Investing
A certificate of deposit (CD) is a savings investment where the investor commits to depositing funds for a set period of time, such as six months, one year, or five years. In exchange for the investo...
Above the market describes the price at which a person wants to buy or sell a security. Let's say John Doe owns 100 shares of Company XYZ stock that he bought at $10 a share. He wants to sell the sh...
Above water is a term to describe being financially stable. In accounting, the term often refers to assets whose market value is higher than book value. For instance, let's say John Doe has $30,000 ...
Accumulation phase refers to the period of time (often several years or even decades) during which an annuitant (annuity policyholder) is making cash contributions to an annuity account. After the a...
The opposite of passive investing, active investing is an investment strategy that advocates significant trading and a short-term horizon. Active investment strategies generally dismiss long-term tr...
Also called tracking error, active risk is the difference between a portfolio’s returns and the benchmark or index it was meant to mimic or beat. There are two ways to measure active risk. The fir...
An activist investor invests in a company for the purpose of changing or influencing the company's decisions. Carl Icahn, known as a corporate "raider" in the 1980s, is one of the most famous activi...
An aggressive investment strategy emphasizes a substantially higher portfolio allocation of high-return equity over debt in order to generate high returns through exposure to high risk. An aggressiv...
Annual percentage yield (APY) is the rate of interest an investor earns in a year after accounting for the effects of compounding. APY is not the same as annual percentage rate (APR). The formula for...
Annualize means to express a rate in terms of its annual equivalent. The concept is best illustrated with an example: Assume a portfolio generates a 1% return in one month. The monthly rate can be a...
The anti-Martingale system is an investment strategy that doubles the position sizes of securities that experience gains. By using this method, investors will overweight their winning investments in ...
Appreciation is an increase in the value of an investment. Let's assume you purchased one share of Company XYZ stock for $5. If that share's value increased to $7, the investment has appreciated by...
An arbitrage trading program is a software program that attempts to take advantage of very small price differences between securities, such as index futures and the underlying stocks represented. The...
An arbitrageur is a person who exploits the differences in the price of a given security by simultaneously purchasing and selling that security. For example, if Company XYZ's stock trades at $5 per ...
Similar to diversification, asset allocation refers to the portioning of a portfolio among various types of investment asset classes so as to maximize return for a given level of risk. Just as it is...
An asset class is a group of investments that have similar characteristics, behave similarly and are subject to similar market forces, laws and regulations.  Typical asset classes include stocks, b...
Asset management has two general definitions, one relating to advisory services and the other relating to corporate finance. In the first instance, an advisor or financial services company provides a...
Asymmetric information occurs when information is held by one, but not all, of the parties to a transaction. For example, consider a potential buyer of Company XYZ shares and the seller of those sha...
The average annual growth rate (AAGR) is the arithmetic mean of a series of growth rates. The average annual growth rate (AAGR) formula is: AAGR = (Growth Rate in Period A + Growth Rate in Period B ...
The average annual return (AAR) is the arithmetic mean of a series of rates of return. The formula for AAR is: AAR = (Return in Period A + Return in Period B + Return in Period C + ...Return in Peri...
In the finance world, backdating usually refers to the practice of changing the dates of option grants to one that is earlier than the actual grant date in order to place a lower exercise price on th...
Badwill is essentially damage to a company's reputation.  For example, let's assume that Company XYZ becomes aware that one of its factories in the Pacific Northwest is not structurally strong enou...
A bag holder is a person whose investment has become worthless or almost worthless. The investor is left "holding the bag." For example, let's assume that John invests $10,000 in Start-Up Company. A...
A basis point is the smallest measure used in quoting yields on fixed income products. Basis points also pertain to interest rates. One basis point is equal to one one-hundredth of one percentage poi...
A benchmark is a feasible alternative to a portfolio against which performance is measured. Let's assume you compare the returns of your stock portfolio, which is a broadly diversified collection of...
The best bid is the highest price offered by a stock's market makers to buy a security. For stocks, the best bid is quoted in dollars. For bonds, the best bid is quoted as a percentage of face value ...
Book value of equity per share, abbreviated as BVPS, is a company’s available equity to common shareholders apportioned by the number of outstanding common shares. "Book value” is based on the am...
Bottom fishing is an investment strategy in which investors seek out securities whose prices have recently dropped and are considered undervalued. Investors that engage in bottom fishing, called “...
Bottom-up investing focuses on individual securities rather than on the overall movements in the securities market or the prospects of particular industries. Taking a bottom-up approach to investing...
A bump-up certificate of deposit (CD), also called a step-up CD, is a certificate of deposit that allows the owner to “bump up” the interest rate if rates should rise during the CDs’ holding pe...
A buy limit order is an order to purchase a security at or below a given price. Let's assume you want to buy 100 shares of Company XYZ, but you don't want to pay more than $5 per share for the stock...
Firms that buy securities and assets for their own or their clients' accounts are said to be on the buy side. Institutional investors like mutual funds, pension funds, hedge funds, private equity fun...
Buzzword Bingo is a game involving business jargon. Buzzword Bingo is a lot like regular bingo, in which a caller draws random numbers and players vie to be the first to match them in a row, column ...
Capital appreciation (also called a capital gain) is an increase in the value of an investment. It is the difference between the purchase price (the basis) and the sale price of an asset.  The form...
A capital gain is an increase in the value of an investment. It is the difference between the purchase price (the basis) and the sale price of an asset. The formula for capital gain is: Sale Price -...
A capital loss is a decrease in the value of an investment. It is the difference between the sale price and the purchase price (the basis) of an asset.  The formula for capital loss is: Purchase Pr...
The capital markets are a source of financing for companies around the world. The most famous of the capital markets are the stock market and bond market.  Companies utilize capital markets to rais...
A catalyst is news or information that changes a pricing trend in a security. Let's assume that Company XYZ announces earnings that far exceed analysts' expectations. This information could serve as...
A for-profit service run by the Promontory Interfinancial Network, the Certificate of Deposit Account Registry Service (CDARS) allows investors to purchase certificates of deposit (CDs) across a netw...
The CFA (Chartered Financial Analyst) exam is a professional qualification exam administered as a requirement to earn the CFA designation. The three levels of the exam are offered annually by CFA Ins...
The CFA Institute issues the CFA designation. CFA stands for Chartered Financial Analyst. A CFA charter signifies a mastery of investment management principles and usually takes at least three years ...
A Chartered Financial Analyst (CFA) is a highly-respected designation attained by an investment professional who has successfully completed all three parts of the CFA exam. Because it's so difficul...
A Chartered Investment Counselor (CIC) is an individual certified by the Investment Counsel Association. The certification is available to CFA holders who are currently registered as investment advis...
A clearinghouse is an intermediary between buyers and sellers of financial instruments. Clearinghouses take the opposite position of each side of a trade. When two parties agree on the terms of a tr...
Cockroach theory refers to the notion that unfavorable reports about a company will, once publicized, be followed by similar reports about other companies in the industry. Named in reference to the ...
A commission is a fee paid to an agent as compensation for executing a transaction. It is calculated either as a percentage of the transaction value or as a flat fee. Let's assume you would like to ...
In finance, to compound means to earn interest on principal plus interest that was earned earlier. You have $100 to open a savings account at XYZ Bank on January 1. The annual interest rate is 5%. H...
The financial world often refers to compound interest as magic. Compound interest can be thought of as “interest building on interest” which adds to your principal. In layman’s terms, it’s a ...
Compounding is the process of the exponential increase in the value of an investment due to earning interest on both principal and accumulated interest. Let's assume you have $100 to open a savings ...
A contrarian is an investor that attempts to profit by deviating from conventional wisdom or "the herd."  Generally, the basic premise behind contrarian investment methods is that the market or "cr...
Correlation, as used in investing, is a measure of the return performance of two (or more) securities or asset classes relative to each other. Portfolio managers, traders, brokers, and stock analys...
Cost-benefit analysis is used to analyze a potential investment that will impact a business. Whether a company is looking to purchase a new property – or expand its operations – cost benefit anal...
CUSIP stands for "Committee on Uniform Securities Identification Procedures" and refers to a 9-digit alphanumeric code assigned to all security issues approved for trading in the United States and Ca...
A custodian is an institution or individual that can act as an agent and exercise legal authority over the financial assets of another individual or company. A custodian typically handles a variety ...
A discount broker is a stockbroker who charges a reduced commission to buy and sell shares for clients. Discount brokers are one of two general categories of brokers, the other being full-service br...
Disposition refers to disposing of an asset through sale, assignment, or other transfer method.  When an investor sells stock or bonds in a particular company, the sale is referred to as a disposit...
Diversification is a method of portfolio management whereby an investor reduces the volatility (and thus risk) of his or her portfolio by holding a variety of different investments that have low corr...
A divestiture or divestment is the reduction of an asset or business through sale, liquidation, exchange, closure, or any other means for financial or ethical reasons. It is the opposite of investmen...
Investment advisors frequently suggest dollar-cost averaging in their articles and publications, but what does it mean? Why do many advisors believe it is the best strategy? Dollar-cost average is a...
A downgrade is an announcement of an analyst lowering their opinion on the desirability of a company as an investment. It can apply to either debt or equity. Downgrades can come from a variety of so...
Downside refers to an investment's potential loss in value. Let's pretend you purchase 100 shares of Company XYZ at $5 per share, for a total investment of $500. If the shares subsequently fall to $...
Downside risk is the probability that an asset will fall in price. It is also the measure of the possible loss from that decline. Let's assume an investor owns 1,000 shares of Company XYZ and she's ...
Due diligence is the careful, thorough evaluation of a potential investment, whether on a corporate or individual level. For individual investors, due diligence often means studying annual reports, ...
Dynamic asset allocation is an investment strategy whereby an investor makes long-term investments in certain asset classes or securities and periodically buys and sells those securities in order to ...
Each way refers to a broker's act of earning a commission from both the buyer and the seller in a transaction. Let's say John Doe is a broker for XYZ brokerage. He has a client, Jeff Smith, who want...
The phrase "eat well, sleep well" refers to the risk-return trade-off that most investors must make. When investors decide which securities to buy, they also make a decision about the risk they are ...
Different combinations of securities produce different levels of return. The efficient frontier represents the best of these securities combinations -- those that produce the maximum expected return ...
Elves make up a group of analysts and money managers who appeared on the PBS show "Wall Street Week," which was hosted by Louis Rukeyser. "Wall Street Week" aired from 1970 to 2005. In each episode,...
An escrow agreement is a certificate from an approved bank guaranteeing that an indicated financial security is deposited at that particular bank. John writes a call option for stock in company ABC....
Excess return, also known as "alpha" or the "abnormal rate of return the portion of a security's or portfolio's return not explained by the overall market's rate of return. Rather, it is generated by...
A fade is an investment strategy devoted to doing the opposite of the prevailing wisdom. In the brokerage sector, it also refers to a dealer's inability or refusal to fill an order at the prevailing ...
Issued by the Global Association of Risk Professionals (GARP), the Financial Risk Manager (FRM) designation recognizes individuals who have expert knowledge in the field of financial risk assessment ...
Fixed income is a category of investments where an investor is lending money to the issuer and receives a fixed interest payment periodically until the investment matures. At maturity, the original p...
Forced liquidation is the sale of all investments within a customer's margin account by a brokerage firm, usually after the account has failed to meet margin requirements and margin calls. To engage...
Forward trading, also called front running, occurs when stockbrokers personally purchase shares of a particular stock while knowing that their firm plans to purchase numerous shares of the same stock...
Front running, also called forward trading, occurs when stockbrokers know their firm plans to purchase numerous shares of a particular stock, so they purchase shares of the same stock for themselves....
Funds settlement refers to the transfer of funds from buyer to seller and the transfer of an asset's title from seller to buyer. When an investor sends an order to his or her broker, that trade info...
A gain, also called a capital gain, is an increase in the value of an investment. It is the difference between the purchase price (the basis) and the sale price of an asset. Thus the formula for gain...
The gambler's fallacy is a situation in which a gambler believes that a string of past events will change the probability of future events occurring.   Coin flips are the most common example of the...
Good delivery occurs when all the requirements for transferring title to a security from the seller to the buyer have been met. For example, let's assume John owns 100 shares of Company XYZ. His fat...
Goodness of fit (also known as a chi-square goodness of fit) is a statistical term referring to how far apart the expected values of a financial model are from the actual values. Goodness of fit is...
Growth stocks are fast-growing, higher-risk companies. They tend to be young. They offer a higher chance of higher returns and a higher chance of bankruptcy. The nature of a company's business deter...
A hands-on investor has a substantial interest in a company and chooses to take an active role in its management. It is the opposite of a hands-off investor. A hands-on investor could be a large-s...
Hard dollars are money paid to a broker or investment adviser in return for consultation or investment research. Hard dollars do not include fees related to trading. For example, if someone wishes o...
A hard stop is a standing instruction from a brokerage client to sell units of a security if the market price declines to a specific level. It is a generic term that can refer to both a stop-loss ord...
A hard-to-borrow list outlines the securities that a brokerage house cannot provide to investors for short selling. Similar to goods and services, financial instruments exist in a limited supply, an...
In finance, a hedge is a strategy intended to protect an investment or portfolio against loss. It usually involves buying securities that move in the opposite direction than the asset being protected...
A hedge fund is an investment structure designed to allow management of a private, unregistered portfolio of assets.  The original concept of a hedge fund was to offer plays against the market usin...
A hedge fund manager is an individual responsible for directing all activities associated with the operation of a hedge fund. The role of a hedge fund manager is similar to that of a mutual fund man...
A hedged tender is a strategy used to ensure a profit as a part of a tender offer. A tender offer is a proposition from one investor or company to purchase a number of shares of another company's st...
A herd instinct is emotional pressure to agree with other members of a group. The herd instinct results in failures to think critically about an issue, situation or decision. Let's say John, Jane an...
A high yield savings account is a savings account that pays an account holder a higher-than-average interest rate. If the average US savings account offers an interest rate of 1%, for example, then a...
A histogram is a visual display of information. It uses bars to show the frequency of an item of data in successive intervals. A price by volume chart (PBV chart) is a common horizontal histogram th...
Holding period refers to the time during which an investor holds a given security. The holding period for a security is defined as the elapsed time between the initial date of purchase and the date ...
An investor is left "holding the bag" when his or her investment has gone from valuable to worthless or almost worthless. Let's assume that John invests $10,000 in NewCo, Inc. NewCo develops its fir...
Home bias is a tendency to invest in companies that reside in the investor's home country. For example, let's say John Doe lives in Canada. About 80% of his portfolio is stocks, and of those stocks,...
A hot IPO is an IPO for which there is great demand. For example, let's say Company XYZ invents a cure for cancer and patents the invention. The company can change the world and make its owners fabu...
Also called unsystematic risk, idiosyncratic risk is price risk associated with a company's particular circumstances. For example, price changes can occur in Company XYZ stock for several reasons. S...
Idle funds are monies that are not invested. Money, like people, must work in order to earn money. And just as when people do not work, when money is not invested, it is not earning money. It is idl...
Illiquid describes an asset or security that cannot be sold quickly due to a shortage of interested buyers or a lack of an established trading market. Illiquid assets cannot be easily converted into ...
Immunization is a dedicated-portfolio strategy used to manage a portfolio with the goal of making it worth a specific amount at a certain point, usually to fund a future liability. Immunization is o...
Securities are held in street name when the name of the broker, not the individual owner, is listed on the certificate. Almost all securities held in brokerage accounts are held in street name. Even...
An inactivity fee is a fee charged by brokerages to clients whose infrequent trading does not satisfy a minimum trading requirement. A brokerage house earns revenue from fees and commissions charged...
An indexed certificate of deposit (sometimes called a market-linked, equity-linked, or market-indexed CD) is a type of CD that’s based on either a market index, a basket of equities, or a combinati...
Indexing is a passive investment strategy that seeks to mimic or exceed the returns of a designated market index or other proxy. The strategy requires an investor to first choose an index to mimic. ...
Inflation eats away at the value of every stream of cash flows, including salaries, pension payments and coupon payments. In many cases, the real interest rates on savings accounts are negative. For ...
An institutional investor is an organization, rather than an individual, that invests on behalf of the organization's members.  Institutional investors are the biggest component of the so-called "s...
Institutional ownership refers to the ownership stake in a company that is held by large financial organizations, pension funds or endowments. Institutions generally purchase large blocks of a compan...
Internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows (both positive and negative) equal to zero for a specific project or investment.  What Is Intern...
An international securities identification number (ISIN) is a universally accepted identifier exclusive to a particular issue of a security. Every legitimate market-traded security issued worldwide...
Intraday refers to price movements of a given security over the course of one day of trading.  It is generally used to describe the high and low price of a stock or option during a given trading day...
An investment is an asset that is intended to produce income or capital gains.  Investing is the act of using currently-held money to buy assets in the hopes of appreciation. Investing is a way to b...
An investment is an asset intended to produce income or capital gains. Investments can be stocks, bonds, mutual funds, interest-bearing accounts, land, derivatives, real estate, artwork, old comic b...
An investment bank is a financial intermediary that specializes primarily in selling securities and underwriting the issuance of new equity shares to raise capital funds. This is different from a com...
The role of an investment banker is to serve as a middle-man between prospective investors and companies that intend to raise capital through the issuance of new stock. Investment bankers are often e...
Joining an investment club is an excellent way to learn more about investing, and it is not unusual for investment clubs to experience outstanding returns. It is important that members of investment ...
An investment consultant is an educated investment professional who helps people and businesses set and meet long-term financial goals. An investment consultant is similar to an investment advisor, ...
Investment management has two general definitions, one relating to advisory services and the other relating to corporate finance. In the first instance, a financial advisor or financial services com...
An investment manager is an educated investment professional who helps people and businesses set and meet long-term financial goals. A investment manager is similar to an investment advisor, financi...
An investor is any person or entity, like a firm or mutual fund, who commits capital with the expectation of receiving financial returns. Individuals use investments in order to increase their money ...
Investor relations (IR) refers to the function within a public company that is responsible for managing and communicating information to the public pertaining to the company's operations, managerial ...
Issuer refers to a legal entity -- i.e., government, corporation, or investment trust -- that develops, registers and sells securities to the investing public in order to finance its operations. Th...
A jackpot is a big winning -- often the largest a competition or event has to offer. Let's say John Doe goes to Las Vegas to get away from his wife for a few days. He puts a few dollars in a slot ma...
Jekyll and Hyde is a term to describe volatile corporate earnings. Let's say Company XYZ reports a profit in the first quarter of 5 cents per share. In the second quarter, it reports a loss of 15 ce...
Jensen's measure is a statistical measurement of the portion of a security's or portfolio's return that is not explained by the market or the security's relationship to the market but rather by the s...
The Joseph Effect is a statistical measure that indicates whether certain price movements are part of a long-term trend. The Joseph effect is really a description of the Hurst exponent, which is a m...
In the finance world, a kicker is a feature that makes a security more attractive. Often, kickers are equity kickers, which are the right but not the obligation to buy shares of the issuer of a bond...
Kicking the tires refers to researching multiple aspects of a prospective investment in order to become as familiar as possible with the potential risks and rewards. Derived from the practice of out...
A large trader is a person or entity that trades more than 2 million shares or $20 million worth of shares in a single day, or 20 million shares or $200 million worth of shares in a single month. Le...
Latin baseball futures are investments in Dominican, Cuban or other Latin American baseball coaches or academies that train up-and-coming baseball players who could one day obtain multimillion-dollar...
Layered fees are management fees, typically in investment products, that investors pay to financial managers for the same group of assets. Many mutual funds, annuities and investment advisors charge...
A learning curve is the time it takes to master a concept. It is more of an idea than a chart or other visual representation of learning. For example, piloting a 777 has a steep learning curve -- yo...
In the brokerage world, a leg is an individual component of a multistep trade. Let's say John Doe wants to do an options straddle, which involves buying call and put options with the same expiration...
Legging out means to unwind part of a transaction. Let's say John Doe conducts an options straddle, which involves buying a call and a put with identical expiration dates. His broker first has to pu...
A lemming is an investor who does whatever the crowd does. A lemming is a short, furry rodent that is noted for its tendency to migrate en masse, regardless of the danger of the location or the stup...
Liquid refers to the ability to transfer hard assets to cash or the state of being in a position where one has sufficient cash on hand to accommodate any and all necessary financial obligations. Mar...
A liquid CD allows you to withdraw money without penalty before the CD matures. These financial instruments are sometimes known as risk-free or no-penalty CDs.  Traditional CDs typically cannot be c...
Liquid market refers to any market in which there are many buyers and sellers present and in which transactions can take place with relative ease and low costs. A liquid market refers to any market ...
In the financial world, to liquidate something means to sell it for cash. Although this sounds harmless, in the corporate world the term often carries a connotation of failure, because it is most oft...
Liquidity is the ability to sell an investment at or near its value in a relatively short period of time. Let’s say you take an old painting from the attic to the local filming of Antiques Roadsho...
A managed account is an investment account in which a financial advisor or other kind of money manager is responsible for managing in the best interests of a client or beneficiary. Let's say John Do...
A managed futures account is an alternative asset created and maintained by a commodity trading advisor (CTA). The account invests in commodity futures contracts.  When you buy a managed futures ac...
A managed futures fund is an alternative asset created and maintained by a commodity trading advisor (CTA). The fund invests in commodity futures contracts.  When you buy a managed futures fund, in...
A margin account is a brokerage account that allows investors to borrow money (leverage) from the broker in order to purchase securities. Let's assume you have $2,500 and Company XYZ trades at $5 a ...
A margin call is a brokerage firm's demand that a margin-account client deposit securities or cash into their account in order to bring the account balance up to the minimum maintenance margin requir...
Markdown refers to the negative spread between the price a broker charges a client for a security and the highest price at which that security is sold between brokers. It is the opposite of markup. ...
Market exposure is the degree to which a portfolio invests in a particular stock or market sector. An investment portfolio is made up of several types of assets (for example, stocks, bonds, real est...
A market index is a metric that tracks the performance of a group of stocks. Some indices are designed to indicate the overall performance of the market, while others follow a particular sector. The...
A market letter is a publication that offers information and advice about specific market sectors and types of securities. Market letters offer advice to investors interested in investing in a parti...
A market maven is a person who keeps abreast of market news and is a successful investor. A market maven is someone who conscientiously absorbs information and news about the financial markets on a ...
Market neutral refers to an investing strategy that seeks to generate similar returns regardless of the market climate. An investor or fund manager takes a market neutral position by obtaining both ...
A market order is an order to trade a stock at the current market price. If you do not give your broker additional instructions, the trade will automatically be entered as a market order. When usin...
"Market perform" is an expression indicating that a security experiences returns similar to the overall market. A security that investors and analysts describe as "market perform" closely follows th...
Market risk is the fluctuation of returns caused by the macroeconomic factors that affect all risky assets. Market Risk is also referred to as systematic risk or non-diversifiable risk. Market ris...
A market strategist is an individual who makes investment recommendations based on available market information. A market strategist tries to predict the future market climate as a pretext for buyin...
Market timing is the practice of buying and selling securities based on economic trends, corporate information, and market factors.  Market timing can also be referred to as tactical asset allocat...
Market value refers to the current or most recently-quoted price for a market-traded security. It can also refer to the most probable price an asset, like a house, would fetch on the open market. Se...
A market-linked certificate of deposit (CD), also called an indexed or equity-linked CD, is a type of CD where the rate of return is based on either a market index, a basket of equities, or a combina...
The Markowitz efficient set, also called the efficient frontier, is a mathematical concept that reflects the combinations or portfolios that generate the maximum expected return for various levels of...
Minimum investment is the least amount of money an investor must invest to take part in a specific investment. Many types of investments have a minimum investment, including mutual funds, certificat...
A money manager is an individual responsible for managing an investment portfolio, providing investment advice and planning portfolio strategies. A money manager buys and sells securities in a portf...
The money market yield is the interest rate earned by investing in highly liquid and short-term securities. It is calculated by adjusting the holding period to its bank year (360 days) equivalence. T...
Near money is a term for highly-liquid assets that are quickly and easily converted into cash. They may also be referred to as cash equivalents.  Examples of near money investments are interest-bea...
Negative arbitrage occurs when the interest rate a borrower pays on its debt is higher than the interest rate the borrower earns on the money that will be used to repay the debt. For example, let's ...
Negative gearing is an investment strategy whereby an investor can deduct any shortfall in income from an investment that does not cover the interest expense and maintenance costs associated with own...
A negative return is a loss on an investment. For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%. Similarly, an invest...
A negative volume index (NVI) identifies days in which trading volume of a particular security is substantially lower than other days. Mathematically, the NVI compares the day's volatility to its mo...
A negotiable certificate of deposit (NCD) is a certificate of deposit that differs from a conventional CD in that its terms are negotiated with the issuer. Another difference is that it can be sold i...
Net change refers to the difference in closing price of a stock, bond, mutual fund, ETF or other traded financial instrument from one period to the next. In fundamental analysis, net change is used ...
An investor is net long when he or she has more long positions than short positions for a particular asset, market sector or portfolio. The concept also applies to commodities trading. Net long is th...
The net present value rule is the idea that investors and managers should only engage in deals, projects or transactions that have positive net present value (NPV).  Using the NPV formula, the net ...
A no penalty CD is a type of certificate of deposit. A certificate of deposit, or CD, is a financial product offered by banks and credit unions for personal savings and investing. It offers an intere...
An odd-lotter buys securities in odd lots. An odd lot is a group of shares that is not a multiple of 100 (100 shares is called a round lot). For example, let's assume John wants to buy a few shares ...
A one-night-stand investment is a security that was supposed to be a long-term investment but is sold after a short time. Let's say John Doe goes to an investing seminar that hypes the stock of a be...
Also called a one-sided market, a one-way market is a market in which market makers only show a bid or an offer price rather than both. In broader terms, the concept refers to situations in which the...
Thanks to an ability to spot undervalued companies and purchase them on the cheap, Buffett has made many people very wealthy over the course of his five-decade career. Buffett caught the investing ...
Overvalued describes a security for which the market price is considered too high for its fundamentals. Some metrics used to evaluate whether a security is overvalued are: P/E ratio, growth potential...
A pairs trade occurs when an investor buys two stocks in the same industry. Let's say John Doe buys shares of Ford and General Motors. The stocks tend to follow the same patterns -- they tend to ris...
The Paris Hilton Stock Index is a list of companies that benefit from the actions of and associations with Paris Hilton. The index contains the following stocks: News Corporation (NYSE: NWS), which ...
A partial redemption occurs when an investor withdraws some of a security's value.   Let's say John Doe owns $200,000 of Treasury securities. He decides he's having a mid-life crisis and wants to ...
Pass-through securities receive payments from an intermediary that collects payments from a pool of assets. Mortgage-backed securities (MBS) are some of the most common pass-through securities. To g...
Passive income is income generated from any business activity in which the earner does not participate. When people describe the dream of "getting rich quick" and "striking it big," they are usually...
Passive investing is a strategy focused on achieving long-term appreciation of portfolio values with limited day-to-day management of the portfolio itself. A passive investor is one who limits on-go...
A personal financial advisor (also spelled personal financial adviser) is an educated investment professional who helps people set and meet long-term financial goals. A personal financial advisor is...
Positive correlation describes a relationship in which changes in one variable are associated with the same kind of changes in another variable. For example, many economists have discovered that peo...
Prepayment risk is the risk that a borrower will pay off a loan earlier than expected. For example, let's say that John Doe borrows $300,000 to buy a house in Phoenix. The loan is a 30-year mortgage...
Price talk refers to discussions about the price of a pending initial public offering (IPO) or upcoming bond issue.  Price talk is usually debate and discussion about what a fair price is for certa...
Quid pro quo is a Latin phrase that literally means "something for something." The phrase usually indicates an exchange of goods or services of roughly equivalent value. From a legal perspective, qu...
A rate of return is measure of profit as a percentage of investment. Let's say John Doe opens a lemonade stand. He invests $500 in the venture, and the lemonade stand makes about $10 a day, or about...
A real interest rate is an inflation-adjusted interest rate. Let's say John Doe has a bond from Company XYZ that pays a 4% coupon. If the inflation rate is 3% per year, then the value of that coupon...
A real rate of return is a return on an investment that is adjusted for inflation, taxes or other external factors. Let's say John Doe opens a savings account that offers a 2.5% interest rate (this ...
A retail investor is an individual who purchases securities for his or her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than institut...
Return of capital (ROC) is a payment from a security to an investor from funds that were not derived from net income. Real estate investment trusts (REITs), mutual funds, master limited partnerships...
Risk averse is an oft-cited assumption in finance that an investor will always choose the least risky alternative, all things being equal. Modern portfolio theory (MPT), which is the theory behind w...
A risk free rate of return, often denoted in formulas as rf,, is the rate of return associated with an asset that has no risk (that is, it provides a guaranteed return). It is also commonly referred ...
A risk lover is an investor who has a high propensity to engage in risky investments. A risk lover is the opposite of a risk-averse investor. Let's assume you are considering purchasing some stock i...
Rolling returns are the returns on an investment measured over several periods. The rolling returns on an investment are measured over a discrete number of consecutive periods (usually years) starti...
Roy's safety-first rule is a measure of the minimum returns an investor requires from a portfolio. The formula for Roy's safety-first rule is: Roy's Safety-First Rule = (Expected return for portfoli...
A safe asset (usually a physical asset rather than a security) carries a low degree of liability for its owner. In more technical financial terms, safe assets are similar to cash -- they carry little...
A safekeeping certificate is a document that proves that a person owns a security or a certificate of deposit (CD). An American Depository Receipt (ADR) is one of the most common forms of safekeepin...
The safety-first rule, also called Roy's safety-first rule, is a measure of the minimum returns an investor requires from a portfolio. The formula for the safety-first rule is: Safety-First Rule = (...
Sandbag is slang for lowering expectations. Let's say John Doe is a new employee at Company XYZ. He gets invited to the annual company golf outing. The other employees ask him how his game is. John ...
Administered by the Financial Industry Regulatory Authority (FINRA) and designed by the North American Securities Administrators Association (NASAA), the Series 65 is an exam and professional license...
In regards to investing, “short-term” refers to an investment made that can easily be converted to cash in under five years. Usually, these investments are high-quality and very liquid assets or ...
A sweep account is a bank or brokerage account that automatically transfers amounts above a certain threshold into a higher interest-earning investment option. These transfers are made at the close o...
Synergy is the benefit that results when two or more agents work together to achieve something either one couldn't have achieved on its own.  It's the concept of the whole being greater than the sum...
Also called co-sale rights, tag-along rights allow minority shareholders to sell their stakes in a company if a majority shareholder wishes to sell its stake in a company. Let's say Company XYZ is a...
Tainted alpha is the portion of a security's or portfolio's return that is not attributable solely to the skill of the investor or portfolio manager. Alpha is the portion of a security's or portfoli...
To "take a bath" means to take a large loss. John Doe buys Company XYZ shares at $10. Two weeks later, the stock tanks to $2 a share. John Doe has to sell the shares because he has to pay an outstan...
To take a flier means to invest in a highly risky asset or to try for the first time. John Doe starts his own business. He looks for angel investors to give him seed capital. One day, he meets Jane ...
Also referred to as a time deposit or a certificate of deposit (CD), a term deposit is a type of fixed-term deposit, typically at a banking institution. Term deposits will usually have short-term mat...
A tranche is a “slice” of an investment in pooled securities, commonly debt instruments such as mortgages, that is sold separately to investors. Tranching allows investors to choose to invest in ...
Transaction costs are fees incurred during the process of buying or selling a good or service. These costs may include brokers' commissions and spreads in the sale and purchase of securities. When i...
Unannualized refers to a rate of return or other measure for a period that is not one year. Let's assume Company XYZ stock rises by 2% in one week. The 2% is an unannualized return -- it's just for ...
An uninsured certificate of deposit (CD) is a certificate of deposit that is not covered by depositor’s insurance. Certificates of deposit (CD) are insured up to the maximum allowable amounts by ei...
An unweighted index has components that are not adjusted to reflect importance or certain characteristics. Here is information about five stocks. There are wayward dohickies on the top left and bot...
Upside refers to an investment's potential future increase in value. For example, you purchase 100 shares of Company XYZ at $5 per share, for a total investment of $500. If you know or believe that ...
Value averaging is a strategy in which an investor places a variable dollar amount into a given investment (usually common stock) on a regular basis to ensure that the investment grows by a certain d...
The Vanguard Federal Money Market Fund, or VMFXX, is an investment fund offered through Vanguard that invests in U.S. government securities. As its main goal is to provide current income and preserve...
The Vanguard Prime Money Market Fund, or VMMXX, is an investment fund offered through Vanguard that invests in U.S. government securities and foreign bonds. As its main goal is to provide current inc...
Variance is a statistical measure of how much a set of observations differ from each other. In accounting and financial analysis, variance also refers to how much an actual expense deviates from the...
A warehouse receipt is a piece of paper promising that a specific quantity and quality of a particular asset is in a given location. Let's say John Doe buys a coffee futures contract. On October 31,...
A wash-out round is a round of financing that dilutes the original shareholders so much that their voting power is essentially "washed out." For example, let's assume that John starts Company XYZ, w...
A watch list is a list of securities that regulators, brokerages, research firms, or other entities are interested in monitoring. Watch lists can be good or bad. An investor can start a watch list, ...
In futures trading, weak hands are investors who do not intend to take delivery of the underlying asset. In currency trading, weak hands are investors who tend to follow traditional trading rules, th...
Weighted refers to the mathematical practice of adjusting the components of an index to reflect the importance of certain characteristics. Here is information about five stocks. If we wanted to cre...
Weighted average refers to the mathematical practice of adjusting the components of an average to reflect the importance of certain characteristics. Here is information about five stocks. We could ...
Weighted average maturity or WAM is the weighted average amount of time until the securities in a portfolio mature. The higher the WAM, the longer it takes for all of the holdings in the portfolio to...
In the finance world, yard is slang for one billion. The term comes from the French word milliard, which means one billion. For example, if the United States were to buy 200 new fighter jets for the...