Actively-managed fund: A fund in which there is a manager conducting frequent transactions, research and making forecasts.
Alpha: A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.
American Depositary Receipt (ADR): A certificate issued by a U.S. bank which represents a certain number of shares in a foreign stock traded on a U.S. exchange. They are meant to make it easier for investors to buy shares in foreign companies.
Arbitrage: A concurrent purchase and sale of an asset to profit from the price change.
Backwardation: As a futures contract nears its expiration, the contract will trade at a higher price compared to when the contract was further out from its expiration date.
Balanced fund: A fund that has stocks, bonds and occasionally money market in a single portfolio.
Basis Point: A unit equal to 1/100th of 1%, primarily used to calculate changes in interest rates, equity indexes and the yield of a fixed-income security. A 1% change equals 100 basis points.
Bear market: A state of the market where the prices of securities are falling or are expected to fall. The numbers vary, but in general, a downturn of at least 15-20% in more than one index is considered to be the start of a bear market.
Benchmark: The standard against which a security’s performance is measured.
Beta: A measure of a security’s volatility. If the beta is greater than 1, it is more volatile than the market. If it’s less than 1, naturally, it is less volatile than the market. The higher the beta, the greater the potential for a high rate of return, but also the possibility of more risk.
Blend: Also known as a “hybrid fund,” it is a category of equity mutual funds with portfolios that are made up both value and growth stocks.
Brady Bond: Issued by the governments of developing countries. Brady bonds are some of the most liquid emerging market securities. They are named after former U.S. Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging market debt instruments.
Bull market: The opposite of a bear market, the bull market is when securities are expected to rise and the general feeling is one of optimism.
Buy & Hold: An investment strategy in which stocks are bought and then held for a long period, regardless of the market’s fluctuations.
Capital gains: A tax on profits investors realize when a capital asset is sold for a price that is higher than the purchase price.
Closing price: Price of the last transaction of a particular stock completed during a day’s trading session on an exchange.
Commodity: A good used in commerce that is traded on a commodity exchange. Examples are gold, wheat, oil, natural gas and even cell phone minutes.
Consumer Price Index: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.
Contango: The opposite of backwardation, it’s a situation in which the futures price is above the expected future spot price.
Corporate Bonds: Debt obligations issued by corporations.
Correction: A generally temporary situation in which there is a drop of at least 10% in an index. It’s often seen as a sign of a healthy market.
Credit Quality: One of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio’s credit worthiness, or risk of default.
Cyclical Stock: The evolution of a stock’s price from an early uptrend to a price high and eventually to a downtrend. The stock cycle is a buy-and-sell cycle that occurs over several years and has four stages – accumulation, markup, distribution and markdown.
Day Trading: To establish and liquidate the same position or positions within one day’s trading.
Debenture: A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
Deflation: An overall decline in prices, usually caused by a drop in the supply of money or credit.
Diversification: A risk management technique that mixes a wide variety of investments within a portfolio.
Earnings per share (EPS): The portion of a company’s profit that is allocated to each outstanding share of common stock. It’s calculated as net income minus dividends on a preferred stock divided by average outstanding shares.
Equal-weighted indexes: An index in which each company in an index has the same weight, so small companies have just as much an impact as large companies.
Exchange traded fund (ETF): A basket of stocks that tracks an underlying index, commodity or currency. ETFs are traded like stocks: daily, and on an exchange.
Exchange Traded Note (ETN): A type of unsecured, unsubordinated debt security that was first issued by Barclays Bank PLC. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exists.
Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors.
Forex: The market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day.
Fundamentally weighted index: A newer type of indexing in which the stocks are chosen based on their fundamentals (instead of their market capitalization). Fundamentals include revenue, dividend rates, earnings or book value.
Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
Hedge fund: An aggressively managed portfolio of investments. Hedge funds use strategies such as leverage, long, short and derivative positions both domestically and internationally. The goal is, of course, big returns.
Index: A group of securities representing a certain market or portion of a market. Among the best-known indexes are the Standard & Poor’s 500 or the Dow Jones industrial average.
Index fund: A type of mutual fund that tracks an index. ETFs are one example of an index fund.
Inflation: The rate at which prices for goods and services is going up while the purchasing power is falling.
Initial margin: Also known as the “initial margin requirement,” it’s the percentage of the purchase price of securities than an investor must pay for with their own cash.
Initial public offering (IPO): The first sale of a stock when a private company goes public.
Interest Rate Risk: A type of interest rate risk which asserts that the characteristics of interest rate fluctuation are variable (as opposed to constant) over a period of time. Although interest rates are expected to fluctuate over the period of an investment, the probability of an interest rate change is not always constant, nor is the magnitude of the volatility of interest rate changes.
Inverse ETFs: An exchange-traded fund (ETF) that is constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Investing in these ETFs is similar to holding various short positions, or using a combination of advanced investment strategies to profit from falling prices.
Margin: Money that has been borrowed to purchase securities. The practice is known as “buying on margin.”
Market capitalization: The measurement of a company’s size, equal to the share price times the number of shares outstanding.
Market-capitalization weighted index: Weighting the stock in an index by their market capitalization.
Market timing: An ethically questionable scheme in which a trader attempts to take advantage of the different closing times of markets around the world.
Micro-Cap: Companies with a market capitalization of $250 million or lower.
Mid-Cap: Companies with a market capitalization between $1 billion and $8 billion.
Minimum margin: The initial, minimum amount that’s required to be deposited into a margin account before one can trade on margin or sell short.
Moving Average: An indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.
Municipal Bonds: A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.
Mutual fund: Pools of money that are managed by an investment company. The funds have managers who invest in stocks, bonds, options, money market instruments and other securities.
Over-the-counter (OTC): A security that is traded somewhere other than on a formal exchange.
Over-the-Counter Bulletin Board (OTCBB): A regulated electronic trading service offered by the National Association of Securities Dealers (NASD). It shows quotes in real time, last-sale prices and volume information for over-the-counter securities.
Passive management: A management style in which the portfolio of a fund tracks a market index. It’s the opposite of active management, as it doesn’t require a manager consistently doing trading and research.
Pink Sheets: A daily publication assembled by the National Quotation Bureau with the bid and ask prices of over-the-counter securities.
Price to Book Ratio (P/B Ratio): A ratio that compares a stock’s market value to it’s book value, calculated by dividing the closing price of the stock by the latest quarter’s book value per share. It’s calculated as the stock price divided by total assets minus intangible assets and liabilities.
Price/Earnings Ratio (P/E Ratio): The valuation ration of a company’s current share price compared to its per-share earnings. It’s calculated as the market value per share divided by the earnings per share (EPS).
Price/Earnings to Growth (PEG Ratio): A ratio used to determine a stock’s value while also factoring in earnings growth. It’s calculated as the price/earnings ratio divided by the annual EPS growth.
Price-weighted index: An index in which each stock in it influences the index in proportion to its price per share. Therefore, stocks with a higher price are given more weight. The Dow Jones industrial average is an example of this.
Return: A gain or loss of a security in a specified period. It is usually quoted as a percentage.
R-Squared (R2): A statistical measure that represents the percentage of a fund or security’s movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500.
Sarbanes-Oxley Act: A congressional act passed to protect investors from the possibility of fraudulent accounting schemes by corporations.
Savings Bonds: A U.S. government savings bond that offers a fixed rate of interest over a fixed period of time. Many people find these bonds attractive because they are not subject to state or local income taxes. These bonds cannot be easily transferred and are non-negotiable.
Securities and Exchange Commission (SEC): A government body created by Congress to provide regulation in the securities markets as well as offer protection to investors and keep an eye on corporate takeovers within the U.S.
Short selling: Selling a security that the seller does not actually own or has borrowed. By short selling, an investor is assuming that the stock can be bought at a lower amount than the price at which they sold it.
Small-Cap: Companies with a market capitalization between $250 million and $2 billion.
Tax efficiency: A fund that is tax efficient has been structured to reduce the tax liability facing those who hold it.
Tracking Errors: A divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.
Transparency: The ability a security offers to allow you to “know what you own.”
Treasury Bonds: A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
Treasury Inflation Protected Securities (TIPS): A type of treasury note or bond offering protection against inflation.
Turnover rate: A measurement of how often the assets in a fund are bought and sold by its managers. It is measured yearly, and calculated by taking the total amount of new securities bought or sold (whichever is less) and dividing the number by the net asset value (NAV) of the fund.
Value investing: Value stocks, by those who favor them, are those perceived to be those diamonds in the rough. Value is in the eye of the beholder, though: one man’s value stock is another’s man’s trash.
Variable annuity: An insurance contract in which the insurance company guarantees a minimum payment.
Yield: The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.