Finance Definitions
A-Share: A-shares are a share classification for common or preferred stock. Share classification refers to the different types of shares that investors can own in a company’s stock.
Absolute owner: This is the sole owner of a piece of property, such as a building, vehicle, or piece of equipment.
Accrue: This is a security (investment) which pays interest at regular intervals. When it is sold, interest may have built up and this interest will be paid to the new owner. Interest built up like this is called accrued interest.
Ad Valorem: If a duty is ad valorem the duty varies with the price of the asset which is being transferred.
Additional Value Contribution: It refers to the extra benefits or advantages that a particular action, investment, or decision brings beyond the expected or baseline level of value. It signifies the additional positive impact or outcome that is achieved beyond what is typically anticipated.
Annual percentage rate (APR): The interest rate charged, expressed as a percent per year, for the use of credit.
Assets: possessions that have economic value (some of which may provide an economic and/or financial return).
Bank: A company chartered by state or federal government to offer numerous financial services, such as checking and savings accounts, loans, and safe-deposit boxes; the Federal Deposit Insurance Corporation (FDIC) insures accounts in federally chartered banks and most state-chartered banks.
Bond: A certificate of indebtedness issued by a government or a company, promising to repay borrowed funds to the lender at a fixed rate of interest and at predetermined intervals.
Bond Yield: Bond yield is the return an investor realizes on a bond and can be derived in different ways. The coupon rate is the annual interest rate established when the bond is issued. The current yield depends on the bond's price and its coupon, or interest payment.
Board of Directors: The board of directors is responsible for overseeing the management and strategic direction of the corporation. Directors are elected by the shareholders and make decisions on behalf of the company. They have fiduciary duties to act in the best interests of the corporation and its shareholders.
Budget: A plan to manage income, spending, and saving.
Call Option: A contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks.
Capital Gains: A profit realized from the sale of property, stocks, or other investments.
Capital Market: The capital market encompasses the trade in both stocks and bonds. These are long-term assets bought by financial institutions, professional brokers, and individual investors.
Carried Interest: Carried interest is a share of profits from a private equity, venture capital, or hedge fund paid as incentive compensation to the fund's general partner.
Certificate of Deposit (CD): a certificate issued by a bank to a person depositing money in an account for a specified period of time. A penalty is charged for early withdrawal from most CD accounts.
Commodities: Commodities, such as oil, gold, natural gas, or agricultural products, can be traded in financial markets through commodity contracts. These contracts represent the right to buy or sell a specified quantity of the commodity at a predetermined price and future date.
Commodity Market: A commodity market is a marketplace for buying, selling, and trading raw materials or primary products. Commodities are often split into two broad categories: hard and soft commodities. Hard commodities include natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans, and pork.
Common Stocks: Common stocks, also known as common shares or ordinary shares, represent ownership in a company and give shareholders certain rights and privileges. When individuals purchase common stocks, they become partial owners or shareholders of the company, with the potential to benefit from the company's financial success.
Compound interest: A situation in which interest is earned on previously earned interest in such a way that earnings accumulate more rapidly over time.
Corporation: A corporation is a legal entity that is separate and distinct from its owners, known as shareholders or stockholders. It is created by filing articles of incorporation with the appropriate government authority, typically at the state or national level. Once established, a corporation has its own legal rights, liabilities, and obligations.
Derivatives: Derivatives are financial contracts whose value is derived from an underlying asset or benchmark. Examples include options, futures, swaps, and forward contracts. Derivatives are often used for hedging, speculation, or risk management purposes.
Dividend: It refers to a portion of a company's profits that is distributed to its shareholders as a way to provide a return on their investment. It is a form of payment made by the company to its shareholders, typically in the form of cash, although dividends can also be issued as additional shares of stock or other property.
Dividend Yield: Dividend yield is a measure of the annual dividend payment relative to the stock price. It is calculated by dividing the annual dividend per share by the stock price. Dividend yield is often used by investors to assess the income potential of dividend-paying stocks.
Extrinsic Value: Extrinsic value measures the difference between the market price of an option, called the premium, and its intrinsic value. Extrinsic value is also the portion of the worth that has been assigned to an option by factors other than the underlying asset's price. The opposite of extrinsic value is intrinsic value, which is the inherent worth of an option.
Financial Market: Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. Financial markets are vital to the smooth operation of capitalist economies.
Fixed Income: Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products.
Fomenting: fomenting occurs when a small group of informed people attempts to drive down a stock's price by spreading false information, rumors, and otherwise damaging information.
Fundamental Analysis: Fundamental analysis (FA) measures a security's intrinsic value by examining related economic and financial factors. Intrinsic value is the value of an investment based on the issuing company's financial situation and current market and economic conditions.
Futures Contract: A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.
Growth Investing: Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
Hedge Fund: Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors.
Hedging: Hedging attempts to eliminate the volatility associated with the price of an asset by taking offsetting positions in it—that is, contrary to what the investor currently has. The main purpose of speculation, on the other hand, is to profit from betting on the direction in which an asset will be moving.
Hurdle Rate: The hurdle rate, also called the minimum acceptable rate of return, is the lowest rate of return that the project must earn in order to offset the costs of the investment.
Initial Public Offering (IPO):An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors.
Insider Trading: Insider trading involves trading in a public company's stock or other securities by employees with non-public, material information about the company. Insider trading can be either illegal or legal depending on when the insider makes the trade and the laws of the country the person is in.
Internal Rate of Return (IRR): The internal rate of return is the expected annual amount of money, expressed as a percentage, that the investment can be expected to produce for the company over and above the hurdle rate.
Intrinsic Value: Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model. Intrinsic value is different from the current market price of an asset. However, comparing it to that current price can give investors an idea of whether the asset is undervalued or overvalued.
Margin Call: A margin call is a demand made by a brokerage firm to an investor who has purchased securities using borrowed funds (margin) when the value of the investor's account falls below a certain threshold known as the maintenance margin. The purpose of a margin call is to bring the account's equity back up to the required level or to request additional collateral to cover potential losses.
Margin Loan: A margin loan, also known as margin trading or buying on margin, is a type of loan provided by a brokerage firm to an investor. It allows the investor to borrow funds to purchase securities, such as stocks, bonds, or mutual funds, using the securities themselves as collateral. Margin loans can amplify both potential gains and losses for the investor.
Money Market: The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year.
Option Contract: An option contract is a financial derivative that gives the holder (buyer) the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. The underlying asset can be stocks, bonds, commodities, currencies, or other financial instruments.
Preferred Stocks: Preferred stocks, also known as preference shares or preferred shares, are a type of ownership interest in a company that combines features of both common stocks and bonds. Preferred stocks represent a higher claim on a company's assets and earnings compared to common stocks, but they generally do not carry voting rights like common shares.
P/E Ratio: The P/E ratio, or price-to-earnings ratio, is a financial metric used to evaluate the valuation of a company's stock. It is calculated by dividing the market price per share by the earnings per share (EPS). The P/E ratio is a commonly used tool for investors to assess the relative value of a stock and compare it to other companies or the overall market.
Primary Market: When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. This market is also called the new issues market. In many cases, the new issue takes the form of an initial public offering (IPO).
Private Equity: Private equity (PE) is ownership or interest in an entity that is not publicly listed or traded. A source of investment capital, private equity (PE) comes from high-net-worth individuals (HNWI) and firms that purchase stakes in private companies or acquire control of public companies with plans to take them private and delist them from stock exchanges.
Put Option: a put gives the holder the right, but not the obligation, to instead sell the underlying stock at the strike price on or before expiration. A long put, therefore, is a short position in the underlying security, since the put gains value as the underlying price falls (they have a negative delta).
Resistance: Resistance is a price or price zone above the current market that contains the upside movement of an asset. Resistance is where selling interest appears over time, blocking further upside progress.
Return on Investment (ROI): Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.
Risk Management : Risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the fund's investment objectives and risk tolerance.
Secondary Market: The secondary market is where securities are traded after the company has sold its offering on the primary market. It is also referred to as the stock market.
Security: A security refers to a tradable financial instrument that holds monetary value and represents a legal right to ownership or a financial claim on an underlying asset or entity. Securities are commonly bought, sold, and held by investors as part of their investment portfolios.
Scrip Dividend: Sometimes companies will offer to pay dividends in shares instead of cash if shareholders want this.
Shareholder: A shareholder, also known as a stockholder, is an individual, organization, or entity that owns shares or stock in a company. By owning shares, shareholders become partial owners or stakeholders in the company and have certain rights, privileges, and responsibilities.
Share Capital: It is the money invested directly in a company by its members (shareholders).
Short-selling: Short selling is an investment or trading strategy that speculates on the decline in a stock or other security’s price. It is an advanced strategy that should only be undertaken by experienced traders and investors.
Speculation: Speculation involves trying to make a profit from a security's price change, whereas hedging attempts to reduce the amount of risk, or volatility, associated with a security's price change.
Speculative Bubble: A speculative bubble is a spike in asset values within a particular industry, commodity, or asset class to unsubstantiated levels, fueled by irrational speculative activity that is not supported by the fundamentals.
Statistical Arbitrage: statistical arbitrage (or stat arb) refers to a group of trading strategies that utilize mean reversion analyses to invest in diverse portfolios of up to thousands of securities for a very short period of time, often only a few seconds but up to multiple days.
Stocks: Stocks represent ownership shares in a company, entitling the shareholder to a portion of the company's assets and profits. Stockholders may also have voting rights in certain corporate matters.
Support: Support, or a support level, refers to the price level that an asset does not fall below for period of time. An asset's support level is created by buyers entering the market whenever the asset dips to a lower price.
Technical Analysis: Technical analysis differs from fundamental analysis, in that traders attempt to identify opportunities by looking at statistical trends, such as movements in a stock's price and volume. The core assumption is that all known fundamentals are factored into price, thus there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future.
Unrealized Gains/Loss: An unrealized gain is an increase in the value of an asset or investment that an investor has not sold, such as an open stock position. An unrealized loss is a decrease in the value of an ongoing investment.
Value Investing: Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices—on sale.
Venture Capital: Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
Volatility: Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured from either the standard deviation or variance between returns from that same security or market index.