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Arbitrage Arbitrage is the technique of simultaneously buying a security at a lower price in one market and selling it at a higher price in another market to make a profit on the spread between the prices. Although the price difference may be very small, arbitrageurs, or arbs, trade huge amounts, so they can make sizable profits. But the strategy, which depends on split-second timing, can also backfire if interest rates or prices move in unanticipated ways. Asset allocation Asset allocation is a strategy, advocated by modern portfolio theory, for maximizing gains while minimizing risks in your investment portfolio. Specifically, asset allocation means dividing your assets among different broad categories of investments, including shares, bonds, and cash. An asset allocation model — specifically the percentages of your portfolio allocated to each investment category — that's appropriate for you depends on many factors, such as how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook. Many experts advise you to adjust or rebalance your portfolio at least once a year to bring it back in line with your model or to realign your model as your financial goals change. Adhoc Margin Margin collected by the Stock Exchange from the members having unduly large outstanding position Advance-decline (A-D) line The advance-decline line graphs the ratio of shares that have risen in value — the advancers — to Shares that have fallen in value — the decliners — over a particular trading period. The direction and steepness of the A-D line gives you a general idea of the direction of the market. For example, a noticeable upward trend, which is created when there are more advancers than decliners, indicates a growing market. A downward slope indicates a market in retreat. At times, however, there may be no clear trend in either direction. Alpha A Share's alpha is an analyst's estimate of its potential price increase based on the rate at which the company's earnings are growing and other aspects of the company's current performance. For example, if a Share has an alpha of 1.15, that means the analyst expects a 15% price increase in a year when Share prices in general are flat. One investment strategy is to look for shares whose alphas are high, which means the shares are undervalued and have the potential to provide a strong return. A share's alpha is different from its beta, which estimates its price volatility in relation to the market as a whole. American Depository Receipts (ADR) (U.S.) A certificate issued in the United States in lieu of a foreign security. The original securities are lodged in Bank/Custodian abroad, and the American depository receipts (ADRs) are traded in the US for all intents and purposes as if they were a domestic stock. An ADR dividend is paid in US dollars, so it provides a way for American investors to buy foreign securities without having to go abroad, and without having to switch in and out of foreign currencies. American Option An option that can be exercised at any time prior to expiry date. Amortization Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage or credit card balance. To amortize a loan, your payments must be large enough not only to pay interest that has accrued but also to reduce the principal amount you owe. The word amortize itself tells the story, since it means "to bring to death." Analyst A financial analyst tracks the performance of a number of companies or industries, evaluates their potential value as investments, and makes recommendations to buy, sell, or hold specific securities. When the most highly respected analysts express a strong opinion about a share, there is often an immediate impact on that share's price as investors rush to follow the advice. Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Crisil , Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Analysts' commentaries appear regularly in the financial press, and on radio, television, and the Internet. Annual report By law, each publicly held corporation must provide its shareholders with an annual report showing its income and balance sheet. In most cases, it contains not only financial details but also a message from the chairman, a description of the company's operations, and an overview of its achievements. Most annual reports are glossy affairs that also serve as marketing pieces. Copies are generally available from the company's investor relations office, and annual reports may even appear on the company's website. Annuity Originally, an annuity was simply an annual payment — hence the name. Over time, annuity has come to refer to different kinds of payments, investments, and financial products. Most commonly, an annuity describes the amount you receive from your pension each year, usually in monthly installments. But, in fact, annuity also refers to the annual income you receive from any source, as well as the source itself. For example, in USA, some tax-deferred retirement savings plans are called annuities. Asset Management Company Company which handles the day to day operations and investment decisions of a mutual fund. At Best An instruction from the client to the broker authorising him to use his discretion and try to execute an order at the best possible market price. At-the-Money Option When the price of the underlying security equals the strike price of the option. Auction When a seller is not in a position to deliver the securities he has sold, the buyer sends in his applications for buying-in, so that the securities can be bought from the market and delivered to him. This process by which the securities are procured in the Stock Exchange, on behalf of the defaulter is known as Auction. Average annual yield This figure, expressed as a percentage, is your average yearly income on an investment. You can calculate the average annual yield by adding all the income you received on an investment and dividing that amount by the number of years the money was invested. So if you receive Rs.60 interest on a Rs.1,000 bond each year, the average annual yield is 6% (Rs.600 ÷ Rs.1,000 = 0.06, or 6%). Basis point Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only within hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a deposit changes from 6.72% to 6.65%, it has dropped 7 basis points. Bear market A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as the point at which prices have fallen 20% or more from a high. A bear market in shares is triggered by investors selling off shares because they anticipate worsening economic conditions and falling profits. A bear market in bonds is usually brought on by rising interest rates. Bearer Securities/Bearer Bonds Securities which do not require registration of the name of the owner in the books of the company. Both the interest and the principal whenever they become due are paid to anyone who has possession of the securities. No endorsement is required for changing the ownership of such securities. Benchmark Originally a benchmark was a surveyor's mark indicating a specific height above sea level. But it has come to have a much broader meaning in the world of investing. A share market benchmark, for example, is an index or average whose movement is considered a general indicator of the direction of the overall market, against which investors and financial professionals often gauge their market expectations and judge the performance of individual shares or market sectors. For example, the National Stock Exchange’s NIFTY (share Index of 50 companies) and the Bombay Stock Exchange’s SENSEX (share index of 30 companies) are the most widely followed benchmarks, or indicators, of the Indian stock market. There are also benchmarks for international markets, and for other types of investments such as bonds, mutual funds, and commodities. Beta Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. Betas as low as 0.5 and as high as 4 are fairly common, depending on the sector and size of the company. However, in recent years, a number of experts have disputed the validity of assigning and using a beta value as an accurate predictor of share performance. Bid An offer price to buy. Business on the Stock Exchange is done through bids. Bid also refers to the price one is willing to pay for a security. Bid-Ask spread The difference between the bid price and the ask price. Big Board The Big Board is the nickname of the New York Stock Exchange (NYSE), the oldest and largest stock exchange in the U.S. and the largest in the world. Common and preferred share, bonds, warrants, and rights are all traded on the Big Board, which dates back to 1792. Blue chip share Blue chip shares are the share of large, well-regarded companies. Blue chips, which take their name from the most valuable poker chips and in the U.K. are known as alpha shares, have a reputation for quality products and services and a long-established record of earning profits and investor friendliness Boiler room A boiler room is a share brokerage firm that uses aggressive tactics to sell risky, and sometimes falsified, shares to willing investors. Boiler rooms often use sales methods that violate Sebi rules requiring brokers to recommend investments that are appropriate for each investor's portfolio. For example, a broker working in a boiler room might try to sell very speculative share to retired investors whose portfolios cannot tolerate such high risk. Many boiler room brokers may also try to create investor interest in companies that don't actually exist in order to profit from the sale of fraudulent shares. Bond A negotiable certificate evidencing indebtedness for e.g. debt security issued by a company, government agency etc. A bond investor lends money to the issuer and, in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bondholder periodic interest payments over the life of the loan. Bonus Shares Shares issued by companies to their shareholders free of cost by captialisation of accumulated reserves from the profits earned in the earlier years. Book Closure The periodic closure of the Register of Members and Transfer Books of the company, to take a record of the shareholders to determine their entitlement to dividends or to bonus or right shares or any other related corporate benefits. Book Value Book value of shares is calculated by adding up Share Capital, reserves and surplus of a company which is then divided by the number of equity shares issued by the company. Bottom fishing Investors using a bottom-fishing strategy look for shares that they consider undervalued because the prices are low. The logic of bottom fishing is that share prices sometimes fall further than a company's actual financial situation warrants, especially in the aftermath of bad news, and can rebound dramatically, providing a healthy profit. Bottom-up investing When you use a bottom-up investing strategy, you focus on the potential of individual shares, bonds, and other investments. Using this approach, for example, means you pay less attention to the economy as a whole, or to the prospects of the industry a company is in, than you do to the company itself. In making decisions based on bottom-up investing, you read research reports, examine the company's financial stability, and evaluate what you know about its products and services in great detail. Bourse Bourse is the French term for a stock exchange, meaning, literally, purse. The national share market of France, a totally electronic market, is known as the Paris Bourse. The term is used throughout Europe and worldwide as a synonym for stock exchange, though it generally isn't used in India. Breakout Share prices fluctuate constantly, but each share typically moves within a fairly narrow range. That means the share's average price changes gradually, if at all. But sometimes a share's price breaks out of its limits, and jumps or tumbles suddenly. Usually the breakout is fueled by a particular event. The company may realize a commercial success, such as a drug company discovering a new cure. Or a breakout may reflect a financial development, such as a new alliance with a successful partner Broker Broker Broker is a member of a Stock Exchange who acts as an agent for clients and buys and sells shares on their behalf in the market. Though strictly a stock broker is an agent, yet for the performance of his part of the contract both in the market and with the client, he is deemed as a principal, a peculiar position of dual responsibility. Bull market A prolonged period when share prices as a whole are moving upward is called a bull market, although the rate at which those increases occur can vary widely from bull market to bull market. So can the length of time a bull market lasts. Business Day A day on which the Stock Exchange is open for business. Buyback When a company purchases shares of its own publicly traded share or its own bonds in the open market, it's called a buyback. The most common reason a company buys back its share is to make the share more attractive to investors by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increase because the number of shares has been reduced. Companies may also buy back shares to pay for acquisitions that are financed with share swaps, to make shares available for employee share option plans, to decrease the risk of a hostile takeover by reducing the number of shares available for sale, or to discourage short-term trading in its share by driving the price of the shares upward. Companies may buy back bonds when they are selling at discount, which is typically the result of rising interest rates. By paying less than par in the open market, the company is able to reduce the cost of redeeming the bonds when they come due. Call Money The unpaid installment of the share capital of a company, which a shareholder is called upon to pay. Call option Buying a call option gives you the right to buy a fixed quantity of the underlying investment at a specified price, called the strike price, within a specified time period. For example, you might buy a call option on 100 shares of a share if you expect the market price to increase but prefer not to tie up your money by making the actual purchase. If the price of the share goes up, you can exercise the option and buy at less than the market price. But if the price doesn't change or it drops, you can simply let the option expire. In contrast, you can sell a call option, which is known as writing a call. That gives the buyer the right to buy the underlying investment from you at the strike price before the option expires. If you write a call, you are obliged to sell if the option is exercised. Cap A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. Capital gain When you sell an asset at a higher price than you paid for it, the difference is your capital gain. If you own the share for more than a year before selling it, you have a long-term capital gain. If you hold the share for less than a year, you have a short-term capital gain. Capital gains tax A capital gains tax is due on profits you realize on the sale of a capital asset, such as share, bonds, or real estate. Long-term gains, on assets you own more than a year, are generally taxed at a lower rate than ordinary income while short-term gains are taxed at your regular rate. Capital loss When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. Cash flow Cash flow is a measure of changes in a company's cash account during an accounting period (usually a month, quarter, or year), specifically its cash income minus the cash payments it makes. You can calculate whether your cash flow is positive or negative the same way you would a company's: Subtract the money you receive (from wages, tips, investments and other income) from the money you spend on expenses (such as housing, utilities, transportation, and other costs). If there's money left over, your cash flow is positive. If you spend more than you have coming in, it's negative. Central bank Most countries have a central bank, which issues the country's currency, holds the reserve deposits of other banks in that country, and either initiates or carries out the country's monetary policy, including keeping tabs on the money supply. In India, Reserve Bank of India, is the central bank. In contrast,in the U.S., the 12 regional banks that make up the Federal Reserve System act as the central bank. This structure was deliberately developed to ensure that no single region of the country could control economic decision making. Circuit bre Circuit breaker After the share market crash of 1987 in U.S., share and commodities exchanges established a system of trigger-point rules, known as circuit breakers, to temporarily restrict trading in shares, share options, and share index futures when prices fall too far, too fast. Circuit breakers have been established in Indian securities market also. Generally, circuit breakers are put up for individual shares and the manner of restrictions vary, depending on the rules framed from time to time. Currently, trading on the New York Stock Exchange (NYSE) is halted when the market, measured by the Dow Jones Industrial Average (DJIA), drops 10% any time before 2:30 p.m., sooner if the drop is 20%. But trading could resume, depending on the time of day the loss occurs. However, if the DJIA drops 30% at any point in the day, trading ends for the day. The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month. Clean Float Price of securities is permitted to vary in line with the market forces, in absence of official intervention; this is termed as clean float. Clearing House/corporation Clearing house is in the Stock Exchange acting as a central agency for effecting delivery and settlement of the contacts between all the members, of that Exchange. Clearing corporation does the same activities but it is independent of the Exchange. Closing price The closing price of a share, bond, option, or futures contract is the last trading price before the exchange or market on which it is traded closes for the day. However, the opening price at the start of the next trading day may be different from the closing price the day before. When a security is valued as part of an estate or charitable gift, its value is normally set at the closing price on the day of the valuation of the estate. Coercive Tender Offer A tender offer that exerts pressure on target shareholders to tender early. This could be in form of preferential compensation for shareholders tendering early, etc. Changes in securities laws have limited the effectiveness of such tender offers. Collateral Assets with monetary value, such as shares, bonds, or real estate, that are used to guarantee a loan are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, becomes the property of the lender Compound interest When the interest you earn on an investment is added to form the new base on which future interest is calculated, it is said to be compound interest. Without compounding, you earn simple interest, and your investment doesn't grow as quickly. Contract Month The month in which futures contracts may be settled by making or accepting delivery. Contract Note A note issued by a broker to his client with regard to his order, stating the number of securities bought or sold in the market along with the rate, time and date of contract. Contrarian An investor who marches to a different drummer is sometimes described as a contrarian. In other words, if most investors are buying shares, a contrarian is concentrating on building a bond portfolio or putting more money into cash investments. This approach is based, in part, on the idea that if everybody expects something to happen, it probably won't. In addition, the contrarian believes that if other investors are fully committed to a certain type of investment, they're not likely to have cash available if a better one comes along. But the contrarian would. Contrarian mutual funds use this approach as their investment strategy, concentrating on building a portfolio of out-of-favor (and therefore often undervalued) investments. Convertible bond Convertible bonds are corporate bonds that you can convert into equity share of the company that issues them rather than redeeming them for cash when they mature. The details governing the conversion, such as the price of the share, are set when the bonds are issued. These bonds have a double appeal for investors concerned about volatility and high share prices: Their prices go up if share prices go up but usually drop less than the underlying share price if that price should fall. And while convertible bonds typically provide lower yields than regular bonds, they generally provide higher yields than the underlying share. Convertible Preference Shares These preference shares may be converted into equity shares after a specified time period as mentioned in the offer document. Corporate bond Corporate bonds are debt securities issued by publicly held corporations to raise money for expansion or other business needs. Correction A correction is a drop — usually a sudden and substantial one of 10% or more — in the price of an individual share, bond, commodity, index, or the market as a whole. Market analysts anticipate market corrections when security prices are high in relation to company earnings and other indicators of economic health. When a market correction is greater than 10% and the prices do not begin to recover promptly, some analysts point to the correction as the beginning of a bear market. Coupon rate The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the term of a loan. For example, a bond that is paying 6% annual interest has a coupon rate of 6%. Coupons Tokens for payment of interest attached to bearer securities. Crash A crash is a sudden, steep drop in share prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value. Credit rating A corporation's credit rating is an assessment of whether it will be able to meet its obligations to bond holders and other investors. Credit rating systems for corporations generally range from AAA or Aaa at the high end to D (for default) at the low end. Creditor A person or company who provides credit to another person or company functions as a creditor. For example, if you take out a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond issued by a company or other institution, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer. Cum Means ‘with’ or ‘including’. A cum price includes the right to any declared dividend or bonus. Cumulative Convertible Preference Shares A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Cumulative Preference Shares A type of preference shares on which dividend accumulates, if not paid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Current yield Expressed as a percentage, current yield is a measure of your actual rate of return on an investment. If you own a bond, current yield is calculated by dividing the coupon rate by the purchase price and multiplying by 1,000. Cyclical share Cyclical shares tend to rise in value during an upturn in the economy and fall during a downturn. They usually include shares in industries that flourish in good times, including airlines, automobiles, and travel and leisure. In contrast, shares in industries that provide necessities such as food, electricity, gas, and health care products, or those that provide services that reduce the expenses of other companies, tend to be more price-stable. Shares of such companies are sometimes called countercyclicals. Daily Margin The amount that has to be deposited at the Stock Exchange on a daily basis for the purchase or sale of a security. This amount is specified by the Stock Exchange. Daily trading limit The daily trading limit is the most that the price of a futures or options contract can rise or fall in a single session before trading in that contract is stopped for the day. Trading limits are designed to protect investors from wild price fluctuations and the potential for major losses. They're comparable to the circuit breakers established by stock exchanges to suspend trading when prices fall by a specific percentage. Date of maturity The date of maturity, or maturity date, is the day on which a bond's term ends, and its issuer repays the principal and makes the final interest payment. When the phrase is used in connection with mortgages or other personal loans, the date of maturity is the day your last payment is due and your debt is repaid. Day Order An order that is placed for execution if possible, during only one trading session. If the order cannot be executed in that trading session then it is automatically cancelled. Debentures Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures. Debt-to-equity ratio You find a company's debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. The ratio indicates the extent to which a company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage, which may mean a fast-growing company or one that is overextended. Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry. From an investor's perspective, the higher the ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt efficiently to expand its sales and earnings. Deflation The opposite of inflation, deflation is a gradual drop in the cost of goods and services, usually caused by a surplus of goods and a shortage of cash. Although deflation seems to increase your buying power in its early stages, it is generally considered a negative economic trend because it is typically accompanied by rising unemployment, falling production, and limited investment. Delivery Order Data given to each member of the Stock Exchange at the end of a settlement period containing particulars such as number of shares, value of shares, names of the receiving members etc. to enable him to deliver such shares in time. Depreciation Certain assets, such as buildings and equipment, depreciate, or decline in value, over time.You can amortize, or write off, the cost of such an asset over its estimated useful life, thereby reducing your taxable income without reducing the cash you have on hand. Depression A depression is a severe and prolonged downturn in the economy. Prices fall, reducing purchasing power. There tends to be high unemployment, lower productivity, shrinking wages, and general economic pessimism. Since the Great Depression following the share market crash of 1929 in U.S., the governments and central banks of major industrialized countries have carefully monitored their economies and adjusted their economic policies to try to prevent another financial crisis of this magnitude Dirty price A price for a bond which includes the amount of interest that has accrued on the bond since the date of the last interest payment. Dividend Corporations may pay out part of their earnings as dividends to you and other shareholders as a return on your investment. Share dividends, which are generally paid yearly, are in the form of cash. Dividend payout ratio You can calculate a dividend payout ratio by dividing the dividend a company pays per share by the company's earnings per share. Dividend yield If you own dividend-paying shares, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share's current market price. Dividend yield, which increases as the price per share drops and drops as the share price increases, does not tell you what you're earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding shares. Dow Jones Global Indexes Dow Jones Global Indexes are market capitalization weighted indexes that track the share market performance of more than 3,000 companies in 34 countries. Together they represent more than 80% of the equity capital on share markets throughout the world. Eventually, the indexes will include every country where shares can be purchased. Market capitalization weighting means that those companies with higher market capitalizations, figured by multiplying the current price per share by the number of existing shares, have a greater impact on the index than shares with smaller capitalizations. Global market performance is also tracked in eight geographically defined regional indexes and in the Dow Jones World Share Index, a composite of the global indexes. Dow Jones Industrial Average (DJIA) The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip U.S. shares. Though it is called an average, it is actually a price-weighted index, which means the gains and losses of the highest priced shares are counted more heavily than gains and losses of lower priced shares. Quoted in points, not dollars, the DJIA is computed by totaling the weighted prices of the 30 shares and dividing by a number that is regularly adjusted for share splits, spin-offs, and other changes in the shares being tracked. The companies that make up the DJIA are changed from time to time. For example, in 1999 Microsoft, Intel, SBC Communications, and Home Depot were added and four other companies were dropped. The changes were widely interpreted as a reflection of the emerging or declining impact of a specific company or type of company on the economy as a whole. Dow Jones Total Market Index This benchmark index measures price changes in approximately 2,200 U.S. shares, representing more than 100 industries, that trade on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the Nasdaq Share Market (Nasdaq). Representing approximately 80% of the U.S. equity market, this index is market capitalization weighted. That means a share's influence on the movement of the index is in proportion to its current price multiplied by the total number of shares that investors own. The higher the capitalization, the greater the influence. Dow Jones Transportation Average The Dow Jones Transportation Average tracks the performance of the shares of 20 airlines, railroads, and trucking companies, and is one of the components of the Dow Jones 65 Composite Average. Dow theory Dow theory maintains that a major market trend — up or down — will continue only if both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average move simultaneously in the same direction until they both hit a new high or a new low. Some experts discount the relevance of this approach as a useful guideline, arguing that waiting to invest until a trend is confirmed can mean losing out on potential growth. Earnings From a corporate perspective, earnings are profits, or net income, after the company has paid income taxes and bond interest Earnings estimate Professional share analysts use mathematical models that weigh companies' financial data to predict their future earnings per share on a quarterly, annual, and long-term basis. Investment research companies, publish averages of analysts' estimates, called consensus estimates, for shares that are closely followed by market professionals. When a company's earnings report either exceeds or fails to meet analysts' estimates, it's called an earnings surprise. An upside surprise occurs when a company reports higher earnings than analysts predicted and usually triggers an increase in the share price. A negative surprise, on the other hand, occurs when a company fails to meet expectations and often causes the share's price to fall. Earnings momentum When a company's earnings per share grow from year to year at an ever-increasing rate, that pattern is described as earnings momentum. One example might be a company whose earnings grow one year at 10%, the next year at 18%, and a third year at 25%. In many cases, this momentum triggers an increase in the share's share price as well, as investors identify the share as one they expect to continue to grow and increase in value. Earnings per share Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of existing shares. For example, if a company earns Rs.100 million in a year and has issued capital of 50 million shares, the earnings per share are Rs.2. Earnings and other financial measures are provided on a per share basis to make it easier for investors analyze the information and compare the results to those of other investments. Efficient market When the information that investors need to make investment decisions is widely available, thoroughly analyzed, and regularly used, the result is an efficient market. Conversely, an inefficient market is one in which there is limited information available for making rational investment decisions. Efficient mark Efficient market theory Proponents of the efficient market theory believe that a share's current price accurately reflects what investors know about the share, and further that you can't predict a share's future price based on its past performance. Their conclusion, which is contested by other experts, is that it's not possible for an individual or institutional investor to outperform the market as a whole. Index funds, which are designed to match, rather than beat, the performance of a particular market segment, are in part an outgrowth of efficient market theory. Emerging market Countries in the process of building market-based economies are broadly referred to as emerging markets, though there are major differences among the countries included in this category. Eurobond Bonds issued outside the borders of a national market. If may or may not be denominated in the issuers national currency. Euroequities Equities underwritten and distributed to investors outside the country of origin of the issuer. European Option A put or call that can be exercised only on its expiration date, and not before it. Ex Means ‘without’ or ‘not inclusive of’. A price so quoted excludes recently declared dividends, rights, or bonus share. Exchange Regulated market place where products are bought and sold through intermediaries, for e.g. a Stock Exchange for securities market products. Expected Return The return an investor might expect on an investment if the same investment were made many times over an extended period. The return is found through the use of mathematical analysis. Extrinsic Value The amount by which the market price of an option exceeds the amount that could be realised if the option were exercised and the underlying commodity liquidated. Face Value The value that appears on the face of the scrip, same as nominal or par value of share/debentures Fair market value Fair market value is the price you would have to pay to buy a particular asset or service on the open market. The concept of fair market value assumes that both buyer and seller are reasonably well informed of market conditions, that neither is under undue pressure to buy or sell, and that neither intends to defraud the other. Federal Reserve System Established in 1913 to stabilize the U.S’s financial system, the Federal Reserve System, sometimes known as the Fed, is the central bank of the U.S. The Federal Reserve System includes 12 regional Federal Reserve banks, 25 Federal Reserve branch banks, all national banks, and some state banks. Member banks must meet the Fed's financial standards. Under the direction of a chairman, a seven-member Federal Reserve Board oversees the system and determines national monetary policy, with the goal of keeping the economy healthy and its currency stable. The Fed's Open Market Committee (FMOC) sets interest rates and establishes credit policies, and the New York Federal Reserve Bank puts those policies into action by buying and selling government securities. Fiduciary A fiduciary is an individual or organization legally responsible for holding or investing assets on behalf of someone else, usually called the beneficiary. The assets must be managed in the best interests of the beneficiary, not for the personal gain of the fiduciary. However, the term acting responsibly can be broadly interpreted, and may mean preserving principal to some fiduciaries and producing reasonable growth to others. Executors, trustees, guardians, directors of listed companies and agents with powers of attorney are examples of individuals with fiduciary responsibility. Financial Accounting Standards Board (FASB) In United States, this independent, self-regulatory board establishes and interprets generally accepted accounting principles (GAAP). It operates under the principle that the economy in general and the financial services industry in particular work smoothly when credible, concise, and understandable financial information is available. The FASB periodically revises its rules to make sure corporations fully account for different kinds of income, avoid shifting income from one period to another, and properly categorize their income. Financial planner A financial planner evaluates your personal finances and helps you develop a financial plan to meet both your immediate needs and your long-term goals. In India, this service is at a nascent stage of development. In U.S., some, but not all, planners are certified by professional organizations. Among the most respected credentials are Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), and Personal Financial Specialist (PFS), a Certified Public Accountant (CPA) who has passed an exam on financial planning. Fee-only financial planners charge by the hour or a flat fee for a specific service. They don't sell products or earn sales commissions. Other planners don't charge a fee but earn commissions on the products they sell. Still others both charge fees and earn commissions but may offset their fees by the amount of commission they earn. Financial pyramid Many investors structure their portfolios in the form of a financial pyramid. The base of the pyramid is made up of nonvolatile, liquid assets. The next level includes securities that provide both income and long-term capital growth. At the third level, a smaller portion of the portfolio is allocated to more volatile investments with higher potential returns and greater risk. And at the top level, the smallest percentage of the overall portfolio is invested in ventures that have the highest potential return but also pose the greatest investment risk. This strategic approach gives you the potential to realize significant returns if some of your speculative investments succeed without risking more than you can afford to lose. It's entirely different from a pyramid scheme, a scam that uses new investor money to pay large returns and repayment, to earlier investors. Float In investment terms, a float is the number of shares a company has issued and are available for trading. If there is a small float, share prices tend to be volatile, since one large trade could significantly affect the availability and therefore the price of these shares. If there is a large float, share prices tend to be more stable. In banking, the float is the period that elapses from the time you write a check until it clears your account. The same term also refers to the time lag between your depositing a check in the bank and the day the funds become available for use. For example, if you deposit a check on Monday, and you can withdraw the cash on Friday, the float is four days. When you write a check, the float works to your advantage. When you deposit a check, the float works to the bank's advantage. In a credit account, float is the amount of time between the date you charge a purchase and the date the payment is due. Floating an issue When a company offers new shares or bonds to the public, making the offering is called floating an issue. In the case of shares, the securities may be an initial public offering (IPO) or additional issues of a company that has already gone public. In that case, they're called secondary offerings. Floating rate A debt security whose interest rate is adjusted on a regular schedule to reflect changing money market rates is said to have a floating rate. These securities, are offered at a rate lower than comparable fixed-rate notes but help protect against declining prices in a period of rising interest rates. When a nation's currency moves up and down in value against the currency of another nation, the relationship between the two is described as a floating exchange rate. For example, the U.S. dollar is worth more Japanese yen in some periods and less in others. That movement is usually the result of what's happening in the economy of each of the nations and in the economies of their trading partners. A fixed exchange rate, on the other hand, means that two (or more) currencies, such as the U.S. dollar and the Bermuda dollar, always have the same relative value. Floating Stock The paid up equity capital of a company which normally participates in day to day trading. Foreign exchange (FOREX) Any type of financial instrument that is used to make payments between countries is considered foreign exchange. The list of instruments includes electronic transactions, paper currency, checks, and signed, written orders called bills of exchange. Forward Contract An agreement for the future delivery of the underlying commodity or security at a specified price at the end of a designated period of time. Unlike a future contract, a forward contract is traded over the counter and its terms are negotiated individually. There is no clearing house for forward contracts, and the secondary market may be non-existent or thin. Forward price-to-earnings (forward P/E) Share analysts calculate a forward price-to-earnings ratio (forward P/E) by dividing a share's current price by estimated future earnings per share. Some forward P/Es are calculated based on estimated earnings for the next four quarters. Others use actual earnings from the past two quarters with estimated earnings for the next two. Unlike a P/E ratio based exclusively on past performance, sometimes described as a trailing P/E, a forward P/E may help you evaluate the current price of a share in relation to what you can reasonably expect to happen in the near future. For example, a share whose current price seems high in relation to the last year's earnings may seem more reasonably priced if earnings estimates are higher for the next year. On the other hand, the expectation of lower future earnings may make the current price higher than you are willing to pay. Front-end load When you purchase shares or units of a mutual fund, you may have to pay a load, or sales charge. If you pay the charge when you make the purchase, it's called a front-end load. Frontrunning If you buy or sell a share, share option, or other investment because you know that an upcoming transaction is likely to affect the market price of the investment, you're frontrunning. Because frontrunning, sometimes known as forward trading, relies on information that isn't available to the general public, it's considered unethical and is illegal, in certain circumstances Fundamental analysis Fundamental analysis is one of two primary methods for analyzing a share's potential return. It involves assessing a corporation's financial history and current standing, including earnings, sales, and management, as well as the strength of the corporation's products or services in the marketplace. A fundamental analyst uses these details as well as the current state of the economy to assess whether the share is likely to increase or decrease in value in the short- and long-term, and whether its current price is an accurate reflection of its value. Fungible When two or more things are interchangeable, can be substituted for each other, or are of equal value, they are described as fungible. For example, shares issued by the same company are fungible at any point in time since they have the same value no matter who owns them. On the other hand, multiple classes of the same share may not be fungible. For example, in some markets citizens of the country are eligible to buy one class of share and non-citizens a different class. Typically, the shares have different prices and may not be exchanged for each other. Futures Contract An exchange traded contract generally calling for delivery of a specified amount of a particular financial instrument at a fixed date in the future. Contracts are highly standardized and traders need only agree on the price and number of contracts traded. Global depositary receipt (GDR) In order to raise money in more than one market, some companies sell their share on markets in countries other than the one where they have their headquarters. To do it, they issue global depositary receipts (GDRs) in the currency of the country where the share is trading. For example, a Mexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets without having to deal with currency conversion and other complications of overseas investing. However, since GDRs are frequently offered by newer or less-known companies, the prices are often volatile and the shares may be thinly traded. That makes buying GDRs riskier than buying domestic shares. Global fund Global, or world, mutual funds invest in U.S. securities as well as those of other countries. In that way, they differ from international funds, which invest only in non-U.S. markets. Although global funds may keep as much as 75% of their assets invested in the U.S., fund managers are able to take advantage of opportunities they see in a variety of overseas markets. Go long When you go long, you buy a security or other financial product that you intend to hold for a period of time or one that you expect to increase in value so that you can sell it at a profit. Going long is the opposite of going short, which means you sell an investment, usually because you expect it to decline in value in the near future. If you're buying and selling futures contracts, you go long when you enter a contract to buy and you go short when you enter a contract to sell. Go short When you go short, you either enter a futures contract to sell, or you borrow shares, sell the borrowed shares at their current market price, and pocket the money, minus commission. The reason you go short with a share, which is also known as selling short, is because you expect the share's price to decline in the near future. If it does, you can buy shares at the lower price and return the number you borrowed, plus interest/charges. The amount you make on the transaction depends on the difference between the price at which you sold and the price at which you can repurchase the shares, plus the amount of time you have to wait for the price to drop. However, there is always the risk that the price will remain stable or even increase, which could mean losing money on the transaction. Gold standard The gold standard is a monetary system that measures the relative value of a currency against a specific amount of gold. Developed in England in the early 18th century, when the scientist Sir Isaac Newton was Master of the English Mint, the gold standard was used throughout the world by the late 19th century. The U.S. was on the gold standard until 1971, when it stopped redeeming its paper currency for gold. Golden Share A share with special voting rights that give it peculiar power vis-à-vis other share. The term applies particularly to share retained by a government after privatisation. If a government wishes to sell off a company in a sensitive industry (e.g. defense) and yet retain control, it can hold on to a golden share. This might give it the right to veto any takeover bid. Good will When analysts estimate the value of a company, they look first at the value of its tangible assets, or what it owns. But they also look at its good will, a term that covers the intangible value such as, its reputation, its satisfied clients, and its productive work force — factors that are considered evidence of the corporation's potential to produce strong earnings. Gross domestic product (GDP) The total value of all the goods and services produced within a country's borders is described as its gross domestic product. When that figure is adjusted for inflation, it is called the real gross domestic product, and it's generally used to measure the growth of the country's economy. Guaranteed Coupon (GTD) Bonds issued by a subsidiary corporation and guaranteed as to principal and/or interest by the parent corporation. Hedging Hedging is an investment technique designed to offset, or neutralize, a potential loss on one investment by purchasing a second investment that you expect to perform in the opposite way. For example, you might sell short one share, expecting its price to drop. At the same time, you might buy a call option on the same share as insurance against a large increase in value. High-yield bond Low-rated bonds pose greater risk of default than higher-rated bonds. As a result, their issuers must pay investors a higher rate of interest to offset that risk, and the higher rate, in turn, provides a higher yield. Bonds that fit that description are called high-yield bonds, but may also be described, somewhat more graphically, as junk bonds. Inefficient market When a market is described as inefficient, it means that investors do not know enough about the securities in that market to make informed decisions about what to buy or the price to pay. There can be inefficient markets for shares in new companies, particularly those in new industries. An inefficient market is the opposite of an efficient one, where it's assumed that investors know everything there is to know about the securities they are buying. Inflation Inflation is a persistent increase in prices. Hyperinflation, when prices rise by 100% or more annually, can destroy economic, and sometimes political, stability by driving the price of necessities higher than people can afford. Inflation-adjusted return Inflation-adjusted return is what you earn on an investment after accounting for the impact of inflation. For example, if you earn 7% on a bond during a period when the inflation rate averages 3%, your inflation-adjusted return is 4%. Inflation-adjusted return is also known as real return. Since inflation diminishes the buying power of your money, it's important that the rate of return on your overall investment portfolio be greater than the rate of inflation. That way, your money grows rather than shrinks in value over time. Initial Public Offering (IPO) The first offering to the public of common stock, e.g. of a former privately-held company or a portion of the common stock of the hitherto wholly-owned subsidiary. Internal Rate of Return (IRR) The rate at which future cash flows must be discounted in order to equal the cost of the investment. International Monetary Fund (IMF) The IMF was set up as a result of the United Nations Bretton Woods Agreement of 1944 to help stabilize world currencies, lower trade barriers, and help developing nations pay their debts. The IMF's activities are funded by developed nations and are sometimes the subject of intense criticism, either by the nations the IMF is designed to help, the nations footing the bill, or both. In-the-Money A call option is said to be in the money when it has a strike price below the current price of the underlying commodity or security on which the option has been written. Likewise when a put option has a strike price above the current price it is said to be in the money. Intrinsic value A company’s intrinsic value, or underlying value, is used to calculate its projected worth. You determine intrinsic value by subtracting a company’s long-term debt from its anticipated future assets, including profits, the potential for increased efficiency, and the sale of new company share. Some experts also calculate intrinsic value by dividing the company’s estimated future earnings by the number of its existing shares. This method weighs the current price of a share against its future worth. Critics of using intrinsic worth as a way to evaluate potential investments point out that all of the numbers except debt are hypothetical. Investment objective An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want to provide a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying shares. ISIN (International Securities Identification Number) is a unique identification number for a security. Laddering Laddering is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments, such as intermediate-term bonds or certificates of deposit (CDs). For example, instead of buying one Rs.15,000 CD with a three-year term, you buy three Rs.5,000 CDs maturing one year apart. As each CD comes due, you can reinvest the principal to extend the pattern, use the money for a preplanned purchase, or have it available to take advantage of a new investment opportunity or cover unexpected expenses. And if you ladder, you can avoid having to liquidate a large bond investment if you need just some of the money or reinvest your entire principal at a time when interest rates may be low. Leverage Leverage is an investment technique in which you use a small amount of your own money to make an investment of much larger value. In that way, leverage gives you significant financial power. For example, if you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash. And if you sell the property for more than you borrowed, the profit is entirely yours. Buying share on margin is a type of leveraging, as is buying a futures contract or an option. Leveraging can be very risky, however, if the investment doesn't perform as you anticipate. At the very least, you risk losing your own money and must repay any money you borrowed. And with some leveraged investments, you could be responsible for even larger losses if the value of the underlying product drops significantly. Leveraged buyout A leveraged buyout occurs when a group of investors using borrowed money or other kinds of debt, takes control of a company. Libor – London Interbank Offer Rate Often used as a basis for pricing Euroloans. Libor represents the interest rate at which first class banks in London are prepared to offer dollar deposits to other first class banks. There are a number of similar rates like HIBOR (Hongkong Interbank Offer Rate); SIBOR (Singapore Interbank Offer Rate); TIBOR (Toronto Interbank Offer Rate). Liquidity If you can convert an investment easily and quickly to cash, with little or no loss of value, you have liquidity. The term is sometimes used to describe investments you can buy or sell easily. For example, you could sell several hundred shares of a blue chip share by simply calling your broker, something that might not be possible if you wanted to sell less traded shares or real estate. The difference between cash-equivalent investments and securities like shares and bonds, however, is that securities constantly fluctuate in value. So while you may be able to sell them quickly, you might get back less than you paid to buy them if you sell when the price is down. Make a market A dealer who specializes in a specific security, such as a bond or share, is said to make a market in the security. That means the dealer is ready to buy or sell the bond, or at least one round lot of the share, at its publicly quoted price. Other dealers regularly turn to a market maker, if there is one, when they want to buy or sell that particular security. The overall effect of having multiple marketmakers in a particular security, which is typical of U.S. electronic markets such as the Nasdaq Stock Market (Nasdaq), is greater liquidity in the marketplace and, ideally, more competitive prices. Margin An advance payment of a portion of the value of a transaction. If you buy on margin, you put up some of the cost of the purchase and borrow the rest. If the value of the margin account drops below the maintenance requirement, you must, in most cases, add cash or securities to the account to bring its value back to the minimum. Mark to the market When an investment is marked to the market, its value is adjusted to reflect the current market price. In the case of mutual funds, for example, marking to the market means that a fund's net asset value (NAV) is recalculated each day based on the closing prices of the fund's underlying investments. With a margin account, the value of the investments in the account is recalculated continuously to determine whether it meets margin requirements. If that value falls below the minimum specified, you get a margin call and must add assets to your account to return it to the required level. Market Traditionally, a securities market has been a place-such as the Bombay Stock Exchange (BSE) — where securities are bought and sold. But in the age of electronic trading, the term market is also used to describe the organized activity of buying and selling securities, even if those transactions do not occur at a specific location. Market capitalization Market capitalization is a measure of the value of a company, calculated by multiplying the number of existing shares, or shares the company has issued, by the current price per share. For example, a company with 100 million shares of stock with a current market value of $25 a share would have a market capitalization of $2.5 billion. Market capitalization, or cap, is one of the criteria investors use to choose stocks, which are often categorized as small-, mid-, and large-cap. Generally, large-cap stocks are considered the least volatile, and small caps the most volatile. The term market capitalization is sometimes used interchangeably with market value. Market maker A dealer in a market, who is prepared to buy or sell a specific security — such as a bond or at least one round lot of a share — at its publicly quoted price, is called a market maker. Market order When you tell your broker to buy or sell a security at the current market price, you are giving a market order. The broker initiates the trade immediately, and the transaction is usually completed within minutes. Market orders, which account for the majority of trades, differ from limit orders to buy or sell, in which a price is specified. Market price A security's market price is the price at which it is currently selling on the exchange, market, or electronic communications network (ECN) where it is traded. Market timing This trading strategy aims for quick profits by taking advantage of short-term changes in securities prices. Market timers, sometimes known as day traders, trade electronically, trying to buy low and sell high by taking advantage of second-to-second or minute-to-minute changes in the financial marketplace, such as a forecast on interest rates or a sell-off in a particular market sector. Most experts agree that day trading is especially risky for individual investors because there is no way to predict changes accurately, and a small miscalculation can result in large losses. Further, there's no guarantee that an online transaction can be made quickly enough to lock in gains or prevent losses, especially in a volatile market. Market value The market value of a share or bond is the current price at which that security is trading. In a more general sense, if an item has not been priced for sale, its fair market value is the amount a buyer and seller agree upon, assuming that both know what the item is worth and neither is being forced to complete the transaction. Matched Transaction A check is carried out on the computer to find out whether purchases and sales are reported by the member match. The transactions thus compared are called matched transactions. Maturity date The date on which a loan, bond, or debenture becomes due for payment. Merchant Banker A financial institution that specialises in securities market activities such as underwriting etc. and in advisory activities such as mergers and acquisitions. Merchant Banking also typically refers to acquisition of equity stakes in companies either for strategic or temporary investment purpose. Merger When two or more independent companies consolidate, or pool, their businesses by generally exchanging equity shares , and the resulting single company continues to function, the consolidation is described as a merger. A merger is different from an acquisition, in which one company purchases, or takes over, the assets of another. A merger is typically a tax-free transaction, meaning that shareholders owe no capital gains tax on the stock that is exchanged. In contrast, in an acquisition the owners or shareholders of the acquired company usually realize capital gains on the sale of their stock. Despite their differences, mergers and acquisitions are invariably linked together, often simply described as M&As. Micro-cap stock A micro-cap stock is one with a smaller market capitalization — sometimes much smaller — than stocks described as small-caps. (Market capitalization is figured by multiplying the current market value by the number of existing shares.) The cut-off for deciding that a share belongs in one category or the other is arbitrary. Micro-caps are not only the smallest of the publicly traded companies, but they are also the most volatile, in part because they lack the reserves that may allow a larger company to weather rough periods. And, because there are generally relatively few shares of a micro-cap company in the market, a large transaction may affect the share's price more noticeably than a similar transaction would affect the share price of a larger company that had many more shares in the market. Mid-capitalization (mid-cap) stock A mid-cap share is smaller than the large-caps but larger than small-caps. Investors buy mid-cap stocks for their growth potential and their prices, which are typically lower than for large-caps. At the same time, these companies tend to be less volatile than small-caps, in part because they have more resources with which to weather an economic downturn. Mutual funds that invest in this type of stock are known as mid-cap funds. Minority interest All shareholders whose combined shares represent less than half of the total existing shares issued by a company have a minority interest in that corporation. In fact, in many cases, the combined holdings of the minority shareholders are considerably less than half. In either case, in India it is difficult for minority shareholders, under normal circumstances, to have any real influence on corporate policy. Modern portfolio theory This approach to making investment decisions focuses on potential return in relation to potential risk. The strategy is to evaluate and select individual securities as part of an overall portfolio rather than strictly for their own investment qualities. Asset allocation is a primary tactic, according to theory practitioners, because it allows investors to create portfolios to get the strongest possible return without assuming a greater level of risk than they are comfortable with. Another tenet of portfolio theory is that investors must be rewarded (in terms of a greater return) for assuming greater risk. Otherwise, there would be little motivation to make investments that might result in a loss of principal. Momentum investing Momentum investing is essentially the opposite of contrarian investing. A momentum investor focuses on stocks that are rising in price, and avoids stocks that are falling in price or that are perceived to be undervalued. The logic is that when a pattern of growth has been established, the growth will continue. Money supply The money supply is the total amount of liquid or near-liquid assets in the economy. In U.S., the Federal Reserve Board, or the Fed, manages the money supply, trying to prevent either recession or inflation by changing the amount of money in circulation. The Fed increases the money supply by buying government bonds in the open market, and decreases the supply by selling these securities. In addition, the Fed can adjust the reserves that banks must maintain, and increase or decrease the rate at which banks can borrow money. This fluctuation in rates gets passed along to consumers and investors as changes in interest rates. The money supply, in U.S., is grouped into four classes of assets, called money aggregates. The narrowest, called M1, includes currency and checking deposits. M2 includes M1, plus assets in money market accounts and small time deposits. M3, also called broad money, includes M2, plus assets in large time deposits, eurodollars, and institution-only money market funds. The biggest group, L, includes M3, plus assets such as private holdings of U.S. savings bonds, short-term U.S. Treasury bills, and commercial paper. Monte Carlo When used to analyze the return that an investment portfolio is capable of producing, a Monte Carlo simulation generates thousands of probable investment performance outcomes, called scenarios, that might occur in the future. The simulation incorporates economic data such as a range of potential interest rates, inflation rates, tax rates, and so on, combined in random order. As a result, it's designed to account for the uncertainty and performance variation that's always present in financial markets. In one specific use, financial analysts employ Monte Carlo simulations to project whether or not the investments you are making in your retirement accounts are likely to produce the return you need to meet your long-term goals. Moody's Investors Service, Inc. Moody's is a financial services company best known for rating bonds, common stocks, and other investments, including commercial paper, municipal short-term bonds, preferred stocks, and annuity contracts. Its bond rating system, which assigns a grade from Aaa through C3 based on the financial condition of the issuer, has become a world standard. Morgan Stanley Capital International Indexes These indexes, computed by the investment firm Morgan Stanley's Capital International group (MSCI), track stocks traded in 45 international stock markets, and are considered the benchmarks for international stock investments and mutual fund portfolios. The strong performance of the Europe and Australasia Far East Equity Index (EAFE) between 1982 and 1996 in relation to Standard & Poor's 500-stock Index (S&P 500) is often credited with generating increased U.S. interest in investing in overseas markets. Morningstar, Inc. Morningstar, Inc., offers a broad range of investment information, research, and analysis online, in software products, and in print. For example, the company rates open- and closed-end mutual funds using a system of one to five stars, with five being the highest rating. The Morningstar system is a risk-adjusted rating that brings performance, or return, and risk together into one evaluation. In addition, Morningstar produces analytical reports on the funds it rates, as well as on stocks sold in U.S. and international markets, and on variable annuities. Mortgage A mortgage is an agreement you sign when you borrow money to buy real estate. In exchange for the loan, you give the lender, or mortgagee, a claim against the property, which serves as security for the mortgage. As you repay the loan, you build equity in the property, and when you make the final payment, the mortgage ends and the property is entirely yours. However, if you fail to meet the terms of the mortgage, such as not repaying principal and interest on schedule, the lender may foreclose, or take control of the property, and may even sell it to recover the amount due. Moving average A moving average of securities prices is an average that is recomputed regularly by adding the most recent price and dropping the oldest one. For example, if you looked at a 365-day moving average on the morning of June 30, the most recent price to be included would be for June 29, and the oldest one would be for June 30 of the previous year. The next day, the most recent price would be for June 30, and the oldest one for the previous July 1. Thus the average is moving one. Multiple A stock's multiple is its price-to-earnings ratio (P/E). It's figured by dividing the market price of the stock by its earnings — either the actual earnings for the past four quarters (called a trailing P/E) or actual figures for the past two quarters plus an analyst's projection for the next two (called a forward P/E). Investors use the multiple as a way to assess whether the price they are paying for the stock is justified by its earnings potential. The higher the multiple they are willing to accept, the higher their expectations for the stock. However, some experts point out that when the multiple is too high, it's almost impossible for the stock to meet investors' expectations. Mutual fund A mutual fund is a professionally managed investment that sells units to investors and pools the capital it raises to purchase shares, bonds, or money market securities, depending on the investment objectives of the fund. The fund will also buy, subject to the conditions of the scheme, any unit an investor wishes to redeem, or sell back. All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges. Details of a fund's objective, management, and expenses are spelled out in its prospectus. Naked option When you write, or sell, a call option but don't own the underlying instrument, such as a share, the option you're writing is described as naked. Because you collect a premium when you sell the option, you can make a profit if the underlying instrument performs as you expect, and the option isn't exercised. The risk you run, however, is that the option holder will exercise the option, and you'll have to buy the instrument at the market price in order to meet your obligation to sell. If that price has moved in the opposite direction from the one you expected — specifically if it has gone up instead of remaining steady or going down — buying could cost you a substantial amount of money, and you could have a net loss. NASDAQ NASDAQ, or the National Association of Securities Dealers Automated Quotation system, is a computerized stock trading network that allows brokers to get price quotations for stocks being traded electronically or sold on the floor of a stock exchange. Nasdaq Composite Index This index tracks the prices of all of the securities traded on the Nasdaq Stock Market (Nasdaq), which in one way makes it a broader measure of market activity than the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500-stock Index (S&P 500). On the other hand, since so many computer, biotechnology, and telecommunications companies are listed on the Nasdaq, the movement of the index is heavily influenced by what's happening in those sectors. The index is market capitalization weighted, which means that companies whose market values are higher exert greater influence on the index. Market capitalization, or value, is computed by multiplying the total number of existing shares by the most recent sales price. The index is updated throughout the trading day. Nasdaq Stock Market (Nasdaq) The Nasdaq Stock Market is the world's oldest and largest electronic stock market. It has two divisions, the National Market and the Small-Cap Market. The most active stock market in the nation, the Nasdaq lists many emerging companies as well as some industry giants, especially in computers, technology, and telecommunications. Stocks traded on the National Market must meet specific listing criteria for market capitalization and trading activity. Listing requirements for the Small-Cap Market, which specializes in smaller, newer companies, are less stringent. National Market System (NMS) The NMS links all the major stock markets in the U.S. and was developed to foster competition among them. Its electronic Intermarket Trading System (ITS) displays current bid and ask prices for stocks on each of those markets so that brokers can execute trades on any market where a stock is listed. Brokers can often get a better price or a faster turnaround on one market than on another, depending on the volume of trading or the size of the trade. Net asset value (NAV) The NAV is the rupee value of one unit of a mutual fund. It is calculated by totaling the value of all the fund's holdings and dividing by the number of outstanding units. That means the NAV changes regularly, though day-to-day changes are usually small. Net change Each trading day, the difference between the closing price of a stock, bond, or mutual fund, or the last price of a commodity contract, and the closing price on the previous day is reported as net change, sometimes simply as change. When a stock has gained in value, the positive net change is expressed with a plus sign and a number, such as +1, meaning that the price was up 1 rupee from the previous trading day. On days that a stock falls, the negative net change is expressed with a minus sign and a number, such as -1, meaning that the price was a rupee lower. Net worth A companies net worth, also known as shareholder's equity, is figured by adding retained earnings, which is the amount left after dividends are paid, to the money in the companies capital accounts, and then subtracting all of its short- and long-term debt. To figure your own net worth, you add the value of the assets you own (securities, personal property, real estate) and then subtract your liabilities, or what you owe in loans and other obligations. If your assets are larger than your liabilities, you have a positive net worth. But if your liabilities outweigh your assets, you have a negative net worth. New issue When a share or bond is offered for sale for the first time, it's considered a new issue. New issues can be the result of an initial public offering (IPO), when a private company goes public, or they can be additional, or secondary, offerings from a company that's already public. For example, a public company may sell bonds from time to time to raise capital. Each time a new bond is offered, it's considered a new issue. New York Stock Exchange (NYSE) The NYSE is the largest equity exchange in the world. Founded in 1792, it adopted its constitution in 1817 and its current name in 1863. The NYSE has a global market capitalization of over $15 trillion. Common and preferred stock, bonds, warrants, and rights are all traded on the NYSE, which is also known as the Big Board. New York Stock Exchange Composite Index This index tracks the market value of all the common stocks listed on the New York Stock Exchange (NYSE). The index is market capitalization weighted, which means that companies with the greatest market value, based on their most recent market prices multiplied by the number of their existing shares, have a greater impact on the movement of the index than companies with fewer shares or lower prices. Odd lot The purchase or sale of shares in quantities other than their marketable lot is considered an odd lot. In the physical segment, if you buy or sell odd lots, you may pay a slightly higher commission than someone trading normal lots, generally in multiples of 100 or 50 shares. With the introduction of electronic trading in dematerialized form the concept of Odd lot has become redundant as you can buy and sell in any quantity. Offering price When a security, such as a shares, is offered for sale to the public for the first time, or a publicly traded company issues new shares, the initial price per share fixed is known as the offering price or the public offering price. When the share begins to trade, its market price may be higher or lower than the offering price. Online brokerage firm To buy and sell securities over the Internet, you can set up an account with an online brokerage firm. The firm executes your orders and confirms them electronically, though you may have to mail the firm a check to settle your transaction. Online trading If you trade online, you use a computer and an Internet connection to place your buy and sell orders with an online brokerage firm. While the orders you give online are executed while the markets are open, you may have the option of placing orders at your convenience, outside of normal trading hours. Open Order An order to buy and sell a security that remains in effect until it is either cancelled by the customer or executed. Open outcry When someone who shouts an offer to buy and someone who shouts an order to sell name the same price, a deal is struck, and the trade is recorded. This interaction is described as open outcry. Prior to introduction of online trading, the Indian market had an open outcry system. Opening Price The first transaction in each security or commodity when trading begins for the day occurs at what's known as its opening, or opening price. Sometimes the opening price on one day is the same as the closing price the night before. But that's not always the case Operating Income Net Sales less cost of sales, selling expenses, administrative expenses and depreciation is operating income. The pre-tax income from normal operations. Option Buying an option gives you the right to buy or sell a specific financial instrument at a specific price, called the strike price, during a preset period of time. In the U.S., you can buy or sell options on individual stocks, stock indexes, futures contracts, currencies, and Treasury security interest rates. If you buy an option to buy, which is known as a call, you pay a one-time premium that's a fraction of the cost of the actual transaction. For example, you might buy a call option giving you the right to buy 100 shares of a particular stock at a strike price of Rs.80 a share when that stock is trading at Rs.75 a share. If the price goes higher than the strike price, you can exercise the option and buy the stock, or trade the option to someone else at a profit. If the stock price doesn't go higher than the strike price, you don't exercise the option, and it expires. Your only cost is the money that you paid for the premium. Similarly, you may buy a put option, which gives you the right to sell the underlying instrument to the person who sold the option. In this case, you exercise the option if the market price drops below the strike price. In contrast, if you sell a put or call option, you collect a premium and must be prepared to buy or sell the underlying instrument if the investor who bought the option decides to exercise it. Outstanding shares In the U.S., the number of shares that a corporation has issued are described as its outstanding or existing shares. A corporation's market capitalization is figured by multiplying its outstanding shares by the market price of a share. The number of outstanding shares is also used to derive all of the financial information that's provided on a per-share basis, such as earnings per share or sales per share. Overbought When a share or a securities market as a whole, rises so steeply in price that technical analysts think that buyers are unlikely to push the price up further, the analysts consider the stock or the market to be overbought. For these analysts, an overbought market is a warning sign that a correction — or rapid price drop — is likely to occur. Oversold A share, a market sector, or an entire market may be described as oversold if it drops suddenly and dramatically in price, despite the fact that the country's economic outlook remains positive. For technical analysts, an oversold market is poised for a price rise, since there would be few sellers left to push the price down further. Paid up Capital The amount of capital, both equity and preference, paid up by the shareholders against the capital subscribed to by them. Paper profit (or loss) If you own a security or other investment that increases in value, but you don't sell it, the gain is your paper profit, or unrealized gain. But if you sell at the higher value, your paper profit becomes an actual profit, or realized gain. The same relationship applies if the security has lost value. Your paper loss isn't realized until you sell. Par value Par value is the face value, or named value, of a share or bond. Pari Passu A term used to describe new issue of securities which have same rights as similar issues already in existence. Pay In/Pay Out The days on which the members of a Stock Exchange pay or receive the amounts due to them are called pay in or pay out days respectively. Payout ratio A payout ratio is the percentage of a company's net earnings that is distributed to its shareholders as dividends. Penny stock Stocks in U.S., that trade for less than $1 a share are often described as penny stocks. Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next, reflecting the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace. While some penny stocks may produce big returns over the long term, many turn out to be worthless. Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks. However, penny stocks are sometimes marketed aggressively to unsuspecting investors. Portfolio If you own more than one security, you have an investment portfolio. You build the portfolio by buying additional shares, bonds, mutual funds, or other investments. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes enough different types, or classes, of securities so that at least some of them may produce strong returns in any economic climate. Positive yield curve When the interest rate on a long-term bond is higher than the interest rate on a shorter-term bond of the same quality, the relationship between the two, called the yield curve, is positive. That's the norm, since if you're tying up your money for an extended period, you want to earn more than someone who is investing for just a few months. When the reverse is true, and interest rates on short-term investments are higher than the rates on long-term investments, the yield is negative, or inverted. That typically occurs if inflation spikes after a period of relatively stable growth or if the economic outlook is uncertain. Power of attorney A power of attorney is a written document that gives someone the authority to act for you or on your behalf. Preferred Shares/Preference shares Owners of this kind of shares are entitled to a fixed dividend to be paid regularly before dividend can be paid on equity shares. They also exercise claims to assets, in the event of liquidation, senior to holders of equity shares but junior to bondholders. Holders of preference shares normally do not have a voice in management. Premium When used in connection with investments, the term premium usually describes the amount you pay for a security over its stated value, or the amount you collect over the stated value when you sell. For example, if you sell a bond with a face value of $1,000 for $1,200, you collect a premium of $200. In a more general sense, a security or group of securities that command higher prices than others are said to sell at a premium, either to comparable securities or to the market as a whole. A premium is also the amount you pay to purchase certain financial products, such as options, annuities, or insurance policies. Present value The present value of a future payment, sometimes called the time value of money, is what the money is worth now in relation to what you anticipate it will be worth in the future based on the earnings you expect. For example, if you're earning 10% annual interest, Rs.1,000 is the present value of the Rs.1,100 you expect to have a year from now. The concept of present value is useful in calculating how much you need to invest now in order to meet a certain future goal, such as buying a home. Many personal investment handbooks and online financial services sites provide tables and other tools to help you calculate these amounts based on different interest rates. Inflation has the opposite effect from interest on the present value of money, accounting for loss of value rather than increase in value. For example, in an economy with 5% annual inflation, Rs.100 is the present value of Rs.95 next year. Price-to-book ratio Some financial analysts use price-to-book ratios to identify shares they consider to be overvalued or undervalued. You figure this ratio by dividing a shares market price by its book value per share. Other analysts argue that book value reveals very little about a company's financial situation or its prospects for future performance. Price-to-cash flow You find a company's price-to-cash flow ratio by dividing the market price of its share by its cash receipts minus its cash payments over a given period of time, such as a year. Some institutional investors prefer price-to-cash flow over price-to-earnings as a gauge of a company's value. They believe that by focusing on cash flow, they can better assess the risks that may result from the company's use of leverage, or borrowed money. Price-to-earnings ratio (P/E) The P/E is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. If earnings falter, there is usually a sell-off, which drives the price down. But if the company is successful, the share price and the P/E can climb even higher. Similarly, a low P/E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential or, conversely, a clue that the market considers the company a poor investment risk. Stocks with higher P/Es, which are typical of companies that are expected to grow rapidly in value, are often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations. The P/E can be calculated two ways. A trailing P/E, the figure reported in newspaper stock tables, generally uses earnings for the last four quarters or financial year. A forward P/E generally uses earnings for the past two quarters and an analyst's projection for the coming two. Price-to-growth flow (P/GF) Price-to-growth flow is a method of stock evaluation that considers money spent on research and development (R&D) as an important factor in assessing a technology company's value and potential for growth. Proponents of this view, particularly analysts at the California Technology Stock Letter, maintain that a company's potential for growth through research and development can compensate for its having low (or no, or negative) earnings per share because R&D can lead to profits in the future. According to these analysts, P/GF can be a more appropriate gauge for assessing whether to invest in technology companies than traditional measures such as price-to-earnings ratio (P/E). To calculate a company's growth flow, you add its R&D spending per share to its earnings per share, and then divide its current stock price by this sum. Price-to-sales ratio A price-to-sales ratio, or a stock's market price per share divided by the revenue generated by sales of the company's products and services per share, may sometimes identify companies that are undervalued or overvalued within a particular industry or market sector. For example, a corporation with sales per share of Rs.28 and a share price of Rs.92 would have a price-to-sales ratio of 3.29, while a different stock with the same sales per share but a share price of Rs.45 would have a ratio of 1.61. Some financial analysts and money managers suggest that, since sales figures are less easy to manipulate than either earnings or book value, the price-to-sales ratio is a more reliable indicator of how the company is doing and whether you are likely to profit from buying its shares. Other analysts believe that steady growth in sales over the past several years is a more valuable indicator of a good investment than the current price-to-sales ratio. Primary market If you buy shares, bonds, futures contracts, or options when they are initially offered for sale, and the money you spend goes to the issuer, you are buying in the primary market. In contrast, if you buy a security that's already on the market, and the amount you pay goes to an investor who is selling the security, you're buying in the secondary market. Profit margin A company's profit margin is a ratio derived by dividing its net earnings, after taxes, by its gross earnings minus certain expenses. Profit margin is a way of measuring how well a company is doing, regardless of size. Profit margins can vary greatly from one industry to another, so it can be difficult to make valid comparisons among companies unless they are in the same sector of the economy. Profit taking Profit taking is the sale of securities after a rapid price increase to cash in on gains. Profit taking sometimes causes a temporary market downturn after a period of rising prices as investors sell off shares to lock in their gains. Program trading Normally used by institutional investors and arbitrageurs in U.S., program trading is the purchase or sale of a basket, or group, of 15 or more stocks with the combined value of $1 million at the same time. In some cases, programmed trades are triggered automatically when prices hit predetermined levels. Large-scale program trading can cause abrupt price changes in a stock or group of stocks and may even have a dramatic effect on the overall market. The New York Stock Exchange (NYSE) and other exchanges have instituted circuit breakers, which halt trading for a period of time when prices fall 10% or more in a single day. Prospectus A prospectus is a formal written offer to sell shares or securities to the public. It is prepared by the Lead Manager to the Issue, making disclosures for investor protection, as per guidelines laid down by Securities and Exchange Board of India (SEBI) and the Companies Act, 1956. The prospectus must be filed with the SEBI and is intended to help investors make an informed investment decision. Put option Buying a put option gives you the right to sell the specific financial instrument underlying the option at a specific price (called the exercise or strike price) to the writer, or seller, of the option before the option expires. You pay the seller a premium for the option, and if you exercise your right to sell, the seller must buy. Selling a put option means you collect a premium at the time of sale. But you are obligated to buy the option's underlying instrument if the option buyer exercises the option. Not surprisingly, buyers and sellers have different goals. Buyers hope that the price of the underlying instrument drops so they can sell at the exercise price, which is higher than the market price. This way, they could offset the price of the premium, and hopefully make a profit as well. Sellers, on the other hand, hope that the price stays the same or increases, so they can keep the premium they've collected and not have to lay out money to buy. Put-call ratio Since investors buy put options when they expect the market to fall, and call options when they expect the market to rise, the relationship of puts to calls, called the put-call ratio, gives analysts a way to measure the relative optimism or pessimism of the marketplace. The customary interpretation is that when puts predominate, and the mood is bearish, stock prices are headed for a tumble. The reverse is assumed to be true when calls are more numerous. The contrarian investor, however, holds just the opposite view. For example, a contrarian believes that by the time investors are concentrating on puts, the worst is already over, and the market is poised to rebound. Qualitative analysis When a securities analyst evaluates intangible factors, such as the integrity and experience of a company's management, the positioning of its products and services, or the appeal of its marketing campaign, that seem likely to influence future performance, the approach is described as qualitative analysis. While this type of evaluation is more subjective than quantitative analysis — which looks at statistical data — advocates of this approach believe that success or failure in the corporate world is often driven as much by qualitative factors as by financial data. Quantitative analysis When a securities analyst focuses on a companies’ financial data in order to project potential future performance, the process is called quantitative analysis. This methodology involves looking at profit-and-loss statements, sales and earnings histories, and the statistical state of the economy rather than at more subjective factors such as management experience, employee attitudes, and brand recognition. While some people feel that quantitative analysis by itself gives an incomplete picture of a company's prospects, advocates tend to believe that numbers tell the whole story. Quarter The financial world splits up its calendar into four quarters, each three months long. If January to March is the first quarter, April to June is the second quarter, and so on, though a company's first quarter does not have to begin in January. In India, the financial year normally starts from first April and ends on last day of March. The listing agreement of the stock exchanges requires all companies to submit a quarterly report on a prescribed format and, publish them as well, in two newspapers, describing their financial results for the quarter. These reports and the predictions that market analysts make about them often have an impact on a company's stock price. 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. Screen In searching for shares that meet certain investment criteria, you may screen a large sample to identify one or more to invest in. You can also establish a screen, which is a set of criteria against which you measure shares (or other investments) to find those that meet your criteria. For example, you might screen for shares that meet a certain environmentally or socially responsible standard, or for those with current price-to-earnings ratios (P/E) less than the current market average. Scripophily Scripophily is the practice of collecting antique shares, bonds, and other securities. The most valuable documents are usually the most beautiful, or those that have some historical significance because of the role the issuing company played in the economy. Sometimes those with distinctive errors are also especially valuable. Secondary market When shares and other securities are bought and sold after the date they are first issued, they trade on what's known as the secondary market. The issuer, or company that offers the share or securities, receives no proceeds from these secondary trades, as it does when it issues these securities the first time in the primary market. In fact, most securities trading occurs in the secondary market through the stock exchanges. Secondary offering The most common form of secondary offering occurs when an investor (usually a company, but sometimes an individual) sells to the public a large block of shares or other securities it has been holding in its portfolio. In a sale of this kind, all of the profits go to the seller rather than the company that issued the securities in the first place. Secondary offerings can also originate with the issuing companies themselves. In these cases, a company issues shares of its stock over and above those sold in its initial public offering (IPO), usually in order to raise additional capital. Sector A sector is a group of shares, often in one industry. The performance of any single share in a sector can be measured against the performance of the sector as a whole, showing where that share ranks in relation to its peers. Mutual funds that concentrate on the shares of a specific sector are known as sector funds. These funds can be more volatile than other funds, reflecting the current strength or weakness of that sector in the overall economy. Technology shares, for example, were hot in the year 2000 but later in the doldrums. Sector fund Also called specialty or specialized funds, sector mutual funds concentrate their investments in a single segment of an industry, such as biotechnology, natural resources, utilities, or regional banks, for example. Sector funds tend to be more volatile and erratic than more broadly diversified funds, and often dominate both the top and bottom of annual mutual fund performance charts. A sector that thrives in one economic climate may wither in another one. Secured bond The issuer of a bond or other debt security may guarantee, or secure, the bond by pledging, or assigning, collateral to investors. If the issuer defaults, the investors may take possession of the collateral. A mortgage-backed bond is an example of a secured security, since the underlying mortgages can be foreclosed and the properties sold to recover some or all of the amount of the bond. Holders of secured bonds are at the top of the pecking order if an issuer misses an interest payment or defaults on repayment of principal. However, there were instances, in India, where the Trustees of a bond failed to carry out their obligations, leaving the investors in a lurch, when defaults in interest payment or repayment of principal occurred. Securities and Exchange Commission (SEC) The SEC is an independent federal agency that oversees and regulates the securities industry in the US, and enforces securities laws. It requires registration of all securities offered in interstate commerce, and of all individuals and firms who sell those securities. Established by Congress in 1934, the SEC sets high standards for disclosure about publicly traded securities, including stocks, bonds, and mutual funds, and works to protect investors from misleading or fraudulent practices, including insider trading. The SEC has also helped to establish a competitive national market system known as Intermarket Trading System (ITS) for trading securities, and set up a system for clearing and settling securities transactions. Securities Investor Protection Corporation (SIPC) The SIPC is a non-profit corporation created by U.S.Congress to insure investors against losses caused by the failure of a brokerage firm. Through the SIPC, assets in your brokerage account are insured up to $500,000 (including up to $100,000 in cash), but only against losses that result from the brokerage firm going bankrupt, not against market losses caused by trading decisions or other causes. All brokers and dealers registered with the Securities and Exchange Commission (SEC) are required to be SIPC members. Security Generally speaking, a security is a financial instrument that shows you own shares in a company , have loaned money to a company, or have rights to future ownership (as with options, rights, or warrants). Traditionally, securities were physical documents, such as share or bond certificates. But with the advent of electronic recordkeeping, paper certificates have increasingly been replaced by electronic documentation. Sell-off A sell-off is a period of intense selling of securities and commodities triggered by declining prices. Sell-offs — sometimes called dumping — usually cause prices to plummet even more sharply. Settlement Date Settlement Period For administrative convenience, a Stock Exchange divides the year into a number of settlement periods so as to enable members to settle their trades. All transactions executed during the settlement period are settled at the end of the settlement period. Settlement Risk The risk that operational difficulties may prevent the settlement of a transaction even when the counter party is able to perform. Shareholder If you own share in a company , you are a shareholder of that company. You're considered a majority shareholder if you (alone or in combination with other shareholders) own more than half the company's shares, which allows you to control the outcome of a company vote. Otherwise, you are considered a minority shareholder. Sharpe ratio One way to compare the relationship of risk and reward in following different investment strategies, such as emphasizing growth or value investments, is to use the Sharpe ratio. To figure the ratio, you subtract the risk-free return from the average return of an investment portfolio made up of these investments over a period of time, and then divide the result by the standard deviation of the return. A strategy with a higher ratio is less risky than one with a lower ratio. This approach is named for William P. Sharpe, who won the Nobel Prize in economics in 1990. Short position If you sell share short and have not yet repurchased shares to replace the ones you borrowed, you are said to have a short position in that share. Similarly, if you buy a futures contract that commits you to sell a commodity at a specific price at some date in the future, you have a short position in that commodity. Soft market A soft market, also known as a buyer's market, is one in which supply exceeds demand. In the financial world, the term often refers to a time in which there are more shares or bonds for sale than there are customers eager to buy them. The lack of interest creates a wide spread, or gap, between the prices being asked for securities and the prices being bid. As a result, trading is often sluggish. Spin-off In a spin-off, a company sets up one of its existing subsidiaries or divisions as a separate company. The motives for spin-offs vary. In some cases, a company may want to refocus its core businesses, shedding those that it sees as unrelated. Or it may want to set up a company to capitalize on investor interest. In other cases, a company may face regulatory hurdles in expanding its business and spin off a unit to be in compliance. Spot market Commodities and foreign currencies are traded for immediate delivery and payment on the spot market, also known as a cash market. The term refers to the fact that the full cash price is paid "on the spot," or within a short period of time. A cash sale, whether arranged in person, over the telephone, or electronically, is the opposite of a forward contract, where delivery and settlement are set for a date in the future, or a futures contract, which is an agreement to trade a commodity for a set price on a specific date in the future. Spot price The spot, or cash, price is the price of commodities and foreign currencies that are being sold for immediate delivery with payment in cash. Spread In the most general sense, a spread is the difference between two similar measures. In the stock market, for example, the spread is the difference between the highest price offered and the lowest price asked. Standard & Poor's (S&P) Standard & Poor's is an investment services company, in U.S., that rates bonds, shares, commercial paper, and insurance companies. It also compiles influential stock market indexes and publishes a broad range of reports, guides, and handbooks on financial topics. The S&P 500-stock Index is one of the key measures of stock market performance and is also the benchmark for a large number of stock index funds. Standard & Poor's 500-stock Index (S&P 500) This benchmark index, of U.S., tracks the performance of 500 widely held large-cap stocks in the industrial, transportation, utility, and financial sectors. This capitalization weighted index, also called a market value weighted index, gives greater weight to stocks with the greatest number of existing shares and highest share prices. That can mean that a relatively few stocks have a major impact on the movement of the index. The stocks included in the index, their relative weightings, and the number that represent each sector vary from time to time, at S&P's discretion. Standard deviation Standard deviation is a statistical measurement of how far a variable quantity, such as the price of a share, moves above or below its average value. The wider the range, which means the greater the standard deviation, the riskier an investment is considered to be. Some analysts use standard deviation to predict how a particular investment or portfolio will perform. They calculate the range of the investment's possible future performances based on a history of past performance, and then estimate the probability of meeting each performance level within that range. Standard Price The standard price of a security is generally worked out as a weighted average price of all recorded transactions for that security adjusted to the nearest rupee. Stochastic modeling Stochastic modeling is a statistical process that uses probability and random variables to predict a range of probable investment performances. The mathematical principles behind stochastic modeling are complex, so it's not something you can do on your own. But based on information you provide about your age, investments, and risk tolerance, a number of online financial sites use stochastic modeling to help you evaluate the probability that your current investment portfolio will allow you to meet your financial goals. Appropriately enough, the term stochastic c comes from the Greek word meaning "skillful in aiming." Stock In the U.S. parlance, stock is an equity investment that represents part ownership in a corporation and entitles you to part of that corporation's earnings and assets. Common stocks give shareholders voting rights but no guarantee of dividend payments. Preferred stocks provide no voting rights but usually guarantee a dividend payment. In the past, shareholders received a paper stock certificate — called a security — verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm. Stock option A stock option is contract that gives the buyer the right to buy or sell a specific share at a preset price during a certain time period and obligates the seller to buy or sell the stock if the option is exercised. If an option isn't exercised within the set period, it expires. Stock split When a company wants to make its shares more attractive and affordable to a greater number of investors, it may authorize a stock split to create more shares selling at a lower price. A 2-for-1 stock split, for example, doubles the number of existing shares and halves the face value and it’s price. If you own 100 shares, having face value of Rs.10 each, and it is selling at Rs.50 a share, total market value of your shares is Rs.5,000 and the company's board of directors authorize a 2-for-1 split, you would own 200 shares, having face value of Rs.5 each and it’s market price, normally, would be Rs.25, with the same face value of Rs.1000 and market value of Rs.5,000. Announcements of stock splits, or anticipated stock splits, often generate a great deal of interest. Buyers may simply want to take advantage of the lower share price, or they may believe that the split stock will increase in value, moving back toward its presplit price. In addition, a company can reverse the process and consolidate shares to reduce their number by authorizing a reverse stock split. Stop order You can issue a stop order, which instructs your broker to buy or sell a security once it trades at a certain price, called the stop price. Stop orders are entered below the current price if you are selling and above the current price if you are buying. For example, if you owned a stock currently trading at Rs.35 a share that you feared might drop in price, you could issue a stop order to sell if the price dropped to Rs.30 a share to protect yourself against a larger loss. Once the stop price is reached, your order becomes a market order. If the price drops very quickly, and other orders have been placed before yours, the stock could actually end up selling for less than Rs.30. Stop-limit order A stop-limit is a combination order that instructs your broker to buy or sell a share once its price hits a certain target, known as the stop price, but not to pay more for the share, or sell it for less, than a specific amount, known as the limit price. For example, if you give an order to buy at "40 stop 43 limit," you might end up spending anywhere from Rs.40 to Rs.43 a share to buy, but not more than Rs.43. A stop-limit order can protect you from a rapid run-up in price, but you also run the risk that your order won't be executed because the share's price leapfrogs your limit. Systematic risk Systematic risk, also known as market risk, is the risk that's inherent in, or characteristic of, a particular type or class of security, such as shares or bonds, as opposed to the risks posed by an individual security of that type. For example, the prices of existing bonds characteristically drop when interest rates go up. So a systematic or market risk of owning bonds is that you would probably realize less than the par value of a bond if you sold it in the secondary market after a jump in interest rates. That loss of value, however, would not reflect whether or not the individual bond was a good credit risk. Technical analysis Technical analysts study trading histories to identify price trends in particular shares, mutual funds, commodities, or options in specific market sectors or in the overall financial markets. They use their findings to predict probable, often short-term, trading patterns in the investments that they study. The speed (and advocates would say the accuracy) with which the analysts do their work depends on the development of increasingly sophisticated computer programs. Ticker (tape) While the stock markets are in session, there is a running record of trading activity in each individual stock. Today's computerized system, still referred to as the ticker or ticker tape, actually replaces the scrolling paper tape of the past. Time deposit When you put money into a bank or savings and loan account with a fixed term, such as a certificate of deposit (CD), you are making a time deposit. Time deposits may pay interest at a higher rate than demand deposit accounts, such as checking or money market accounts, from which you can withdraw at any time. But if you withdraw from a time deposit account before the term ends, you may have to pay a penalty — sometimes as much as all the interest that has been credited to your account. Some other time deposits. Trustee A trustee is a person or institution appointed to manage assets for someone else's benefit. For example, a trustee may be responsible for money you have transferred to a trust, or money in certain retirement accounts. Trustees are entitled to collect a fee for their work, often a percentage of the value of the amount in trust. In turn, they are responsible for managing the assets in the best interests of the beneficiary of the trust. That's known as fiduciary responsibility. Underlying investment An underlying investment is a security (such as a share) or other type of financial product (such as a stock index or futures contract) held whose value determines the value of another investment. The investments a mutual fund makes are considered the fund's underlying investments, since the net asset value (NAV) of the fund is based on the combined values of all of the investments the fund owns. Unsystematic Risk Also called the diversifiable risk, residual risk, or company-specific risk, the risk that is unique to a company such as a strike, the outcome of unfavourable litigation etc. Volatility Volatility indicates how much and how quickly the value of an investment, market, or market sector changes. For example, shares of small, newer companies are usually more volatile than those of established, blue chip companies because their values tend to rise and fall very sharply over short periods of time. The volatility of a share relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha. Xenocurrency Xenocurrency is currency that trades outside of its own borders. Yankee Bond (U.S.) A bond offering in the U.S. domestic market by a non-U.S. entity registered with the Securities Exchange Commission. Yield Yield is the rate of return on an investment, paid in dividends or interest and expressed as a percent. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment. Yield curve A yield curve shows the relationship between the yields on short-term and long-term bonds of the same investment quality. Since long-term rates are characteristically higher than short-term rates, a yield curve that confirms that expectation is described as positive. In contrast, a negative yield curve occurs when short-term rates are higher. Yield to maturity (YTM) Yield to maturity is the most precise measure of a bond's anticipated return. It takes into account the interest rate in relation to the price, the purchase or discount price in relation to the par value, and the years remaining until the bond matures. Although YTM figures are complex to calculate, brokers will supply this information if you ask, or you can use a calculator programmed to provide YTM figures. Zero Coupon Bond A bond that pays no interest while the investor holds it. It is sold originally at a substantial discount from its maturity value, paying the investor its full face value when it comes due, with the difference between what he paid initially and what he finally collected representing the interest he would have received over the time period it was held. |