Glossary

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(excerpts from Investopedia)

A

• Accumulation: Accumulation means the amount of something is increasing over time. In finance, accumulation more specifically means increasing position size in one asset, increasing the number of assets owned/positions, or an overall increase in buying activity in an asset. The accumulation phase in an annuity refers to the period where premiums are being paid or money is being put in.
• Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its legal structure, and often preserve the existing stock symbol. Acquisitions may be done by exchanging one company’s stock for the others or using cash to purchase the target company’s shares.
• Arbitrage: Arbitrage is the purchase and sale of an asset in order to profit from a difference in the asset’s price between markets. It is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.
  • The purpose of arbitrage is to take advantage of the difference in prices available for the same financial instrument being offered on different exchanges.
  • Arbitrage is not only legal in the United States, but is also considered useful to markets as it helps promote market efficiency and also provides liquidity for trading.
• Asset: An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses or improve sales, regardless of whether it’s manufacturing equipment or a patent. Assets can be broadly categorized into short-term (or current) assets, fixed assets, financial investments, and intangible assets.
  • Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year.
  • Non-current assets are also known as long-term assets. Non-current asset costs are allocated over the number of years the asset is used. Noncurrent assets are on the balance sheet under investment; property, plant, and equipment; intangible assets; or other assets.
  • Fixed assets are items, such as property or equipment, a company plans to use over the long-term to help generate income. Fixed assets are most commonly referred to as property, plant, and equipment (PP&E).
  • Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other hybrid securities. Financial assets are valued depending on how the investment is categorized and the motive behind it.
  • Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset, and they can be either amortized or tested for impairment each year.
• Asset Class:  An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Equities (stocks), fixed Income (bonds), cash and cash equivalents (Forex), real estate, commodities, futures, and other financial derivatives are examples of asset classes. There is usually very little correlation, and in some cases a negative correlation, between different asset classes. Financial advisors focus on asset class as a way to help investors diversify their portfolio.
• Average Daily Volumes: Daily trading volume is how many shares are traded per day. Average daily trading volume is typically calculated over 20 or 30 days. Decreasing volume shows interest is waning, but even declining volume is useful because when higher volume returns there is often a strong price push as well.

B

• Balance of Trade (BOT): Balance of trade (BOT) is the difference between the value of a country’s imports and exports for a given period and is the largest component of a country’s balance of payments (BOP). A country that imports more goods and services than it exports in terms of value has a trade deficit while a country that exports more goods and services than it imports has a trade surplus. (Also read: Current Account, Trade Deficit and Trade Surplus)
• Beta: Beta indicates how volatile a stock’s price is in comparison to the overall stock market.
  • A beta greater than 1 indicates a stock’s price swings more wildly (i.e., more volatile) than the overall market.
  • A beta of less than 1 indicates that a stock’s price is less volatile than the overall market.
  • A beta of 1 indicates the stock moves identically to the overall market.
  • A beta below 0.5 implies that the stock might tend to be Contrarian to the market’s direction.
• Black Friday: Black Friday refers to the day after Thanksgiving and is symbolically seen as the start of the critical holiday shopping season. Stores offer big discounts on electronics, toys, and other gifts, or at least the first opportunity for consumers to buy whatever the hottest products are. Also important to retailers: Cyber Monday, the first day back to work for many consumers after the long holiday weekend.
  • Black Friday can also refer to an 1869 stock market crash that took place on September 24, 1869. On that day, after a period of rampant speculation, the price of gold plummeted, and the markets crashed.
• Black Swan: A black swan is an extremely rare event with severe consequences. It cannot be predicted beforehand, though after the fact, many falsely claim it should have been predictable. Black swan events can cause catastrophic damage to an economy by negatively impacting markets and investments, but even the use of robust modeling cannot prevent a black swan event. Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
• Blue Chip Stocks: Blue-chip stocks are huge companies with excellent reputations, often including some of the biggest household names. Investors turn to blue-chip stocks because they have dependable financials and often pay dividends.
• Bonds: see Treasury Bonds
• Buyback or Share Repurchase: A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.
  • A repurchase reduces the number of shares outstanding, thereby inflating (positive) earnings per share and, often, the value of the stock.
  • A share repurchase can demonstrate to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.

C

• Carry Trade: A carry trade is a trading strategy that involves borrowing at a low-interest rate and re-investing in a currency or financial product with a higher rate of return. Because of the risks involved, carry trades are appropriate only for investors with deep pockets. A good example of a carry trade is when you accept a credit card that offers a 0% cash advance in order to invest the borrowed cash in assets with a higher yield. This carry-trade strategy may net you either a profit or a loss.
• Cash Flow: Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow (FCF). Cash flow comes in three forms: operating, investing, and financing.
  • Operating cash flow includes all cash generated by a company’s main business activities.
  • Investing cash flow includes all purchases of capital assets and investments in other business ventures.
  • Financing cash flow includes all proceeds gained from issuing debt and equity as well as payments made by the company.
  • Free cash flow, a measure commonly used by analysts to assess a company’s profitability, represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
• Central Bank: A central bank is a financial institution that is responsible for overseeing the monetary system and policy of a nation or group of nations, regulating its money supply, and setting interest rates. Central banks enact monetary policy, by easing or tightening the money supply and availability of credit, central banks seek to keep a nation’s economy on an even keel. A central bank sets requirements for the banking industry, such as the amount of cash reserves banks must maintain vis-à-vis their deposits. A central bank can be a lender of last resort to troubled financial institutions and even governments.
  • Almost all Central Banks operate independently from the Government. Its Chairperson or Head is often appointed, is usually not a member of parliament or congress and has surrendered all political ambitions.Central Banks were born as a result of the need to expand an economy’s money supply. The most recent evolution of central banking dates back about 200 years to Full-Reserve Banking (also known as 100% Reserve Banking) where banks were required to keep the full amount of each depositor’s funds in cash, ready for immediate withdrawal on demand. This was when money was worth its weight in gold or silver.
  • Fractional reserve banking is the current banking system in which only a fraction of bank deposits is backed by actual cash to be available for withdrawal. The Central Bank uses a variety of monetary policies to maintain a desired economic balance in the country. Such policies include the flexing of Interest Rates, monetary tightening or easing and an array of legal measures for the various growth industries.
• Closing Price: A stock’s closing price is the standard benchmark used by investors to track its performance over time. The closing price is the last price at which the stock traded during the regular trading day. After-hours trading prices can be deceptive as volume is relatively light.
• Collateralised Debt Obligation (CDO): A collateralized debt obligation is a complex structured-finance product that is backed by a pool of loans and other assets. These underlying assets serve as collateral if the loan goes into default. Though risky and not for all investors, CDOs are a viable tool for shifting risk and freeing up capital. Mortgage Backed Securities (MBS) are a common form of CDO.
• Commodities: A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities include gold, beef, oil, lumber and natural gas. Additional examples of commodities include iron ore, crude oil, salt, sugar, tea, coffee beans, copper, rice, wheat, silver, and platinum. Commodities are basic because they have simply been grown or extracted from their natural state and brought up to a minimum grade for sale in a marketplace – there is no extra value added to them by the producer.
• Consumer Confidence: The Consumer Confidence Index (CCI) is published by the Conference Board, a not-for-profit research organization for businesses. The Consumer Confidence Index is released on the last Tuesday of every month. The survey is a sample of 5,000 households from across all nine census regions. The survey usually covers five major sections:
  • Current business conditions
  • Business conditions for the next six months
  • Current employment conditions
  • Employment conditions for the next six months
  • Total family income for the next six months.
• Consumer Discretionary: Consumer discretionary is a sector classification of non-essential consumer goods and services watched by analysts and investors. Consumers tend to spend more on consumer discretionary products in economic growth phases, which are usually characterised by higher disposable income. Consumer discretionary can be contrasted with consumer staples, which is a classification for companies considered to produce daily necessities. Examples of consumer discretionary products can include durable goods, high-end apparel, entertainment, leisure activities, and automobiles.
• Consumer Goods: Consumer goods, or final goods, are goods sold to consumers for their own use or enjoyment and not as means for further economic production activity. From an economic standpoint, consumer goods can be classified as durable (useful for longer than 3 years), nondurable (useful for less than 3 years), or pure services (consumed instantaneously as they are produced). For marketing purposes, consumer goods can be grouped into different categories based on consumer behavior, how consumers shop for them, and how frequently consumers shop for them.
• Consumer Price Index (CPI): The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services. CPI is the most widely used measure of inflation and, by proxy, of the effectiveness of the government’s economic policy. The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country but excludes non-metro or rural populations, farm families, armed forces, people serving in prison and those in mental hospitals.
• Consumer Sentiment: The Michigan Consumer Sentiment Index (MCSI) is a national survey of 500 households conducted by the University of Michigan.4 The purpose of the survey is to collect information about consumer expectations regarding the overall economy. The Consumer Sentiment number comes out around the 10th of the month. The MCSI covers five sections:
  • Personal financial situation now and one year ago
  • Personal financial situation one year from now
  • Overall financial condition of business for the next 12 months
  • Overall financial condition of business for the next five years
  • Current attitude toward buying major household items
• Consumer Spending: Consumer spending is all spending on final goods and services for current personal and household use. Consumer spending is a key driving force in the economy and a critical concept in economic theory. Investors, businesses, and policymakers closely follow published statistics and reports on consumer spending in order to help forecast and plan investment and policy decisions.
• Consumer Staples: Consumer staple stocks represent companies that are noncyclical because they produce or sell goods or services that are always in demand. Characterised by steady if unspectacular growth, the consumer staple sector is a haven in for investors in recessionary times. Consumer staples stocks can be a good option for investors seeking consistent growth, solid dividends, and low volatility.
• Contrarian: Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling. The idea is that markets are subject to herding behaviour augmented by fear and greed, making markets periodically over- and under-priced. Being a contrarian can be rewarding, but it is often a risky strategy that may take a long period of time to pay off.
• Continuing Claims – see Jobless Claims
• Correction/Crash – see Market Crash
• Correlation: Correlation is a statistic that measures the degree to which two variables move in relation to each other. In finance, the correlation can measure the movement of a stock with that of a benchmark index, such as the S&P 500. Correlation measures association, but doesn’t show if x causes y or vice versa, or if the association is caused by a third–perhaps unseen–factor.
• Credit Default Swap (CDS): Credit default swaps, or CDS, are credit derivative contracts that enable investors to swap credit risk on a company, country, or other entity with another counter-party. Credit default swaps are the most common type of OTC credit derivatives and are often used to transfer credit exposure on fixed income products in order to hedge risk. Credit default swaps are customised between the two counter-parties involved, which makes them opaque, illiquid, and hard to track for regulators.
• Currency: Currency is a generally accepted form of payment, usually issued by a government and circulated within its jurisdiction. The value of any currency fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations. (Also see “Money” and “Legal Tender”)
• Cyber Monday: Cyber Monday is an e-commerce term referring to the Monday following the Thanksgiving weekend. It is the second-biggest shopping day and, until 2019, the busiest day for online sales. The term Cyber Monday was coined in 2005 by Shop.org, the online arm of the National Retail Federation. Although Cyber Monday had its origins in the United States, it now happens in other countries as well. The Black Friday/Cyber Monday movement has inspired other special days including Small Business Saturday and even a day dedicated to charity, Giving Tuesday.
• Cyclical Stock: Cyclical stocks are affected by macroeconomic changes, where its returns follow the cycles of an economy. Cyclical stocks are generally the opposite of defensive stocks. Cyclical stocks include discretionary companies, such as Starbucks or Nike, while defensive stocks are staples, such as Campbell Soup. Cyclical stocks usually have higher volatility and are expected to produce higher returns during periods of economic strength.

D

• Dead Cat Bounce: A Dead Cat Bounce is a term describing a pull-back or rise in the price of an asset while in a sustained downtrend. The term was coined in Asia during the Asian Financial Crisis of 1997. It sarcastically infers that even a dead cat will bounce no matter the hype. The term in investing is commonly known as a “sucker’s rally” as part of a manipulative process to get ignorant investors to pump money into a failing stock.
• Dealer: Dealers are people or firms who buy and sell securities for their own account, whether through a broker or otherwise. A dealer acts as a principal in trading for its own account, as opposed to a broker who acts as an agent who executes orders on behalf of its clients.
• Deflation: Deflation is a general decrease in all prices across an economy, often associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Deflation causes the nominal costs of capital, labour, goods, and services to fall, though their relative prices may be unchanged. Deflation has been a popular concern among economists for decades. On its face, deflation benefits consumers because they can purchase more goods and services with the same nominal income over time. However, not everyone wins from lower prices and economists are often concerned about the consequences of falling prices on various sectors of the economy, especially in financial matters. In particular, deflation can harm borrowers, who can be bound to pay their debts in money that is worth more than the money they borrowed, as well as any financial market participants who invest or speculate on the prospect of rising prices.
• Derivatives: Derivatives are securities that derive their value from an underlying asset or benchmark. Common derivatives include futures contracts, forwards, options, and swaps. Most derivatives are not traded on exchanges and are used by institutions to hedge risk or speculate on price changes in the underlying asset. Exchange-traded derivatives like futures or stock options are standardised and eliminate or reduce many of the risks of over-the-counter derivatives Derivatives are usually leveraged instruments, which increases their potential risks and rewards.
• Disinflation: Disinflation is a slowing in the rate of price inflation. It is used to describe instances when the inflation rate has reduced marginally over the short term. Although it is used to describe periods of slowing inflation, disinflation should not be confused with deflation, which can be harmful to the economy.
• Disposable Income, aka Disposable Personal Income (DPI): is the amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.
• Distribution: A distribution generally refers to the disbursement of assets from a fund, account, or individual security to an investor. Mutual fund distributions consist of net capital gains made from the profitable sale of portfolio assets, along with dividend income and interest earned by those assets. With securities, like stocks or bonds, a distribution is a payment of interest, principal, or dividend by the issuer of the security to investors. Tax-advantaged retirement accounts carry required minimum distributions—mandatory withdrawals after the account-holder reaches a certain age.
• Dividend Yield:
  • The dividend yield (displayed as a percentage) is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.
  • Mature companies are the most likely to pay dividends.
  • Companies in the utility and consumer staple industries often having higher dividend yields.
  • Real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs) pay higher than average dividends; however, the dividends from these companies are taxed at a higher rate.
  • It’s important for investors to keep in mind that higher dividend yields do not always indicate attractive investment opportunities because the dividend yield of a stock may be elevated as the result of a declining stock price.
• Dividend: A dividend is the distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors. Dividends are payments made by publicly-listed companies as a reward to investors for putting their money into the venture. Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company’s stock price.
• Durable Goods: Durables are goods that do not need to be purchased very often, they are also known as durable goods and consumer durables that typically last for at least three years. Economists keep a close eye on consumer consumption of durables, as it is considered a good indicator of the strength of the economy. Some examples of consumer durable goods include appliances like washers, dryers, refrigerators, and air conditioners; tools; computers, televisions, and other electronics; jewelry; cars and trucks; and home and office furnishings.

E

• Earnings-Per-Share (EPS): Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
  • EPS indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value.
  • A higher EPS indicates greater value because investors will pay more for a company’s shares if they think the company has higher profits relative to its share price.
  • EPS can be arrived at in several forms, such as excluding extraordinary items or discontinued operations, or on a diluted basis.
  • The formula: EPS = Net Income ÷ Outstanding Shares
• Economic Cycle: Economic cycle refers to the overall state of the economy going through four stages in a cyclical pattern. Economic cycles are a major focus of economic research and policy, but the exact causes of a cycle are highly debated among the different schools of economics. Insight into economic cycles can be very useful for businesses and investors.
• Economic Indicators: Economic indicators can be divided into categories or groups. Most of these economic indicators have a specific schedule for release, allowing investors to prepare for and plan on seeing certain information at certain times of the month and year. The most widely-used economic indicators come from data released by the government and non-profit organizations or universities. Indicators can be:
  • Leading – which tend to precede trends (eg. yield curve, consumer durables, net business formations)
  • Lagging – which confirm trends (eg. gross national product (GNP), CPI, unemployment rates, interest rates)
  • Coincident – that which is happening now (eg. GDP, employment levels, and retail sales)
• Exchange Traded Fund (ETF): An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
  • An ETF is called an exchange traded fund since it’s traded on an exchange just like stocks.
  • The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.
  • Well-known examples are the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index and the SPDR Dow Jones Industrial Average ETF (DIA) which tracks the DJIA Index.
  • Other varieties of ETFs include (and are not limited to);
    • Bond ETFs might include government bonds, corporate bonds, and state and local bonds—called municipal bonds.
    • Industry ETFs track a particular industry such as technology, banking, or the oil and gas sector.
    • Commodity ETFs invest in commodities including crude oil or gold.
    • Currency ETFs invest in foreign currencies such as the Euro or Canadian dollar.
    • Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.There are various types of ETFs available to investors that can be used for income generation, speculation, price increases, and to hedge or partly offset risk in an investor’s portfolio. Below are several examples of the types of ETFs.
    • Leveraged ETFs use financial derivatives and debt to amplify the returns of an underlying index. While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio. Leverage is a double-edged sword meaning it can lead to significant gains, but can also lead to significant losses.
• Ex Dividend Date: The ex-dividend date or ex-date marks the cutoff point for shareholders to be credited a pending stock dividend. To receive the upcoming dividend, shareholders must have bought the stock before the ex-dividend date. On the ex-dividend date, stock prices typically decline by the amount of the dividend.
• Expiration Friday: The third week of every month is Options Expirations Day.  “Quadruple Witching” day falls on the third Friday of every end-of-quarter.  During that week, Options Contracts will expire on stock options, stock index options, futures options and single-stock futures. Traders will tend to rollover or close positions during this period, which creates choppy, unpredictable conditions for the market.  These volatile conditions, often accompanied by larger-than-usual volumes, tend to increase the risk to short-term traders. Generally, the more witches there are, the more volatile it can get.
  • Quadruple Witching or Quad Witch is the end of quarter’s Expiration Friday of four derivatives:

1. 1. 1. stock index futures,
      2. stock index options,
      3. stock options and
      4. single stock futures.

• • There is also Triple Witching:

1. 1. 1. stock options,
      2. index options, and
      3. index futures.

• • and Double Witching:
    • Two of the Triple Witches

• • If it’s just one Derivative expiring, it’s always Stock Options

• Expense Ratio: The expense ratio (ER) is a measure of mutual fund operating cost relative to assets. Investors pay attention to the expense ratio to determine if a fund is an appropriate investment for them after fees are considered. Expense ratios may also come in variations, including gross expense ratio, net expense ratio, and after reimbursement expense ratio.
• Extrinsic Value: Extrinsic value is the difference between the market price of an option, also knowns as its premium, and its intrinsic price, which is the difference between an option’s strike price and the underlying asset’s price. Extrinsic value rises with increase in volatility in the market.

F

• Fair Value: Fair value is a term with several meanings in the financial world and should not be confused with Market Value, which refers to the price of an asset in the marketplace (such as market capitalisation);
  • In investing, it refers to an asset’s sale price that’s determined by a market where they are traded.
  • In accounting, fair value represents the estimated worth of various assets and liabilities that must be listed on a company’s books.
• Federal Deposit Insurance Corporation (FDIC): The Federal Deposit Insurance Corporation is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. As of 2020, the FDIC insures deposits up to $250,000 per depositor as long as the institution is a member firm. The FDIC covers checking and savings accounts, CDs, money market accounts, IRAs, revocable and irrevocable trust accounts, and employee benefit plans. Mutual funds, annuities, life insurance policies, stocks, and bonds are not covered by the FDIC.
• Federal Funds Rate: Federal funds rate is the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight. The Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve System, meets eight times a year to set the federal funds rate. The federal funds rate can influence short-term rates on consumer loans and credit cards as well as impact the stock market.
• Federal Reserve System: The Federal Reserve System is the central bank of the United States. The FRS provides the country with a safe, flexible, and stable monetary and financial system. Known simply as the Fed, it is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S. The Fed’s main duties include conducting national monetary policy, supervising and regulating banks, maintaining financial stability, and providing banking services.
• Fixed-Income Securities: Fixed-Income security provides investors with a stream of fixed periodic interest payments and the eventual return of principal upon its maturity. Bonds are the most common type of fixed-income security, but others include CDs, money markets, and preferred shares. Not all bonds are created equal. In other words, different bonds have different terms as well as credit ratings assigned to them based on the financial viability of the issuer. The U.S. Treasury guarantees government fixed-income securities, making these very low risk, but also relatively low-return investments.
• Float: The float is essentially double-counted money: a paid sum which, due to delays in processing, appears simultaneously in the accounts of the payer and the payee. Individuals and companies alike can use float to their advantage, gaining time or earning interest before payment clears their bank. Playing with float can spill into the realm of wire fraud or mail fraud if it involves the use of others’ funds.
• Fundamental Analysis (FA): Fundamental analysis is a method of determining a stock’s real or “fair market” value. Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given. In contrast, technical analysts ignore the fundamentals in favor of studying the historical price trends of the stock.
• Futures: Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset and have a predetermined future date and price. A futures contract allows an investor to speculate on the direction of a security, commodity, or a financial instrument. Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes.

G

• Greeks (options): An option’s “Greeks” describes its various risk parameters. An option’s price can be influenced by a number of factors that can either help or hurt traders depending on the type of positions they have taken. Successful traders understand the factors that influence options pricing, which include the “Greeks” – a set of risk measures so named after the Greek letters that denote them that indicate how sensitive an option is to time-value decay, changes in implied volatility, and movements in the price its underlying security. These four primary Greek risk measures are known as;
  • Delta – a measure of the change in an option’s price (that is, the premium of an option) resulting from a change in the underlying security. The value of delta ranges from -100 to 0 for puts and 0 to 100 for calls (-1.00 and 1.00 without the decimal shift, respectively).
  • Gamma – measures the rate of changes in delta over time. Since delta values are constantly changing with the underlying asset’s price, gamma is used to measure the rate of change and provide traders with an idea of what to expect in the future. Gamma values are highest for at-the-money options and lowest for those deep in- or out-of-the-money.
  • Theta – measures the rate of time decay in the value of an option or its premium. Time decay represents the erosion of an option’s value or price due to the passage of time. As time passes, the chance of an option being profitable or in-the-money lessens. Time decay tends to accelerate as the expiration date of an option draws closer because there’s less time left to earn a profit from the trade.
  • Vega – measures the risk of changes in implied volatility or the forward-looking expected volatility of the underlying asset price. While delta measures actual price changes, vega is focused on changes in expectations for future volatility. Higher volatility makes options more expensive since there’s a greater likelihood of hitting the strike price at some point.
• Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate. GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights. Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision making. (Also read: money supply, real GDP and GDP price deflator)

H

• Hedge: Hedging is a strategy that tries to limit risks in financial assets. Popular hedging techniques involve taking offsetting positions in derivatives that correspond to an existing position. Other types of hedges can be constructed via other means like diversification. An example could be investing in both cyclical and counter-cyclical stocks.
• Hedge Funds: Hedge funds are actively managed alternative investments that may also utilize non-traditional investment strategies or asset classes. Hedge funds are more expensive compared to conventional investment funds, and will often restrict investment to high net-worth or other sophisticated investors. Hedge funds have had an exceptional growth curve in the last twenty years and have also been associated with several controversies. However, since the financial crisis, many hedge funds have underperformed (especially after fees and taxes).
• Hyperinflation: Periods of Hyperinflation are characterized by very rapid increases in the price level (more than 50% over less than two months) across the economy

I

• Implied Volatility: Implied volatility is an essential ingredient to the option-pricing equation, and the success of an options trade can be significantly enhanced by being on the right side of implied volatility changes. To better understand implied volatility and how it drives the price of options, let’s first go over the basics of options pricing.
• Index: An index is a market or sector benchmark comprising a basket of representative components, be it stocks, currencies, commodities, bonds or other traded financial instruments.
  • Market indexes provide a broad (diversified) representative portfolio of investment holdings. Methodologies for constructing individual indexes vary but nearly all calculations are based on weighted average mathematics. Market indexes are used as benchmarks to gauge the movement and performance of the broader market. Investors use indexes as a basis for portfolio or passive index investing.
  • Sector indexes provide a specific representative portfolio of investment holdings from a specific sector or industry. Methodologies for constructing sectoral/industry indexes vary but nearly all calculations are based on weighted average mathematics. Sectoral indexes are used as benchmarks to gauge the movement and performance of market segments. Investors use indexes as a basis for portfolio or passive index investing.
• Inflation: Inflation is the rate at which the the value of a currency is falling and consequently the general level of prices for goods and services is rising. (Also read Deflation)
  • Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation or Monetarism.
  • Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
  • Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
  • Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.
  • People holding cash may not like inflation, as it erodes the value of their cash holdings.
  • Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.
• Inflation (Core): Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. Food and energy prices are exempt from this calculation because their prices can be too volatile or fluctuate wildly. Core inflation is important because it’s used to determine the impact of rising prices on consumer income.
• Initial Claims – see Jobless Claims
• Institutional Ownership: Institutional ownership is the amount of a company’s available stock owned by mutual or pension funds, insurance companies, investment firms, private foundations, endowments or other large entities that manage funds on behalf of others. Stocks with a large amount of institutional ownership are often looked upon favorably. Large entities frequently employ a team of analysts to perform detailed and expensive financial research before the group purchases a large block of a company’s stock. This makes their decisions influential in the eyes of other potential investors.
• Intrinsic Value: In financial analysis, intrinsic value is the calculation of an asset’s worth based on a financial model. Analysts often use fundamental and technical analysis to account for qualitative, quantitative and perceptual factors in their models. In options trading, intrinsic value is the difference between the current price of an asset and the strike price of the option.

J

• January Barometer: This translates into the market’s direction for the rest of the year depending on how January closed;
  • A bullish January has unwaveringly seen the market close higher by the end of the year without fail for more than 30 years to date.
  • A bearish January usually closes the year in the red unless the government intervened with stimulus or central banking quantitative easing.
• Jobless Claims (Initial Claims): Jobless claims are a statistic reported weekly (every Thursday, 08:30 EST) by the U.S. Department of Labor that counts people filing to receive unemployment insurance benefits. When a growing number of people willing to work are unable to find work, it is generally a poor sign for the economy.
  • There are two categories of jobless claims
    • Initial Claims – comprises people filing for the first time
    • Continuing Claims – consists of unemployed people who have already been receiving unemployment benefits.

K

• K-Ratio: K-ratios measure an equity’s consistency of returns over time, calculated using the value-added monthly index (VAMI). The calculation involves running a linear regression on the logarithmic cumulative return of a Value-Added Monthly Index (VAMI) curve. The K-ratio takes into account the returns themselves, but also the order of those returns in measuring risk. The ratio measures the return of the security over time and is a good tool to measure the performance of equities because it takes the return trend into account.
• Kappa (aka Vega): Kappa is the measurement of an option contract’s price sensitivity to changes in the volatility of the underlying asset. For a trading instrument, like an option, volatility is intended to capture the amount and speed at which the price moves up and down. Kappa, also called vega, is one of the four primary Greek risk measures, so-named after the Greek letters that denote them. This set of risk measures—kappa, theta, gamma, delta—indicate how sensitive an option is to time-value decay, changes in implied volatility, and movements in the price of its underlying security.

L

• Leading Indicators (Composite Index of): The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. Businesses and investors can use the index to help plan their activities around the expected performance of the economy and protect themselves from economic downturns. The 10 components of the LEI are:
  1. Average weekly hours worked by manufacturing workers indicates both consumer income and business demand for labor to engage in ongoing production.
  2. Average number of initial applications for unemployment insurance indicates possible changes in unemployment, which reflects the level of business activity and impacts consumer income.
  3. The volume of manufacturers’ new orders for consumer goods and materials indicates businesses’ short term operational spending.
  4. The new orders index (from the Institute for Supply Management PMI), which indicates whether orders for various manufactured goods are increasing or decreasing.
  5. The volume of new orders for capital goods (except aircraft), unrelated to defense, indicates business plans for longer-term future production involving durable capital.
  6. The number of new building permits for residential buildings indicates future spending on construction projects.
  7. The S&P 500 stock index, which indicates the total value of the business sector and the nominal wealth of stock holders in the economy.
  8. The inflation-adjusted monetary supply (M2) indicates the purchasing power of highly liquid assets available in the financial system for business and consumer borrowing and spending.
  9. The spread between long and short interest rates, which indicates bond market participants expectations for future performance of the economy.
  10. Average consumer expectations for business conditions indicate forward-looking consumer sentiment for the next six to 12 months.
• Legal Tender: Legal tender is the legally recognised money within a given political jurisdiction. Legal tender laws effectively prevent the use of anything other than the existing legal tender as money in the economy. Legal tender serves the economic functions of money plus a few additional functions, such as making monetary policy and currency manipulation possible.
• Leverage: Leverage refers to the use of debt (borrowed funds or borrowed capital) to amplify returns from an investment or project. Investors use leverage to multiply their buying power in the market. Companies use leverage to finance their assets—instead of issuing stock to raise capital, companies can use debt to invest in business operations in an attempt to increase shareholder value.
• Long: A long – or a long position – refers to the purchase of an asset with the expectation it will increase in value – a bullish attitude. A long position in options contracts indicates the holder owns the underlying asset. A long position is the opposite of a short position. In options, being long can refer either to outright ownership of an asset or being the holder of an option on the asset. Being long on a stock or bond investment is a measurement of time.

M

• M&A (Mergers & Acquisitions): The term mergers and acquisitions (M&A) refer broadly to the process of one company combining with one another. M&A deals generate sizable profits for the investment banking industry, but not all mergers or acquisition deals close. Post-merger, some companies find great success and growth, while others fail spectacularly.
  • Also see;
    • Merger – The combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.
    • Acquisition – One company purchases the other outright. The acquired firm does not change its legal name or structure but is now owned by the parent company.
• Macroeconomics: Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy. The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles. Macroeconomics in its modern form is often defined as starting with John Maynard Keynes and his theories about market behavior and governmental policies in the 1930s; several schools of thought have developed since. In contrast to macroeconomics, microeconomics is more focused on the influences on and choices made by individual actors in the economy (people, companies, industries, etc.).
• Market Cap: Market capitalization is the total dollar value of all outstanding shares of a company. Market cap is used to size up corporations and understand their aggregate market value.
• Market Crash: A stock market crash is an abrupt drop in stock prices, which may trigger a prolonged bear market or signal economic trouble ahead. Market crashes can be made worse be fear in the market and herd behavior among panicked investors to sell. Several measures have been put in place to prevent stock market crashes, including circuit breakers and trading curbs to lessen the effect of a sudden crash.
  • Bearish Market Definitions
    • Market Crash : -10% in a single session
    • Market Correction : -10% to -20% from the previous high
    • Technical Bear Market : Price falls below 200 Day Simple Moving Average
    • Bear Market : More than -20% from the previous high
• Market Maker: A market maker is a individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices it displays in its exchange’s trading system, with the primary goal of profiting on the bid-ask spread, which is the amount by which the ask price exceeds the bid price a market asset. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid. Market makers are compensated for the risk of holding assets because they may see a decline in the value of a security after it has been purchased from a seller and before it’s sold to a buyer.
• Market Psychology: Market psychology is the mood of the market participants at any given point in time. Greed, fear, and excitement can all contribute to market psychology. Conventional financial theory assumed that prices were always based on rational considerations and failed to account for the impact of market psychology.
• Market Value (also known as OMV, or “open market valuation”): Market value is the price an asset fetches in the market and is commonly used to refer to market capitalisation. Market values are dynamic in nature because they depend on an assortment of factors, from physical operating conditions to economic climate to the dynamics of demand and supply.
• Maturity Date/Maturities: The maturity date refers to the moment in time when the principal of a fixed income instrument must be repaid to an investor. The maturity date likewise refers to the due date on which a borrower must pay back an instalment loan in full.
  • The maturity date is used to classify bonds into three main categories: short-term (one to three years), medium-term (10 or more years), and long term (typically 30 year Treasury bonds). Once the maturity date is reached, the interest payments regularly paid to investors cease since the debt agreement no longer exists.
• Merger: Mergers are a way for companies to expand their reach, expand into new segments, or gain market share. A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The five major types of mergers are conglomerate, congeneric, market extension, horizontal, and vertical.
• Monetarism: Monetarism is a macroeconomic concept that states that governments can foster economic stability by targeting the growth rate of money supply. Central to monetarism is the “Quantity Theory of Money,” which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy. Monetarists believe that velocity (V) is constant and changes to money supply (M) is the sole determinant of economic growth, a view that serves as a bone of contention to Keynesians.
• Monetary Policy: Monetary policy is a central bank’s actions that influence the country’s money supply and the overall economy. In the United States, the Federal Reserve establishes monetary policy.  It tries to make sure the money supply grows neither too quickly, causing excessive inflation, nor too slowly, hampering economic growth. Ideally, inflation is 2% to 3% annually, which keeps prices stable. The Fed also tries to keep unemployment low, around 5%.
• Money: Money is a generally accepted, recognised, and centralised medium of exchange in an economy that is used to facilitate transactional trade for goods and services. The use of money eliminates issues from the double coincidence of wants that can occur in bartering. Economically, each government has its own money system, defined and monitored by a central authority. In order to be most useful as money, a currency should be:
  1. fungible – relatively uniform quality so that they are interchangeable
  2. durable – durable enough to retain its usefulness in future exchanges and be reused multiple times
  3. portable – divisible into small quantities so that people appreciate its original use value
  4. recognisable – authenticity and quantity should be ascertainable so that users are agreeable to an exchange
  5. stable – interchangeable value that should be relatively constant or increasing over time
• Money Market: The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers. In all of these cases, the money market is characterised by a high degree of safety and relatively low rates of return.
• Money Supply: The money supply is all the currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. The various types of money in the money supply are generally classified as “M”s, such as M0, M1, M2 and M3, according to the type and size of the account in which the instrument is kept.
  • M0 and M1, for example, are also called narrow money – include coins and notes that are in circulation and other money equivalents that can be converted easily to cash.
  • M2 includes M1 and, in addition, short-term time deposits in banks and certain money market funds.
  • M3 includes M2 in addition to long-term deposits. (M3 is no longer included in the Fed’s reporting)
  • MZM, or money zero maturity – financial assets with zero maturity and that are immediately redeemable at par. The Federal Reserve relies heavily on MZM data because its velocity is a proven indicator of inflation.
• Mortgage Backed Securities (MBS): A mortgage-backed security (MBS) is a type of asset-backed security or an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments. The investor who buys a mortgage-backed security is essentially lending money to home buyers. An MBS can be bought and sold through a broker. The minimum investment varies between issuers.
  • • Interesting Trivia: Mortgage-backed securities loaded up with subprime loans played a central role in the financial crisis that began in 2007 and wiped out trillions of dollars in wealth.
• Multiples: A multiple measures the well-being of a company by comparing two metrics, usually by dividing one by the other. Investors generally rely on two stock valuation methods: one based on cash flow and the other based on a multiple of a performance measure. The most common multiple used in the valuation of stocks is the price-to-earnings (P/E) multiple.
• Mutual Fund: A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price. Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek. Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns. The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.

N

• NASDAQ – National Association of Securities Dealers Automated Quotations: Nasdaq is a global electronic marketplace for buying and selling securities. Nasdaq was created by the National Association of Securities Dealers (NASD), which is now known as the Financial Industry Regulatory Authority (FINRA). The marketplace was created so that investors could trade securities on a computerized, speedy, and transparent system, and it commenced operations on February 8, 1971.
  • The Nasdaq Stock Exchange (NASDAQ:NDAQ), or simply Nasdaq, is the second-largest stock exchange in the world for investors looking to buy and sell shares of stock. There are 3,097 Nasdaq-listed securities as of April 2021.
  • The Nasdaq Composite ($COMP, $COMPQ) is a stock market index that consists of the stocks that are listed on the Nasdaq stock exchange. Of the 3,097 Nasdaq-listed securities as of April 2021, only common stocks of an individual companies are list on the index. Thus, preferred stocks, exchange-traded funds (ETFs), and other types of securities are excluded. The Nasdaq Composite is weighted by the market capitalisations of its underlying components. This means that when larger companies’ stocks move, it has a greater effect on the performance of the index than when the stocks of smaller companies move.
  • The Nasdaq 100 (NASDAQ:NDX) is an index which is also market-cap weighted and often confused with the Nasdaq Composite. The big difference is that instead of including all of the common stocks listed on the Nasdaq exchange, the Nasdaq 100 only includes the stocks of the 100 (or 103) largest non-financial companies listed there. The 100 companies in the Nasdaq 100 make up more than 90% of the weight of the Nasdaq Composite Index.
  • Like the Nasdaq Composite, there are mutual fund and ETF products that allow investors to track the Nasdaq 100 Index in their portfolio, most notably the Invesco QQQ (NASDAQ:QQQ) ETF, which invests proportionally in the 100 index components for a low expense ratio of 0.20%.
• NAV: Net Asset Value, or NAV, is equal to a fund’s or company’s total assets less its liabilities. A firm’s or fund’s shares may trade in the market at levels that deviate from its NAV.
• Net Assets: Net tangible assets are listed on a company’s balance sheet and indicate its book value based on the amount of its total assets less all liabilities and intangible assets. Net tangible assets allow analysts to focus on a firm’s physical assets in isolation.
• Non-farm Payrolls: Non-farm payrolls is the measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications. This is measured by the Bureau of Labor Statistics (BLS), which surveys private and government entities throughout the U.S. about their payrolls.
  • Non-farm payrolls is the measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications.
  • The non-farm payrolls classification excludes farm workers as well as some government workers, private households, proprietors, and non-profit employees.
  • The data on non-farm payrolls is collected by the Bureau of Labor Statistics (BLS) and put in its monthly “Employment Situation” report, which also includes the unemployment rate.

O

• Open Interest: An open interest is an active or outstanding derivatives contract, either futures or options (call or puts), that hasn’t been closed out yet. It can represent a long or short position that hasn’t been exercised or assigned or settled for an asset.
  • Open interest equals the total number of bought or sold contracts, not the total of both added together.
  • Increasing open interest represents new or additional money coming into the market while decreasing open interest indicates money flowing out of the market.
  • The relationship between the buyer and seller creates one contract, and a single contract equates to 100 shares of the underlying asset. The contract is considered “open” until the counterparty closes it. Adding up the open contracts, where there are a buyer and seller for each, results in the open interest.
  • If a buyer and seller come together and initiate a new position of one contract, then open interest will increase by one contract. Should a buyer and seller both exit a one contract position on a trade, then open interest decreases by one contract. However, if a buyer or seller passes off their current position to a new buyer or seller, then open interest remains unchanged.
• Options: An equity option represents the right, but not the obligation, to buy or sell a stock at a certain price, known as the strike price, on or before an expiration date. Options are sold for a price called the premium.
  • Call Option – This is a derivative that gives the holder the right (as a buyer), but not the obligation, to buy (long) a security.
  • Put Option – This is a derivative that gives the holder the right (as a  buyer), but not the obligation, to sell (short) a security.
• Outstanding Shares: Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. A company’s number of shares outstanding is not static and may fluctuate wildly over time.

P

• P/E: The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share. A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future. Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator. Two kinds of P/E ratios – forward and trailing P/E – are used in practice.
• P/B: The P/B ratio (price-to-book ratio) measures the market’s valuation of a company relative to its book value. The market value of equity is typically higher than the book value of a company. P/B ratio is used by value investors to identify potential investments. P/B ratios under 1 are typically considered solid investments.
• Personal Consumption Expenditures (PCEs): Personal consumption expenditures (PCEs) are imputed household expenditures defined for a period of time. Personal income, personal consumption expenditures, and the PCE Price Index reading are released monthly in the Bureau of Economic Analysis’ (BEA) Personal Income and Outlays report. Personal consumption expenditures support the reporting of the PCE Price Index, which measures price changes in consumer goods and services exchanged in the U.S. economy.
• Portfolio Manager: A portfolio manager is a person or group of people responsible for investing a fund’s assets, implementing the fund’s investment strategies, and managing day-to-day portfolio management. Portfolio managers can take an active or passive management role.
  • Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor’s 500 Index.
    • Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index.
    • Active management portfolios strive for superior returns but take greater risks and entail larger fees.
  • Passive portfolio management mimics the investment holdings of a particular index in order to achieve similar results.
    • Passive management replicates a specific benchmark or index in order to match its performance.
• Portfolio Pumping: Also known as “Painting The Tape”, Portfolio pumping is the practice of artificially inflating portfolio performance. It is typically done by purchasing large amounts of shares in existing positions, shortly before the end of the reporting period. Public awareness of portfolio pumping has been increased by a series of influential academic articles, and the practice is now more tightly monitored by securities regulators.
  • Portfolio pumping began garnering widespread attention following the publication of an article in 2002, entitled “Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds.” This article, which was published in The Journal of Finance, provided clear evidence that portfolio pumping is a widespread phenomenon.
  • Following this research, the SEC and other regulators increased their oversight of portfolio pumping. However, there is reason to believe that the phenomenon continues to this day.
  • Today, unethical investment managers can also use high-frequency trading (HFT) technologies amongst dark pools to perpetrate portfolio pumping schemes.
• Purchasing Managers Index (PMI): The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing and/or services. The PMI is based on a monthly survey of supply chain managers across 19 industries, covering both upstream and downstream activity. The value and movements in the PMI and its components can provide useful insight to business decision makers, market analysts, and investors, and is a leading indicator of overall economic activity in the U.S.
  • A PMI reading above 50 represents an expansion when compared with the previous month.
  • A PMI reading under 50 represents a contraction when compared with the previous month.
  • A reading at 50 indicates no change.
  • The further away from 50 the greater the level of change.
• Put-Call Ratios: Put-call ratios are trading volumes of put options to call options. The put-call ratio calculates an underlying security’s put volume against its call volume over a period of time (typically a day or week) by dividing the put volume by call volume.
  • A put-call ratio above 1.0 is considered to be an indicator of a selloff
  • A put-call ratio below 1.0 is an opportunity to buy.
  • A Put-Call ratio between 0.5 and 1.0 is considered a sideways.
  • Some traders use the put-call ratio as a contrarian indicator to buy when the ratio is above 1.0 and sell when the ratio is below 1.0.

Q

• Quote: A quote is the last price at which an asset traded; it is the most recent price that a buyer and seller agreed upon and at which some amount of the asset was transacted. Investors typically reference the historical quotes for an asset in order to examine potential trends in a security’s market activity and volatility. Quotes may be provided by a variety of outlets; investment news sites and trading platforms both provide quotes.
  • The bid quote is the most current price and quantity at which a share can be bought.
  • The ask quote shows what a current participant is willing to sell the shares for.

R

• Reflation: Reflation is a fiscal or monetary policy, designed to expand a country’s output and curb the effects of Deflation. Reflation policies can include reducing taxes, changing the money supply (e.g. quantitative easing) and lowering interest rates. The term “reflation” is also used to describe the first phase of economic recovery after a period of contraction

• Risk: Risk takes on many forms but is broadly categorised as the chance an outcome or investment’s actual gain will differ from the expected outcome or return. Risk includes the possibility of losing some or all of an investment. There are several types of risk and several ways to quantify risk for analytical assessments. Risk can be reduced using diversification and hedging strategies.

S

• Sector Rotation: Sector rotation is the act of shifting investment assets from one economic sector to another. The strategy involves using the proceeds from the sale of securities related to a particular investment sector for the purchase of securities in another sector. Sector rotation isn’t an easy strategy to manage because there is a lot of risk involved and the costs associated tend to be fairly high.
• Securities and Exchange Commission (SEC): The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors. The SEC was established by the passage of the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, largely in response to the stock market crash of 1929 that led to the Great Depression. The SEC can itself bring civil actions against lawbreakers, and also works with the Justice Department on criminal cases.
• Shares Outstanding: Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. A company’s number of shares outstanding is not static and may fluctuate wildly over time.
• SPACs: A Special Purpose Acquisition Company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as “blank check companies,” SPACs have been around for decades. In recent years, they’ve become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money in 2019. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.
• Spin-off: A Spin-off is when the parent company distributes shares of its subsidiary that is being spun-off to its existing shareholders on a pro rata basis, in the form of a special dividend. The spin-off is a distinct entity from the parent company and has its own management. Existing shareholders benefit by now holding shares of two separate companies after the spin-off instead of one.
• Split-off: A split-off offers shares in the new subsidiary to shareholders but they have to choose between the subsidiary and the parent company. In a split-off, the parent company offers shareholders the option to keep their current shares or exchange them for shares of the divesting company. Shares outstanding are not proportioned on a pro rata basis like in other divestitures. In some split-offs, the parent company may choose to offer a premium for the exchange of shares to promote interest in shares of the new company.
• Stagflation: Stagflation is a term used by economists to define an economy that has inflation, a slow or stagnant economic growth rate, and a relatively high unemployment rate.
• Short Float: A Short Float is defined as the percentage of shares in the market that are shorted in relation to all shares in a float. (See “Float”) Many active traders consider this percentage because it can indicate whether they can make a profit from trading a share.
• Short Interest: Short interest indicates how many shares of a company are currently sold short and not yet covered. Short interest is often expressed as a number yet is more telling as a percentage. Short interest is used as a sentiment indicator: an increase in short interest often signals that investors have become more bearish, while a decrease in short interest signals they have become more bullish. Stocks with an extreme level of short interest, however, may be viewed by contrarians as a bullish signal.
• Short-Selling/Shorting/Short: Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. Short sellers bet on, and profit from, a drop in a security’s price. Short selling has a high risk/reward ratio: It can offer big profits, but losses can mount quickly and infinitely.
• Short Squeeze: A short squeeze accelerates a stock’s price rise as short-sellers bail out to cut their losses. Contrarian investors try to anticipate a short squeeze and buy stocks that demonstrate a strong short interest. Both short-sellers and contrarians are making risky moves. A wise investor has additional reasons for shorting or buying that stock.
  • Beginning in January 2021, a series of short squeezes occurred on several different stocks, including GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC), following concerted efforts by retail traders on Reddit to drive up the price of the stocks. This resulted in large price spikes as short sellers were forced to cover their short positions for substantial losses. These volatile price movements were not driven by fundamental factors or news about the companies. Investors should be particularly cautious when considering trading stocks during short squeezes.
• Stock Split:
  • A Stock Split is when a company divides the existing shares of its stock into multiple new shares to boost the stock’s liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.
  • Reverse stock splits are the opposite transaction, where a company divides, instead of multiplies, the number of shares that stockholders own, raising the market price accordingly.
  • The most Stock Split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares, respectively, for every share held earlier. Reverse Split ratios read as 1-for-2 or 1-for-3 meaning that the stockholder will have one share for every two or three shares held earlier, respectively.

T

• Technical Analysis (TA): Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Technical analysts believe past trading activity and price changes of a security can be valuable indicators of the security’s future price movements. Technical analysis may be contrasted with fundamental analysis, which focuses on a company’s financials rather than historical price patterns or stock trends.
• Ticker Symbol: A ticker symbol is a grouping of letters or other characters that represent certain publicly-traded or listed securities. A company picks an unused ticker symbol for its shares when it issues securities to the public marketplace for sale. Investors and traders use the ticker symbol to research the security and to place trade orders. Every listed security has a unique ticker symbol, facilitating the vast array of trade orders that flow through the financial markets every day.
  • Standard & Poor’s (S&P) developed the modern letter-only ticker symbols in the U.S. to standardize investing. Previously, a single company could have numerous ticker symbols among different individual stock markets. The term “ticker” refers to the noise made by the ticker tape machines, which were once widespread in use, but now have largely been replaced by various types of electronic digital tickers. Each stock market has a formatting convention for the issuance of tickers specific to that stock market.
• Treasury Bonds: Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government that have maturities greater than 20 years. T-bonds earn periodic interest until maturity, at which point the owner is also paid a par amount equal to the principal.
  • Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.
  • T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond is paid to the owner.
  • Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS), Treasury bonds are one of four virtually risk-free government-issued securities.
• Treasury Notes: A Treasury note is a U.S. government debt security with a fixed interest rate and maturity between one to 10 years. Treasury notes are available either via competitive bids, wherein an investor specifies the yield, or noncompetitive bids, wherein the investor accepts whatever yield is determined. A Treasury note is just like a Treasury bond, except the two have differing maturities—T-bonds’ lifespans are10 to 30 years.
• Turnover:
  • When portfolio managers of mutual funds buy and sell stocks in the market to alter the fund portfolio, it is referred to as ‘turnover’.
  • While not necessarily a bad thing at the outset, turnover generates transaction fees and potential taxable events for fund investors.
  • In general, lower fund turnover rates signal higher quality – but the turnover will depend on the type of fund and its stated investment strategy.
  • Growth funds tend to have higher turnover rates as they invest more actively.
  • On the other end of the spectrum, index funds should have very low turnover rates as they only trade when the index they’re tracking changes composition.

U

• Underlying Asset: Underlying assets represent the assets from which derivatives derive their value. Knowing the value of an underlying asset helps traders determine the appropriate action (buy, sell, or hold) with their derivative.
• Undervalued: An asset that is undervalued is one that has a market price less than its perceived intrinsic value. Buying undervalued stock in order to take advantage of the gap between intrinsic and market value is known as value investing. For a stock to be undervalued means that the market price is somehow “wrong” and that the investor either has information not available to the rest of the market or is making a purely subjective, contrarian evaluation.
• Unit Trust: Unit trusts are unincorporated mutual funds that pass profits directly to investors rather than reinvesting in the fund. The investor is the trust’s beneficiary. Fund managers run the unit trust and trustees are often assigned to ensure that the fund is run according to its goals and objectives.
  • A unit trust differs from a mutual fund in that a unit trust is established under a trust deed, and the investor is effectively the beneficiary of the trust.
• Uptick Rule (also known as the “Plus Tick Rule”): The Uptick Rule prevents sellers from accelerating the downward momentum of a securities price already in sharp decline. By entering a short-sale order with a price above the current bid, a short seller ensures that an order is filled on an uptick. The Uptick Rule is designed to preserve investor confidence and stabilize the market during periods of stress and volatility, such as a market “panic” that sends prices plummeting.
  • The Alternative Uptick Rule: The 2010 alternative uptick rule (Rule 201) allows investors to exit long positions before short selling occurs. The rule is triggered when a stock price falls at least 10% in one day. At that point, short selling is permitted if the price is above the current best bid. This aims to preserve investor confidence and promote market stability during periods of stress and volatility.

V

• Value Investing: Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. Value investors use financial analysis, don’t follow the herd, and are long-term investors of quality companies. Warren Buffett is probably the best-known value investor today, but there are many others, including Benjamin Graham (Buffet’s professor and mentor), David Dodd, Charlie Munger, Christopher Browne (another Graham student), and billionaire hedge-fund manager, Seth Klarman.
• Valuation: Valuation is a quantitative process of determining the fair value of an asset or a firm. In general, a company can be valued on its own on an absolute basis, or else on a relative basis compared to other similar companies or assets. There are several methods and techniques for arriving at a valuation—each of which may produce a different value. Valuations can be quickly impacted by corporate earnings or economic events that force analysts to retool their valuation models.
• Vanilla (strategy): Vanilla strategies tend to be simple, practical and conservative. Generally a vanilla strategy makes sense when explained in a few short sentences. For example, to build an income portfolio, buy and hold dividend paying stocks with a history of paying dividends for 10 years or more. Vanilla strategies are not diminished by their simplicity – they are simply not as flashy or aggressive as other approaches. More importantly, it can actually be difficult to implement and stick to a vanilla strategy long term. When speaking about investment strategies, a vanilla strategy can often be outperformed by any number of short-term strategies. Over the long-term, however, a vanilla strategy will generally see less under-performance than more aggressive strategies do in challenging markets.
• Vega (options): See “Kappa”
• Volatility: Volatility represents how large an asset’s prices swing around the mean price – it is a statistical measure of its dispersion of returns. There are several ways to measure volatility, including beta coefficients, option pricing models, and standard deviations of returns. Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable. Volatility is an important variable for calculating options prices.

W

• Wall Street: Wall Street is a street located in the lower Manhattan section of New York City and is the home of the New York Stock Exchange or NYSE. Wall Street has also been the historic headquarters of some of the largest U.S. brokerages and investment banks. Today, the term Wall Street is used as a collective name for the financial and investment community, which includes stock exchanges, large banks, brokerages, securities, and underwriting firms.
• Window dressing: is a strategy used by mutual fund and other portfolio managers to improve the appearance of a fund’s performance before presenting it to clients or shareholders. To window dress, the fund manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter or year.
• “Witching” Fridays: see Expiration Friday
• Writer: Traders who write an option receive a fee, or premium, in exchange for giving the option buyer the right to buy or sell shares at specific price and date. Put and call options for stocks are typically written in lots, with each lot representing 100 shares. The fee, or premium, received when writing an option depends upon several factors, such as the current price of the stock and when the option expires. Benefits of writing an option include receiving an immediate premium, keeping the premium if the option expires worthless, time decay, and flexibility. Writing an option can involve losing more than the premium received.

Y

• Yield: Yield is a return measure for an investment over a set period of time, expressed as a percentage. Yield includes price increases as well as any dividends paid, calculated as the net realized return divided by the principal amount (i.e. amount invested). Higher yields are perceived to be an indicator of lower risk and higher income, but a high yield may not always be a positive, such as the case of a rising dividend yield due to a falling stock price.
• Yield Curve: Yield curves plot interest rates of bonds of equal credit and different maturities. The three key types of yield curves include normal, inverted and flat. Upward sloping (also known as normal yield curves) is where longer-term bonds have higher yields than short-term ones. While normal curves point to economic expansion, downward sloping (inverted) curves point to economic recession. Yield curve rates are published on the Treasury’s website each trading day.