balance of
payments refers to the accounts that sum up a country’s financial position
relative to other countries.
The Baltic Dry Index
(BDI) is a key barometer of global freight activity – measuring the cost of
ferrying raw materials around the planet.
The Bank of England
is the UK’s central bank. It started life in 1694 as a private bank set up by
London merchants as a vehicle to lend money to the government and to deal with
the national debt.
Beta (or the ‘beta
coefficient’) is a way to measure the relative riskiness of a share.
The bid-offer spread,
sometimes called the bid-ask spread, is simply the difference between the price
at which you can buy a share and the price at which you can sell it.
The Big Bang refers
to the deregulation of the London Stock Exchange (LSE), which took place on 27
October 1986.
Blockchain, and the
related concept of cryptocurrency, are phrases that have been thrown around a
lot in recent years, following the success of Bitcoin. As a relatively new
concept, blockchain technology has great potential in all manner of
computing-related fields, which nowadays is almost all of them. Blockchain is a
new system for keeping records, but its relevance to trading and its great
potential aren’t immediately obvious.
When governments want
to raise money, they do so through a bond auction by issuing bills (typically
short-term) and bonds (longer term – maturities can reach 30 years or more).
Bond duration is a
measure of how long it will take to reach a bond’s mid point in cash-flow
terms. For example, if a bond’s duration is 3.6 years, that specifies that one
will receive one’s original investment back in that length of time through its
coupon payments (assuming no default).
The risk of default
on bonds varies from issuer to issuer. Credit-rating agencies provide these
securities with a bond rating to help you gauge their risks.
Bond vigilantes refer
to market participants who effectively self-regulate interest rates via the
buying and selling of bonds in accordance with their perceived intrinsic value.
An investor buying a
bond needs to know what return to expect. The most common form of bond
yields – annual yield on a fixed income security – is determined by taking the
annual coupon payouts and dividing them by the market price of the bond.
A bond is a type of
debt instrument issued and sold by a government, local authority or company to
raise money. Investors who buy bonds are paid interest, which for bonds is
called a "coupon".
A bonus issue is
common among British companies, wherein free additional shares are added to the
positions of existing shareholders. Bonus issues are synonymous with scrip
issues or capitalization issues.
Book value is the
total value of the net assets of a company attributable to – or owned by –
shareholders. It is calculated as the net asset value of a company, defined as
the total tangible asset base (i.e., total assets minus intangible assets) minus
total liabilities.
Bottom-up investing
is a strategy that overlooks the significance of industry or economic factors
and instead focuses on the analyses of individual stocks and companies.
CAPM -
Capital Asset Pricing Model
The Capital Asset
Pricing Model establishes the link between the expected return for an asset and
systematic risk. The CAPM uses a simple mathematical formula. Although debunked
and not widely used anymore, this pricing model is conceptually sound.
A Clearing House is
an intermediary entity acting as a trade-facilitator between the buyer and the
seller in the financial markets. An indispensible cog in the system, the
clearing house settles buyer/seller accounts, collects margin, clears trades
and reports trading data to all parties concerned.
Forward contracts are
non-standardised agreements between two parties, concerning the future delivery
of a commodity for a presently set price. Commodity forwards contracts are
customisable. They are not traded through centralised exchanges and are
therefore considered to be OTC (over the counter) instruments.
Convexity is a
concept in finance where there are non-linearities in a potential output after
adjusting an input variable.
Correlation describes
the mutual relationship between two independent values. The most basic use
of correlation in trading is in finding out whether there’s a relationship
between two variables and, if there is, what kind of relationship it is. The
number is generally given as a figure between -1 and 1, where -1 implies a
negative correlation, 0 represents no correlation whatsoever, and 1 implies a
positive correlation.
Also known as FX-risk
and exchange-rate risk, currency risk stems from the fluctuation of the
exchange rate between two currencies. Companies engaged in cross-border
operations are most exposed to currency risk. Such operations may experience
unexpected profit or loss due to currency rate fluctuations - this is currency
risk.
Defensive stocks are
based on underlying assets which tend to be less prone to economic and credit
cycles than others. Because of this, they’re generally invested in when traders
see an economic slowdown approaching and want to hedge their portfolios.
Deflation is a
process over which the nominal prices of goods and services drop. At a glance,
deflation is positive from the perspective of the consumer. It directly boosts
purchasing power. At a closer look, it is, however, akin to poison for the
economy.
Depreciation is the
accounting practice of spreading out the cost of a fixed asset over time and
deducting it from taxable income. The practice works according to rules set by
the IRS (or other competent taxation authorities).
A derivative is the
collective term used for a wide variety of financial instruments whose price
derives from or depends on the performance of other underlying assets, markets
or investments.
Diversification is an
investment strategy focused on risk mitigation. It calls for the creation of a
portfolio that contains a wide variety of investments. The logic behind it is
that the possible negative yields of some investments are neutralized by the
positive yields of other investments in the portfolio.
EBITDA (pronounced
ee-bit-dah) is an acronym that refers to a company’s earnings before interest,
taxes, depreciation, and amortization.
The Elliott Wave
Theory makes use of fractal, repetitive patterns to predict future market
movements. It was developed in the 1930s by Ralph Nelson Elliott. Elliott
recognized the fact that investors' psychology gives rise to certain
"wave" patterns in asset price action.
Exchange-Traded Funds
are baskets of securities, that act like securities themselves. They track an
underlying index (comprised of all the securities covered by the ETF) and they
are marketable. There is no limit on what an ETF can contain: stocks,
bonds, commodities, various investment types, and soon: cyptocurrencies.
The 'Fed Put' is the
widespread belief that the US Federal Reserve (commonly referenced as "the
Fed") can always rescue the economy and financial markets. The term
originates from the analogous comparison of selling a put option on the market.
Named after 13th
century mathematician Leonardo Fibonacci, the Fibonacci Theory consists of a
sequence of numbers. Every number in the sequence (0, 1,1,2,3,5,8,13,21 etc) is
obtained by adding up the two preceding numbers. Traders derive technical
indicators from this sequence, through various mathematical artifices.
Foreign exchange
reserves are foreign currency funds and various foreign assets held by a
country's central bank, or other monetary authority. The purpose of these
reserves is to allow the said authority to pay its liabilities. Such
liabilities may arise from the currency issued by the central bank, as well as
from the deposits held with it, by the government and various financial
institutions.
Market indices are a
hypothetical basket of securities, which provide a relevant snapshot of a given
market segment. The value of an index reflects the values of its constituent
securities. The index provider uses a well defined methodology to calculate
this value.
The information
ratio, sometimes called the appraisal ratio, works to measure the risk-adjusted
return of a financial asset portfolio (collection of assets).
An interest rate
represents the amount of interest that is due per period in relation to the
amount borrowed, lent, or deposited. Interest rates can refer to any period of
time, but it generally takes the form of an annual percentage.
Price Earnings Ratio (P/E Ratio)
The price earnings
ratio, commonly known as the P/E ratio or sometimes PER, is the ratio of a
company’s share price relative to its earnings per share (EPS).
Pump and dump refers
to an illegal practice in trading that attempts to boost the price of stocks.
The scheme works by providing exaggerated or misleading information to
prospective buyers, in the hope of persuading a large number of people to
purchase the stock. When a surge of people buy it, the price goes up, and the
perpetrators of the scam then sell their own stock at highly inflated prices.
A risk reversal is an
options strategy designed to hedge directional strategies. For example, a long
position will be hedged two-fold in a risk reversal scenario:
The Sharpe ratio is a
way to determine how much return is achieved per each unit of risk. It is
useful to, and can be computed by, all forms of capital market participants to
evaluate their performance, from day traders to long-term buy-and-hold
investors.
The Sortino ratio is
a means for traders and investors to gauge the risk-adjusted performance of
their portfolios or strategies. Namely, they can determine how much return they
generate per each unit of risk.
The Treynor ratio,
also commonly known as the reward-to-volatility ratio, is a measure that
quantifies return per unit of risk. It is similar to the Sharpe and Sortino
ratios.
VSTOXX is a method of
showing implied volatility across a basket of Eurozone stocks (Euro STOXX 50).
The VSTOXX number provides a benchmark of market volatility in European
markets.
Bovespa
The Bovespa (or Ibovespa) is the Brazilian stock market’s benchmark index.
Break
even
The break-even point on an option is the price that the underlying asset has to
hit in order to enable the option buyer (holder) to recover their premium.
Bullet
repayment loan
A ‘bullet repayment loan’ is one where the borrower repays the capital in one
chunk at the end of the term of the loan.
Buyouts
and buyins
A management buyout (MBO) occurs when the management of a company buys up a
controlling interest (often by buying all outstanding shares).
CAC-40
The CAC-40 is France’s benchmark stockmarket index.
Capital
adequacy
Central banks impose capital adequacy ratios (also known as solvency ratios)
that set the amount of its own money a bank needs to have relative to its total
loan portfolio.
Capital
expenditure (Capex)
Capex is short for capital expenditure. This is simply the purchase of fixed
assets such as land, buildings and equipment for a business and it is often one
of the biggest uses for a company’s cash flow.
Capital
ratio
In an attempt to prevent organisations such as banks from going bust too
easily, regulators impose minimum capital requirements on them…
Carry
trade
Carry trades seek to make money from the fact that the interest rates set by
central banks around the world vary considerably.
Cash
conversion
Making profits is one thing – but you want to know how well a company converts
these profits into cash.
Cash
flow
As well as publishing yearly profit and loss accounts, companies also have to
produce a cash-flow statement…
Chapter
11
Chapter 11 of the American bankruptcy protection laws effectively puts a
protective ring around a company, winning it time to renegotiate its debts and
stopping creditors from claiming assets…
Closet
tracker funds
An active fund with a portfolio of stocks that is little different from the
overall market is called a “closet tracker”.
Coco
bonds
Could contingent convertible bonds, or Cocos, stop a bank failing? Some
regulators believe so…
Cognitive
bias
We use mental shortcuts (heuristics) to make decisions rapidly. These work in
many circumstances, but when it comes to investing, they can be a major
handicap, giving rise to “cognitive biases”.
Compound
interest
When you invest money, you earn interest on your capital. The next year, you
earn interest on both your original investment plus the interest from the year
before…
Contagion
When used in financial markets, contagion is a term associated with the kind of
market turmoil seen in 2007 as well as previous crises such as those of 2001
and 1998…
Contango
The price of an asset for forward delivery is usually above the price you would
pay today…
Contingent
liability
If a firm has received goods from a supplier, along with an invoice that
remains unpaid when the balance sheet is drawn up at, say, 31 December…
Continuation
vote
An investment company’s articles of association often provide for shareholders
to vote on whether the company should continue to exist. This is known as a
continuation vote.
Contracts
for difference
Entering into a contract for difference, or CFD, involves making a bet on the
movement of share prices…
Convertible
bonds
A convertible bond issued by a public company is one that starts as a bond but
that can also be converted into ordinary shares in that company at any time
before the bond matures, and at a previously specified price…
Convertible
rights
Also known as ‘conversion rights’, these give the buyer of a preference share
or bond the right to convert it into a set number of ordinary shares for a
pre-agreed ‘strike’ price at an agreed point in the future…
Coppock
indicator
The Coppock Breadth Indicator, originally known as Trendex’s Timing Technique
for Texas Traders, is used to identify buy signals from around the bottom of a
bear market…
Cost
of capital
Making a business successful is simply down to ensuring you earn more than your
costs…
Cost
of equity
A company’s cost of equity is the annual rate of return that an investor
expects from a firm in exchange for bearing the risk of owning its shares…
Cost/income
ratio
The cost-to-income ratio is a key financial measure, particularly important in
valuing banks…
Country’s
current account
A country’s balance of payments – its financial situation relative to the world
– is made up of the current account and the capital account…
Cov-lite
‘Cov-lite’ is used to describe a loan where the lender, typically a bank, does
not impose standard performance conditions on a borrower…
Covered
bonds
A bond is an IOU issued by a company, typically offering a fixed rate of
interest and a fixed date for repayment by the issuer…
Credit
default swap
Anyone who owns a bond faces two main risks. The first is that the price drops
and the second is that the issuer goes bust…
Credit
event
Credit events are a crucial aspect of a credit default swap, or CDS…
Credit
rating
Most bonds are allocated a credit rating to indicate to an investor the
likelihood of a subsequent default…
Credit
spread
When governments borrow – by selling ‘gilts’ in the UK and ‘treasuries’ in the
US – they offer the buyer a low annual return or ‘yield’, as the risk of
default is virtually non-existent…
Currency
risk
This is the type of risk that comes from the change in price of one currency
against another…
Current
account surplus/deficit
This is a measure of the position of one country relative to the rest of the
world in terms of imports and exports…
Cyclical
stocks
The performance of cyclical stocks is heavily dependent on the economic cycle –
they do well when the economy is booming but very badly when it falls off a
cliff…
Cyclically
adjusted p/e ratio (Cape)
A classic price/earnings ratio is the relationship between the current share
price and one year’s earnings, usually the last year, or a forecast for the
year ahead…
Daily
repricing
Daily repricing is a feature of exchange-traded funds (ETF) and can affect your
expected performance, especially on inverse products.
Dark
liquidity pools
‘Dark pools’ covers any share trade conducted directly between investing
institutions, such as banks and hedge funds, rather than via a regulated
exchange
DAX
The DAX is Germany’s blue-chip index, the most cyclical of the major western
indices, with almost 80% of it comprised of economically sensitive industries.
Deal-for-equity
swaps
In a debt-for-equity swap, some of a firm’s debt is cancelled and lenders are
given shares.
Debt
swap
There are several possible ways in which a debt swap can be done. However, the
aim is usually the same – to refinance a borrower and strengthen its balance
sheet.
Debt
to equity ratio
The debt to equity ratio of a company is simply its level of debt (any type of
borrowed money) divided by equity (the shareholders’ money in the business).
Debtor
and creditor days
Investors looking for an indication of a firm’s commercial power may look at
how fast it pays customers and suppliers.
Defined
benefit & defined contribution pensions
In a defined benefit pension, you are guaranteed an income in retirement,
calculated as a percentage of your final or average earnings.
Deleveraging
Before the credit crunch, firms and households expanded through ‘leverage’ –
borrowing to buy assets. ‘Deleveraging’ is this process in reverse.
Delta
One
Delta One refers to the way a bank hedges its long and short exposures across a
portfolio of investments.
Depositary
receipt
A depository receipt allows investors to access overseas shares in their own
market and currency.
Dilution
In the world of finance, dilution means something is being watered down,
typically earnings per share.
Discount
rate
The discount rate is used to calculate how much the expected future income from
an investment over a given period of time is worth right now.
Discounted
cash flow
Discounted cash flow is simply a method of working out how much a share is
fundamentally worth based on the present or discounted value of expected future
cash flows.
Discounting
Discounting is expressing cash received in the future in today’s money because
inflation erodes the value of money over time.
Dividend
A dividend is the part of a company’s profits that are distributed to
shareholders.
Dividend
cover
Dividend cover measures the number of times greater the net profits available
for distribution are than the dividend payout.
Dividend
yield
The dividend per share (total dividends paid out divided by total number of
shares) expressed as a percentage is referred to as the dividend yield.
Diversification
Diversification is the process of dividing your wealth between different
investments to avoid being too reliant on any single one doing well.
Dogs
of the Dow
Fans of this theory say that bargains can be spotted by looking for high
dividend yields – the annual dividend as a proportion of the current share
price.
Dow
Theory
Dow theory is often used as an indicator of when a bear market may be about to
start.
Duration
Duration is the point at which a bond reaches the mid-point of its cash flows.
Earnings
per share
Earnings per share is seen as one of the best means of determining a share’s
true price, as it shows how much of a firm’s profits (after tax) each
shareholder owns.
Earnings
yield
The earnings yield is a firm’s earnings per share for the most recent 12 months
divided by the share price – effectively the opposite of the p/e ratio.
Economic
indicators
Economic indicators are statistical measures that reveal general trends in the
economy.
Economic
moat
Warren Buffett first coined the phrase ‘economic moat’ as a way of summing up
how robust a firm is in the long term.
Enterprise
value
This measure’s the total value of a business by combining the market value of
equity and net debt as an estimate of what a predator would pay for it.
Equity
free cash-flow yield
Equity free cash-flow is the cash generated each year for shareholders after
certain ‘non-discretionary’ expenses have been paid.
Equity
risk premium
When buying a security such as a share, every investor should have an expected
return in mind.
ESG
investing
ESG stands for environmental, social and corporate governance, the areas in
which good behaviour is particularly sought.
Eurobond
This describes any international corporate or government bond that is
denominated in a currency held outside its country of origin.
EV
to sales ratio
Enterprise value is the sum of a firm’s market capitalisation and its net debt
(short- and long-term debt minus cash).
EV/Ebit
ratio
Enterprise value to earnings before interest and tax (EV/Ebit) is a way of
deciding whether a share is cheap relative to its peers or the wider market.
EV/Ebita
ratio
EV/Ebita is a valuation method often used by analysts, sometimes used instead
of the p/e ratio to compare growth between firms in heavy debt sectors
Exchange-traded
fund (ETF)
An exchange-traded fund (ETF) is an equity-based product combining the
characteristics of an individual share with those of a collective fund.
FCF
yield
The free cash flow (FCF) yield is a way to decide whether a firm is cheap or
expensive based on its cash flows rather than, say, its earnings.
Final
salary and money purchase pensions
With a money purchase scheme, the size of your pension depends entirely on the
value of your fund when you retire.
Fiscal
cliff
The phrase ‘fiscal cliff’ was coined to capture the large and predicted
reduction in the US budget deficit expected as specific laws kicked into effect
from 2013.
Fiscal
policy
Fiscal policy includes any measure that the national government takes to
influence the economy by budgetary means.
Fixed
assets
The phrase ‘fixed assets’ covers all assets that the business intends to keep
for more than a year.
Flipping
Flipping is when you make an offer on a property and then either look to secure
a new buyer at a higher price before you close on the deal, or wait for it to
rise in value, then sell on.
Floating
rate note
A floating rate note is a form of security that carries a variable interest
rate which is adjusted regularly by a margin against a benchmark rate such as
LIBOR.
Flotation
/ IPO
A flotation is the process of launching a company on to the stock market for
the first time by inviting the general public and investment institutions to
subscribe for shares.
Foreign
exchange reserves
Foreign exchange reserves are stockpiles of foreign currencies held by
governments.
Free
cash flow
Free cash flow is a pure measure of the cash a company has left once it has met
all its operating obligations.
Free
cash flow per share
Free cash flow per share takes the annual cash flow available to pay dividends
and divides by the number of ordinary shares in issue.
Free
cash flow yield
Free cash flow yield (FCFY) is a ratio used to work out the cash flow return on
a share as a percentage.
Free
float
Free float refers to the percentage of a company’s total voting shares that are
freely traded and could therefore be held by anyone.
FTSE
100
The FTSE 100 is Britain’s ‘blue-chip’ stock index.But its makeup means it is
more of a global index than a snapshot of UK plc.
Futures
A future is a tradeable contract that commits you to taking delivery (if you
buy), or making delivery (if you sell), of an agreed amount of something at an
agreed time.
GDP
Gross domestic product (GDP) is a measure of the total amount of goods and
services produced by a country in a specific period of time, usually a year or
a quarter.
Gearing
Gearing (or leverage) is the relationship between the debt and the equity in a
business – between borrowed money and shareholders’ money.
Gilt
A gilt-edged security (gilt) is a government bond – a security or stock issued
by the government paying a fixed rate of interest and redeemable on a set date
for a set amount.
Gilt
yield
Gilt yields express the return on a gilt as an annual percentage.
Global
depository receipt (GDR)
Global depositary receipts (or GDRs) offer a solution for investors wanting to
buy shares listed in countries where there are government restrictions on who
can own and trade them.
Going
concern
A firm is seen as a ‘going concern’ if its auditors believe it will stay in
business for the ‘foreseeable future’.
Goodwill
The simplest way to describe goodwill is as a company’s reputation.
Gordon’s
growth model
Gordon’s growth model is a very simple but powerful way of valuing shares based
on a company’s future dividends. It is sometimes called a “dividend discount”
model.
Government-sponsored
enterprises (GSEs)
The term ‘government-sponsored enterprises’ (GSEs) refers to three US
organisations – Freddie Mac, Fannie Mae and Ginnie Mae – which all play a
crucial role in the US mortgage market.
Greenspan
put
A ‘put’ is a type of option contract that increases in value as the price of
the underlying asset falls.
Gross
margin
There are many ways to measure a firm’s profitability. One of the more
important ones is the gross margin.
Handle
‘Handle’ is traders’ jargon for the whole-dollar amount of a security quote.
Hang
Seng index
Hang Seng is Hong Kong’s benchmark index of stocks.
Hedonic
accounting
When measuring inflation, some countries, such as the US, take into account
changes in the quality of goods in a process known as ‘hedonic’ price adjustment.
Hostile
takeover
A company’s directors may feel that a takeover bid undervalues the shares, and
so do not recommend the offer to shareholders. The bidding company can instead
approach the shareholders directly.
Index-linked
gilts
Index-linked gilts are sterling bonds issued by the Bank of England and listed
on the London Stock Exchange, introduced to act as a hedge against inflation
for pension funds.
Index
fund
Index funds (also known as passive funds or “trackers”) aim to track the
performance of a particular index, such as the FTSE 100 or S&P 500.
Individual
savings account (Isa)
Individual savings accounts (Isas) are a way of saving and investing without
paying income tax or capital gains tax.
Individual
Voluntary Arrangement (IVA)
Individual Voluntary Arrangements are an alternative to bankruptcy, whereby a
debtor in financial difficulty comes to an arrangement with his creditors on
how the debt will be cleared.
Initial
public offering (IPO)
An initial public offering (IPO) is the process of launching a firm on to the
stock exchange for the first time by inviting the general public and financial
institutions to subscribe for shares.
Interest
cover
Interest cover is an affordability test. It compares the profit before tax
(PBT) figure to interest charged in the profit and loss account.
Interest
rate swap
An interest rate swap is a deal between two investors.
Internal
rate of return
The internal rate of return of a bond is essentially the rate of return implied
by its total cash flows.
Inverted
yield curve
A yield curve shows the relationship between the yield on securities and their
maturities (how long it is until they can be redeemed at their face value).
Investment
trusts
An investment trust is a company whose business is to invest in other companies.
ISEQ
Few national indices have changed as much as Ireland’s ISEQ since the peak of
the credit bubble.
Junk
bonds
Junk bonds are also known as ‘high yield’, ‘non-investment grade’, or
‘speculative’ bonds.
Keynesian
economics
Named after economist John Maynard Keynes, who believed the best way to ensure
economic growth and stability is via government intervention in the economy.
Kospi
The Kospi is South Korea’s benchmark stockmarket index. It is typical of
emerging markets, in that it is highly exposed to the global economic cycle.
Leverage
‘Leverage’ is a US term that is also known as ‘gearing’. Both express the
extent to which any transaction is financed by debt from lenders as opposed to
capital provided by the investor.
Leveraged
buyout
A leveraged buyout is where an investor group acquires a business using mainly
borrowed money.
Libor
and the OIS
These are two of the most important interest rates in the world. Libor is the
London Interbank offered rate. The overnight index swap (OIS) is a broadly comparable
rate in the US.
Like-for-like
sales
One way of making meaningful year-on-year comparisons, especially with retail
stocks, is by looking at ‘like-for-like’ sales growth.
Limited
company
A limited company is one in which the liability of the shareholders is limited
to what they have put in to the company.
Liquidity
Liquidity refers to how easy it is to buy or sell an investment.
Lloyd’s
Lloyd’s of London is an international insurance market, which controls and
regulates the activities of the groups offering insurance services
Loan-to-value
ratio
The loan-to-value (LTV) ratio is one of the main risk assessment measures used
by lenders to assess a person’s suitability for a mortgage.
Long
/ short equity
Long / short equity is becoming increasingly popular as a hedge fund strategy.
Long-term
refinancing operations (LTRO)
The Long-term refinancing operations (LTRO) of the European Central Bank (ECB)
are designed to provide stability to Europe’s banking sector.
Low
volatility
Low volatility – or “low vol” – investing means buying shares (or bonds) that
tend to go up or down in price by less than the overall market (in other words,
they’re less volatile).
M&A
arbitrage
M&A arbitrage is a way to profit from one company taking over another, or
two firms deciding to merge.
Margin
When buying a derivative like a spread bet, an investor will only have to pay a
small initial deposit, or ‘margin’, of say 10% of the value of the shares.
Margin
account
A margin account is one that an investor holds with a broker, effectively
allowing him to buy securities on credit.
Margin
of safety
The margin of safety itself is the gap between the price you pay and what you
think a stock might be worth.
Margin
trading
Margin trading is when, typically US, investors put up only a percentage of the
cost of an asset they buy.
Mark
to model
In normal circumstances, securities such as shares or bonds are valued by using
market prices: this valuation method is called ‘mark to market’.
Market
makers
Market makers are typically banks and brokers who commit to trade shares and
bonds, often in larger quantities than most other investors.
Market
neutral funds
Market neutral funds aim to deliver above market rates of return with lower
risk by hedging bullish stock picks (buys) with an equivalent number of short
bets (sells).
Marking
to market
This is the process of updating a portfolio to reflect the latest available
prices.
Maturity
transformation
Maturity transformation is when banks take short-term sources of finance, such
as deposits from savers, and turn them into long-term borrowings, such as
mortgages.
Mean
reversion
Mean reversion is the tendency for a number – say, the price of a house or a
share – to return to its long-term average value after a period above or below
it.
Mean,
median and mode
There are several ways to calculate an average, the three most common being the
mean, median and mode.
Mezzanine
finance
Mezzanine refers to a layer that falls between two others. In the case of
finance, it comes between debt and equity.
Minority
interest
This is an accounting term for the amount of a balance sheet not owned by a
firm’s shareholders.
Misery
index
The misery index is constructed by adding the unemployment rate to the
inflation rate.
Modified
Altman Z score
Altman’s original five-ratio model was designed for manufacturers, or sectors
with high capital intensity, such as mining…
Monetary
policy
Monetary policy is about exercising control over the money supply (the amount
of money circulating in the economy) with the aim of influencing the economy.
Monetisation
A government ca create an IOU for £1,000 and sell it to a central bank, which
pays for it by printing £1,000.
Money
laundering
Money laundering is a catch-all term for any activity that tries to convert the
proceeds of crime into legitimate money.
Money
markets
‘Money markets’ is a generic term covering the vast market for short-term cash
loans and deposits.
Money
multiplier
This is one of the key principles underpinning the entire banking system.
That’s because it’s the basis of ‘credit creation’.
Money
supply
Money supply is simply the amount of money available in the economy.
Monoline
A monoline is any business that specialises in one particular financial
services area, which could in theory be anything from mortgages to car
insurance.
Moving
average
A moving average of a share price is simply the average of the share prices of
the last so many days.
Market
cap weighting
If an index is weighted by market cap (market capitalisation – the number of
shares outstanding multiplied by the share price), it means the companies in
the index are ranked by stockmarket value.
Multiple
compression
Multiple compression is when company’s price/earnings multiple falls as
investors become wary of a company’s growth prospects. The share price may be
static or falling, despite increasing earnings.
Naked
option writing
There are two parties to an option contract – the buyer (holder) and the seller
(writer). If you are an option writer, you can be covered or naked.
Naked
shorting
A ‘naked’ short involves shorting shares that are not available to borrow.
Nation’s
current account
A nation’s current account measures the flows of actual goods and services in
and out of the country
NAV
The net asset value (NAV) of a firm is the amount of money that would be left if
it closed, sold its assets and paid its debts.
Net
working capital
Net working capital measures a firm’s ability to pay its way, or its liquidity.
Subtract its current liabilities from its current assets.
Nikkei
225
The Nikkei 225 isJapan’s major stockmarket index.
Nil-paid
rights
Nil-paid rights arise when a firm sells new shares for cash to existing
shareholders via a rights issue.
Nominal
value of a bond
Each bond has a fixed nominal value, often £100 for a sterling bond.
Nominee
account
Usually, a broker records shares bought on behalf of clients using a general
‘nominee’ account on the register with a name chosen by the broker.
OCF
(ongoing charges figure)
Fund managers publish their ongoing charges figure (OCF) – previously known as
the total expense ratio (TER) – to give an indication of the cost of investing
in their funds.
Option
An option is simply the right to buy (a ‘call’ option) or sell (a ‘put’ option)
a quantity of any asset by an agreed expiry date for a fixed (‘strike’) price.
Non-domicile
Non-domicile status is given to people who were either not born here or whose
parents spent most of their lives in another country.
Off
Exchange (OFEX)
The Off Exchange (OFEX) was started as a way for shareholders to deal in the
shares of small companies that do not meet the requirements of Aim and the
LSE’s official list.
Off-balance-sheet
finance
This technique allows a borrower to legally raise finance (so improving its
cash position) without showing any associated liability on the balance sheet.
Open
& closed end funds
An investment or ‘closed end’ trust is a public company whose business is to
invest in other companies.
Open-ended
investment company (OEIC)
An open-ended investment company, or OEIC (pronounced ‘oik’), is a modern and
more flexible version of a unit trust.
Operating
leverage
High operating leverage (also known as operating gearing) means that fixed
costs (predominantly property and staff) are a high proportion of total costs
in the profit and loss account.
Operational
gearing
Operational gearing describes the relationship between a firm’s fixed and
variable costs.
Opportunity
cost
The opportunity cost of an investment is the return you could have got if you’d
put your money elsewhere.
Optionality
An option gives the right to buy (‘call’) or sell (‘put’) shares at a fixed
‘strike’ price, but only before an agreed date when the option expires.
Out
of the money
If an option is ‘out of the money’ it is usually not worth exercising given the
current market price of the underlying asset.
Output
gap
The output gap is the difference between an economy’s actual output, otherwise
known as gross domestic product (GDP), and what it would be if that country’s
industries were working flat out.
Over
the counter (OTC)
Many transactions are done privately between counter parties and with no
exchange involved.These are known as over the counter, or OTC.
Overweight
and underweight
The terms overweight and underweight are used by brokers and fund managers to
indicate their preference for stocks or markets relative to particular indices
or benchmarks.
Pairs
trade
Pairs traders aim to profit from the change in the price of, say, one share
relative to another.
Payback
period
The payback period measures how long a project or investment takes to repay any
initial outlay.
PIK
note
A “payment-in-kind” (PIK) note (or loan) is a way for companies to borrow
money.
Piotroski
score
The Piotroski score is designed to identify high-quality firms by looking at
nine separate criteria.
Placing
Placing is where selected institutions are phoned by a firm’s advising
investment bank and offered blocks of shares.
Plaza
Accord
The Plaza Accord was an agreement signed between the US, Japan, West Germany,
France and the UK at the Plaza Hotel in New York in 1985.
Ponzi
scheme
Ponzi schemes are a type of illegal ‘rob Peter to pay Paul’ operation named
after Charles Ponzi who took deposits from 40,000 US investors on the promise
of fabulous returns
Pound
cost averaging
Pound cost averaging is when you drip feed money into shares or units on a regular
basis rather than committing a single larger lump sum.
Preference
share
Preference or preferred shares are shares in a company that have a fixed rather
than a variable dividend.
Price
elasticity
In general, the higher the price of a product the lower the demand for it. The
extent to which this is true for each product is referred to as price
elasticity.
Price
to book ratio
Price-to-book value ratio (p/bv) is is calculated by dividing the current share
price by its book value per share.
Price
to cash flow ratio
The price to cash flow ratio (PCF) is a measure of the market’s expectation of
a firm’s future health.
Price
to earnings growth (PEG) ratio
This key ratio compares the price to earnings ratio to a firm’s earnings growth
rate to see whether a share is cheap or expensive.
Price
to sales ratio
A company’s market cap divided by the company’s annual sales (or revenue) gives
us the price to sales ratio
Prime
broker
Prime brokers are typically investment banks which are able to sell clients,
often hedge funds, a ‘one-stop shop’ service.
Private
equity
Private equity covers the many ways of raising finance ‘off exchange’.
Private
finance initiative (PFI) / public-private partnership (PPP)
The private finance initiative (PFI) is a way of getting private sector
involved in financing public sector projects like schools, hospitals and
prisons.
Prop
trading
Proprietary (‘prop’) trading involves banks risking their own capital to make
money.
Public
sector net cash requirement (PSNCR)
Government spending usually exceeds its income, and the difference is known as
a ‘public sector net cash requirement’ (PSNCR).
Purchasing
power parity
Purchasing power parity (PPP) is a theory that tries to work out how over- or
undervalued one currency is in relation to another.
Put
option
A put option gives someone the right to sell something (often shares, but they
can be used in connection with other financial assets) for an agreed price on
or before a certain date.
Puts
and calls
A ‘put’ give you the right to sell a share at a pre-determined price, a ‘call’
gives you the right to buy them.
Q
ratio
The Q ratio, or Tobin’s Q, can be a reliable measure of stockmarket value.
Quantitative
easing (QE)
Quantitative easing (QE) involves electronically expanding a central bank’s
balance sheet.
Real
and nominal
In a monetary context, ‘real’ and ‘nominal’ are used to describe whether or not
a price has been adjusted for inflation.
Real
interest rate
A “real” interest rate accounts for the impact of inflation on a given rate of
interest. It’s very important to your returns.
Recession
The most common definition of a recession is a fall in real
(inflation-adjusted) gross domestic product for two or more quarters in a row.
Redemption
yield
When investors buy different securities, they want to be able to compare
expected annual returns. For bonds this is the ‘redemption yield’ or ‘yield to
maturity’.
Repo
A ‘repo’ is standard sale and repurchase agreement.
Resistance
points
Shares can often trade in channels, rarely breaking below or above consistent
minimum and maximum prices. Those are a stock’s resistance points.
Return
on capital
Return on capital is one of the most useful ratios when it comes to measuring
the performance of a company.
Return
on capital employed (ROCE)
This key ratio measures the profitability of a firm taking account of the
amount of money it deploys.
Return
on equity
Return on equity measures a year’s worth of earnings against shareholders’
equity (the difference between a group’s assets and its liabilities).
Return
on invested capital (ROIC)
This is a ratio that can be used to assess how effectively a company squeezes
profits from the assets it controls and owns.
Rights
issue
A rights issue gives investors who already hold shares in a company the right
to buy additional shares in a fixed proportion to their existing holding.
Risk
premium
The risk premium is the difference between the highest risk-free return
available and the rate of return investors expect from another asset over the
same period
S&P
500 index
America’s S&P 500 index is among the Western world’s most cyclical indices.
Sale
and leaseback
A sale and leaseback arrangement can be a useful way for a company to generate
cash from its property portfolio without having to vacate.
Secular
trend
A secular trend is a long-term phenomenon, whereas a cyclical trend is
short-term and will eventually reverse.
Securitisation
A mortgage is secured on the borrower’s home, which can be seized later and
sold should things go wrong. By extension, the mortgage itself can be
securitised.
Segregated
fund
A segregated fund is a managed pot of assets belonging to just one client,
managed alongside – but separately from – other investments under a manager’s
control.
Share
buyback
As well as issuing new shares, companies sometimes buy back existing ones.
Share
options
Share options give you the right to buy (or to sell) shares in a given company
at a previously set price regardless of the current market price.
Short
squeeze
When a large number of short sellers target the same stock, the price can rise
in a self-perpetuating circle known as a ‘short squeeze’.
Short
sterling future
The ‘short term interest rate future’ (or STIR) is also known as the ‘short
sterling’ future. In essence, it facilitates bets on where interest rates will
be.
Shorting
If a trader believes that the price of an asset will not rise but fall, he can
still make money on it by ‘shorting’ it.
SIPP
A self invested personal pension, or SIPP, is a type of DIY pension.
SIV
(structured investment vehicle)
Structured investment vehicles (or SIVs) are typically created by investment
banks and can be a way to raise capital without having to record an associated
obligation to repay it.
Smart
beta
Smart beta funds aim to combine the best aspects of passive and active
management, aiming to beat the index by eliminating any element of
discretionary human judgement.
Sovereign
wealth fund
A sovereign wealth fund is a state-owned fund of the accumulated reserves that
arise from running a trade surplus with other countries.
Social
Trading
Social Trading is the sharing of trading news and ideas over a social network
to empower all traders. By extension it can facilitate copy trading and mirror
trading.
Special
drawing rights
A special drawing right allows a member country of the IMF to obtain surplus
currency held by another member country.
Spread
A spread is simply a gap, or difference; so the ‘spread’ between two and five
is three. The ‘spread’ between buy and sell prices is often how brokers derive
their profit
Spread
betting
Spread betting is a straightforward and tax-efficient way of leveraging the
financial markets.
Stability
and growth pact
The stability and growth pact, or SGP, played a key role in the establishment
of the euro.
Stagflation
Stagflation is a nasty mix of rising prices (based on high demand, production
capacity constraints, or both) and falling growth.
Stamp
duty
Stamp duty is a re-registration tax. That means you pay it whenever you buy
(but not sell) a registered asset.
Standard
deviation
Standard deviation is still the most widely used measure of dispersion, or in
financial markets, risk.
Stock
overhang
Stock overhang is a phrase used to describe a sizeable block of shares which,
if it were to be released in the market in one go, would flood it, and so
depress prices.
Stock
splitting
A stock split increases the number of a corporation’s issued shares by dividing
each existing share.
Stop-loss
A stop-loss is an instruction given to a broker to by or sell a stock to limit
losses if it moves beyond a certain level.
Subordinated
debt
Holders of subordinated debt rank below most other bondholders when it comes to
paying them back if the company goes backrupt.
Swap
rate
A company has an existing ten-year loan from a bank on which it pays a floating
rate of interest…
Swaps
Company A issues its fixed-interest bond and Company B issues a floating-rate
loan. They then agree to swap their interest payment liabilities…
Synthetics
A synthetic is a combination of financial instruments – often two, sometimes
more – designed to mimic another single security.
Taiex
The TAIEX is Taiwan’s benchmark index, with technology companies accounting for
just over a third of the market. Semiconductors are the main subsector.
Tangible
common equity
Tangible common equity is a measure used to gauge how big a hit a bank can take
before its shareholders’ equity is wiped out.
Tangible
book value per share
Book value (also known as equity, shareholders’ funds, or net asset value) is
the value of all a company’s assets, minus its liabilities.
Target
2
Target is a payment system used by Europe’s central banks for urgent real-time
electronic transfers.
Technical
analysis
Technical analysts or ‘chartists’ attempt to predict future share price (or
index) movements by looking at past movements.
Tier-one
capital
Banks’ capital can be split into tiers. Tier one represents capital of the
highest quality.
Time
value of money
Money has a time value. If you are owed £10, you would rather it was paid back
now than in, say, one year’s time.
Total
expense ratio
The total expense ratio (TER), also known as the ‘expense ratio’ is a way to
capture the annual costs associated with running a fund such as a unit trust.
Tracking
error
Tracking error is defined as the standard deviation of the difference between
the fund’s returns and the returns on the index.
Trade
surplus
When a country’s exports exceed its imports, it is said to have a positive
balance of trade, or trade surplus.
Trailing
stop-loss
A conventional stop-loss will ensure you get out of the market at a fixed price
above or below your initial trading price. A trailing stop allows you to keep
more of your profits.
Treasuries
A government bond is an IOU issued by the central bank, which it guarantees to
repay at a given date. In the US, these are referred to as Treasuries.
Treasury
stock
Treasury stock are shares that have been issued by a firm, but are being kept
‘in treasury’ – ie they are being kept for possible subsequent reissue.
True
and fair value
There is quite a lot of misunderstanding about what auditors mean when they
sign off accounts as “true and fair”.
Utilities
Utilities are companies involved in providing electricity, gas, water and
similar services to consumers and businesses.
Underwriting
A common way to guarantee a minimum level of proceeds when a public company
issues new shares is for the issuing firm to involve an underwriter.
Value
at risk (VAR)
VAR attempts to assess the odds of losing money on a portfolio of, say, shares.
Velocity
of money
The health of an economy can be measured by capturing the speed at which the
money available in it (the money supply) is being spent.
Vendor
finance
Vendor finance is a creative way for a firm to fight falling sales. If a
customer cannot afford to pay up front, it borrows the funds from the
manufacturer.
Vertical
integration
Vertical integration is when two businesses at different stages of production
join to form one bigger company.
Vix
(volatility index)
The Chicago Board Options Exchange (CBOE) Volatility index (Vix for short)
reflects how volatile traders expect the market to be over the coming year.
Volatility
Volatility refers to the fluctuations in the price of a security, commodity,
currency, or index.
WACC
WACC stands for the weighted average cost of capital. It represents the rate of
return a company must make on the money it has invested to stop investors
putting their money elsewhere.
Warrants
Warrants are a type of security issued by companies and traded in the market,
much in the way that shares are.
Wholesale
money markets
The term ‘money market’ covers the vast network of deals involving the lending
and borrowing of cash in a range of currencies. ‘Wholesale’ means funds
borrowed or lent in large quantities.
Withholding
tax
A withholding tax requires a person or company making a payment to someone else
to withhold part of the payment and pay it to the government.
Working
capital
Also known as ‘net current assets’, working capital is the total of a firm’s
current, or short term, balance sheet assets minus all current liabilities.
Yield
curve
A yield curve shows the relationship between the yield on securities and their
maturities (how long it is until they can be redeemed at their face value).
Yield
on cost
The yield on cost tells you a company’s dividend return as a percentage of the
price that you paid for the shares.
Yield
spread
Bonds that are not government securities are evaluated by the market on the
basis of the difference between their yield and the yield of a comparable
government bond. That difference is called a spread
Z
score
The Z score indicates the probability of a company entering bankruptcy within
the next two years.
Zero
A zero is a type of share or bond. Its key feature is that it pays no annual
dividend, or coupon.
Further
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