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Rally A rally is a significant short-term recovery in the price of a share or commodity, or of a market in general, after a period of decline or sluggishness. Shares that make a particularly strong recovery in a particular sector or in the market as a whole are often said to be leading the rally, a reference to the term's origins in combat, where an officer would lead his rallying troops back into battle. While a rally may signal the beginning of a bull market, it doesn't necessarily do so. Random walk theory The random walk theory holds that it is futile to try to predict changes in future share prices on its past price. Advocates of the theory base their assertion on the belief that share prices react to information that becomes known at random, and that, because of the randomness of this information, prices themselves change as randomly as the path of a wandering person's walk. This theory stands in opposition to technical analysis, whose practitioners believe you can predict future share prices behavior based on statistical patterns of prior performance. Rate of return The rate of return is your annual income on an investment. With a stock, this income is calculated as dividend yield, or your annual dividend divided by the price you paid for the stock. In the case of bonds, return is the yield, or the annual interest you receive, divided by the price you paid for the bond. Rating Agency or service A rating agency or service, such as Crisil, ICRA in India or Moody's Investors Service, or Standard & Poor's abroad, evaluates bond issuers to determine the level of risk they pose to would-be investors. Though each rating service focuses on somewhat different criteria in making its evaluation, the assessments tend to agree on which investments pose the least risk and which pose the most. These rating agencies may also evaluate other products or insurance companies, including those offering fixed annuities, in terms of how a provider is likely to meet its financial obligations to policyholders. Real interest rate Your real interest rate is the interest rate you earn on an investment minus the rate of inflation. For example, if you're earning 6.25% on a bond, and the inflation rate is 2%, your real rate is 4.25%. That's enough higher than inflation to maintain your buying power and have some in reserve, which you could use to build your investment base. But if the inflation rate were 5%, your real rate would be only 1.25%. Real rate of return The rate of return on an investment minus the rate of inflation gives you a real rate of return. For example, if you are earning 6% interest on a bond in a period when inflation is running at 2%, your real rate of return is 4%, which is large enough to increase your buying power. But if inflation were at 4%, your real rate of return would be only 2%. Finding your real rate of return, however, is generally a calculation you have to do on your own. It isn't provided in annual reports, prospectuses, or other publications that report investment performance. In the U.S., the exception is mutual funds, which must report after-tax returns. Real time When an event is reported as it happens — such as a quick jump in a share's price or the constantly changing numbers on a market index — you are getting real-time information. Traditionally, this type of information was available to the public with a 15-minute time delay or was reported only periodically by news services. With the increasing popularity of the Internet and cable TV, however, more and more individual investors have access to real-time financial news. Knowing what's happening enables you and others to make buy and sell decisions based on the same information that institutional investors and financial services organizations are using. Realized gain When you sell an investment for more than you paid, you have a realized gain. In contrast, if the price of the stock increases, and you don't sell, your gain is unrealized, or a paper profit. Realizing your gains means you lock in any increase in value, which could potentially disappear if you continued to hold the investment. But it also means you may owe tax on that profit unless the investment is tax exempt. Recession Broadly defined, a recession is a downturn in a nation's economic activity. If national productivity, or gross domestic product (GDP), declines for at least two consecutive quarters, it is usually considered a recession. The consequences typically include increased unemployment, decreased consumer and business spending, and declining share prices. Record date A date on which the records of a company are closed for the purpose of determining the stockholders to whom dividends, proxies, rights etc., are to be sent. To be paid a share dividend, you must own the share on the day that the companies’ board of directors names as the record date. For example, if a company declares a dividend payable on September 1 to shareholders of record as of August 10, you have to own the shares on August 10 to be entitled to the dividend. Any shares bought between the record date and the day on which the dividend is paid are ex-dividend, which means those new owners will get no dividend for the period. Red herring When a security is offered to the public for the first time in U.S., the underwriter prepares a preliminary prospectus, called a red herring. While the name may refer to the parts of the document printed in red ink, the implication is that the document is an attempt to present the company in the best possible light. The reference is to the rather distinctive odor of the fish in question, which fleeing fugitives sometimes used to throw bloodhounds off their scent. Although the preliminary prospectus contains important information about the company, its offerings, financial projections, and investment risk, it is frequently revised before the final version is issued. Redemption When a fixed-income investment matures, and you get your investment amount back, the repayment is known as redemption. Bonds are usually redeemed at par, or face value. However, if a bond issuer calls the bond, or pays it off before maturity, you may be paid as per the terms of the offer document. Redemption fee Some open-end mutual funds impose a redemption fee when you sell units back to the fund, often during a specific (and sometimes brief) period of time after you purchase those units. The fee is usually a percentage of the value of the units you sell, but it may also be a flat fee, or fixed amount. The purpose of the fee is to prevent large-scale withdrawals from the fund in response to changes in the financial markets, which might require the fund manager to sell holdings at a loss in order to meet the fund's obligation to buy back your units. Registered bond When a bond is registered, the name of the owner and the particulars of the bond are recorded by the issuer or the issuer's agent. When registered bonds are issued in certificate form, a bond can be sold only if the owner endorses the certificate, or signs it over to someone else. In contrast, bearer bonds are considered the property of whoever holds them, since there is no record of ownership. Currently, however, bonds are increasingly registered electronically, so there are no certificates to endorse. Reinvestment risk When you use the money from a maturing fixed-income investment, such as a certificate of deposit (CD) or a bond, in order to make a new investment of the same type, there's no guarantee that you will earn the same rate of return on your new investment as on the one coming due. In fact, the return could be significantly lower (or higher), based on what's happening in the economy at large. This unpredictability is known as reinvestment risk. For example, if a bond paying 10% interest matures when the current rate is 5%, you must settle for a lower return if you buy a new bond or choose some other type of investment. One way to limit reinvestment risk is by using an investment technique known as laddering, which means splitting your investment among a number of bonds (or CDs) with different maturity dates. That way only part of your total investment will mature and have to be reinvested at any one time. Return Your return is the profit you make on your investments, usually expressed as an annual percentage. That lets you compare the return of different investments or investments you have held for different periods of time. Return on equity Return on equity measures how much a company earns within a specific period in relation to the amount that's invested in its share capital. It is calculated by dividing the company's net income by the company's net worth. In general, it's considered a sign of good management when a company's performance over time is at least as good as the average return on equity for other companies in the same industry. Return on investment Your return on investment is the profit you make on the sale of a security or other asset divided by the amount of your investment, expressed as an annual percentage rate. Revenue Revenue is the money you collect for providing a product or service. Revenue is different from earnings, which is what's left of your revenue after subtracting the costs of producing or delivering the product or service and any taxes you paid on the amount you took in. When companies release their financial statements, those that provide services, such as power or telecommunications companies, generally describe their income as revenues, while those that manufacture products, such as lightbulbs or books, describe their income as sales. The money a government collects in taxes is also called revenue. Rights offer In a rights offer, a company offers existing shareholders the opportunity to buy additional shares of company in the proportion to the shares held by you. In a rights issue of 1:1 the existing shareholders are entitled to buy one share for every share one held by them. The price of the rights share is same for all the shareholders. You don't have to buy the additional shares compulsorily, and you can transfer your rights, fully or partly, to someone else you prefer. Risk According to modern investment theory, the greater the risk you take in making an investment, the greater your return should be if the investment succeeds. For example, investing in a startup company carries substantial risk, since there is no guarantee that it will be profitable. But if it is, you're likely to realize a greater gain than if you had invested a similar amount in an already established company. As a rule of thumb, if you are unwilling to take some investment risk, you are likely to limit your investment reward. For example, if you put your money into an insured bank deposit, which protects your principal, your real rate of return is unlikely to be high. Risk premium A risk premium is one way to measure the risk you'd take in buying a specific investment. In the U.S., some analysts define risk premium as the difference between the current risk-free return — defined as the yield on a 13-week U.S. Treasury bill — and the total return on the investment you're considering. Other measures of risk premium, which are applied specifically to stocks, are a stock's beta, or the volatility of that stock in relation to the stock market as a whole, and a stock's alpha, which is based on an evaluation of the stock's intrinsic value. Similarly, the higher interest rates that bond issuers typically offer on riskier bonds may be considered a risk premium, since the higher rate, and potentially greater return, is a way to compensate for the greater risk. Risk ratio Some investors and financial analysts try to estimate the risk an investment poses by speculating on how much the investment is likely to increase in value as opposed to how much it could decline. For example, a share priced at Rs.50 that analysts think could increase to Rs.90 or decrease to Rs.30 has a 4:2 risk ratio (the share could go up Rs.40 but down Rs.20). Critics point out that it is impossible to provide an accurate estimate of future prices, rendering risk ratios meaningless. Risk-adjusted performance When you evaluate an investment's risk-adjusted performance, you aren't looking simply at its straight performance figures but at those figures in relation to how much risk you'd be taking to get the potential return the investment could produce. You might compensate for risk by creating a balanced portfolio in which you combine risky and less risky investments. But you might also want to look at the risk posed by various investments individually. One method is to investigate the investment's price volatility over various periods of time, including different market environments. For example, you might consider how far the price fell in the most recent bear market against its price in a bull market, or how it performed in a recent market correction. In general, the greater the volatility, the greater the risk. However, many analysts believe that looking exclusively at past performance can be deceptive in evaluating the risk you are taking in making a certain investment, since it can't predict what will happen in the future. Risk-free return When you buy a Reserve Bank of India bond, you're making a risk-free investment in the sense that there's virtually no chance of losing your principal (since the bond is backed by the Indian government). Risk-to-return profile A risk-to-return profile describes the relation between the risk and the potential for return on a specific investment. Typically the more risk an investment has, the higher the potential return. Some analysts determine the risk-to-return profile by calculating the difference between the current risk-free return and the total return on the investment you're considering. Other measures of risk-to-return profile, which are applied specifically to shares, are a shares beta, or the volatility of that share in relation to the stock market as a whole, and a shares alpha, which is based on an evaluation of the shares intrinsic value. Similarly, the higher interest rates that bond issuers typically offer on riskier bonds is directly influenced by their risk-to-return profiles: the greater the risk, the higher the rate of interest that is potentially paid on the bond. Rollover If you move your assets from one investment to another, it's called a rollover. |