In the context of finance. absence of cash flow needed to fulfill financial debts and meet obligations. In the context of investments, describes a lightly tradedinvestment such as a stock or bond that is not easily converted into cash.
Used for listed equity securities. Too many market
orders of one kind-buy or to sell or limit
orders to buy up or sell down, without matching orders of the opposite
kind. An imbalance usually follows a dramatic event such as a takeover,
research recommendation, or death of a key executive, or a government ruling
that will significantly affect the company's business. If it occurs before
the stock exchange opens, trading
in the stock is delayed. If it occurs during
the trading day, the specialist halts
and then suspends trading (with
floor governor's approval) until enough matching orders can be found to make
an orderly market.
Term used in the NASD rules of fair practice to refer to one's parents, brothers, sisters, children, relatives supported financially, father-in-law, mother-in-law, sister-in-law, and brother-in-law.
A bondportfolio strategy whose goal is to eliminate the portfolio's risk, in case of a general change in the rate of interest, through the use of duration.
A development strategy followed by many Latin American countries and other
LDCs that emphasize import
substitution-accomplished through protectionism-as the route to economic growth.
Refers to the value of an asset, service, or company that is not physically recorded in any accounts but is implicit in the product, e.g., the opportunity cost of cash remaining in a savings account and not invested.
Indication that the customer has revealed trading interest to multiple brokers and that the trade will take place with the firm having the highest bid or lowest offer. Antithesis of exclusive.
Used in the context of general equities. Below the inside market when one is attempting to sell the stock; at a significant discount. Antithesis of premium.
In the context of general equities, keeping an activity within the firm. For example, rather than go to the marketplace and sell a security for a client to anyone, an attempt is made to find a buyer to complete the transaction with the firm. Although a listed trade must be taken to the floor of the stock exchange, matching supply with demand within the confines of the firm results in higher commissions for the firm.
Used in the context of general equities. Having a sell inquiry in a stock (not a firm customer sell order), often entailing a capital commitment. Antithesis of looking for.
A bond whose payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business.
A management company focused on managing a mutual fund whose primary purpose is income generation, typically investing in bonds and high dividend yielding stocks.
Clause in a life insurance contract preventing the insurer from revoking the policy after it has been in force for a year or two if the life insurance company discovers any important facts that the policyholder may have concealed, such as experiencing a stroke.
Costs and benefits that would occur if a particular course of action is taken, compared to those that would have obtained if that course of action had not been taken.
Agreement between lender and borrower that details specific terms of the bondissuance. Specifies legal obligations of bond issuer and rights of bondholders. An indenture spells out the specific terms of a bond, as well as the rights and responsibilities of both the issuer of the security and the holder.
Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stock, bond, and some commoditiesmarkets, in terms of market prices and weighting of companies the index.
Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index.
Total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend. Usually represented by the letter "e" in stock tables.
The yield, based on the most recent quarterly rate times four. To determine the yield, divide the annual dividend by the price of the stock. The resulting number is represented as a percentage. See: Dividend yield.
(1) Notice given by a dealer (through Autex) or customer of an interest in buying or selling stock, sometimes including specific volume and price; (2) approximation of where a specialist sees buy and sell interest to tighten the range to an opening price.
Used in the context of general equities. Technical or fundamental measurement that securities analysts use to forecast the market's direction, such as investment advisory sentiment, volume of stock trading, direction of interest rates, and buying or selling by corporate insiders.
The expression in a graph of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utility.
A retirement account that may be established by an employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred.
A provision of the law governing IRA's that enables a retiree or anyone receiving a lump-sum payment from a pension, profit-sharing, or salary reduction plan to transfer the amount into an IRA.
A statistic determined by the Federal
Reserve Board focusing on the total output of all US factories and mines
on a monthly basis. Used as an economic
indicator.
Group of assets dominated by at least one other portfolio under the mean
variance rule. For example, if A has both lower return and higher volatility
than B, we say A is dominated by B.
Argument that industries in the developing and emerging sectors of the economy need protection against international competition in order to establish themselves.
A clause in a contract providing for increases or decreases in inflation depending on fluctuations in the cost of living, production costs, and so forth.
The correlation between predicted and actual stockreturns, sometimes used to measure the contribution of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.
The ratio of annualized expected residualreturn to residual risk. A central measurement for active
management, value added is proportional to the square of the information ratio.
Conveying intelligence through a firm's actions. A firm's dividend policy, for example, provides signals to investors concerning the value of the firm's stock.
Has various meanings. It could refer to a form that is filed with the Securities and Exchange Commission in advance of a major event, such as a public offering or a share repurchase. It could also refer to filings that occur before legal inside transactions.
(1) Amount of money deposited by both buyers and sellers of futures contracts to ensure performance of the terms of the contract; (2) amount of cash or eligible securities required to be deposited with a broker before engaging in margin transactions.
When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the Board of Governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.
A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept considerable risks for the possibility of large gains. IPOs by investment companies (closed-end funds) usually include underwriting fees that represent a load to buyers.
(1) Firm is now followed by analysts at a particular securities house; (2) Indication to cover short position by purchasing the underlying stock (this cancels out the short position).
Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
These are directors and senior officers of a corporation-in effect, those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.
Computerized subscriber service that serves as a vehicle for the fourth market. "Instinet" is registered with the SEC As a stock exchange it numbers among its subscribers a large number of mutual funds and other institutional investors linked to each other by computer terminals. The system permits subscribers to display bids and offers (which are exposed system wide for whatever length of time the initiating party specifies) and to consummate trades electronically. Instinet is largely used by market makers, but, nonmarket makers and customers have equal access.
Service that assembles analysts' estimates of future earnings for thousands of publicly traded companies, detailing how many estimates are available for each company and the high, low, and average estimates for each.
The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.
Notesissued
by a federal agency whose obligations are guaranteed by the full-faith-and-credit
of the government, even though the agency's responsibilities are not necessarily
those of the US government.
An insurance term referring to the relationship between a policy's insured person or property and the potential beneficiary. The beneficiary must have an insurable interest in the insured person or property to receive payment of the policy if the insured died while the policy was in force.
Guarding against property loss or damage making payments in the form of premiums to an insurance company, which pays an agreed-upon sum to the insured in the event of loss.
A broker, independent of any insurance company, who represents the interests of the buyer in searching for insurance coverage at the lowest cost and providing the highest benefit to the buyer.
A contract detailing an insurance policy and outlining what risks are insured, what insurance premiums are to be paid by the policyholder, what deductibles prevail, and all the details associated with a policy.
Payments calculated by the insurance company based on risk factors that must be made by the insured to guarantee protection of property loss under an insurance policy.
A bank or financial account that is insured for the benefit of the depositor, protecting against loss in the event that the savings institution becomes insolvent. See: FDIC.
A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.
Used in futures or options market to refer the purchase of one month of a contract and selling another month in the same contract, in the hope that the price difference will widen or narrow, depending on the investment.
The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.
A debt limitation that prohibits the issuance of additional long-term debt if the issuer's interest coverage would, as a result of the issue, fall below some specified minimum.
An agreement whereby one party, for an up-front premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).
Expression that the interest rate differential between two countries is equal to the difference between the forwardforeign exchange rate and the spot rate.
The chance that a security's value will change due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk: The risk that spread income will suffer because of a change in interest rates.
A cash value life insurance policy whose insurance dividend rates vary with respect to inflation, enabling the policyholder to avoid the loss of purchasing power associated with inflation.
Electronic communications network linking the trading floors of seven registered exchanges to permit trading among them in stocks listed on either the NYSE or AMEX and one or more regional exchanges. Through ITS, any broker or market maker on the floor of any participating exchange can reach other participants for an execution whenever the nationwide quote shows a better price available. A floor broker on the exchange can enter an ITS order to assure excecution of all of an offering or bid, instead of splitting it with competing brokers.
The federal agency responsible for the collection of federal taxes, including personal and corporate income taxes, Social Security taxes, and excise and gift taxes.
Simultaneous buying and selling of foreign securities and ADRs
to capture the profit potential created by
time, currency, and settlement inconsistencies
that vary across international borders.
A receipt issued by a bank as evidence of
ownership of one or more shares of the underlyingstock of a foreign corporation that the bank
holds in trust. The advantage of the IDR structure is that the corporation
does not have to comply with all the issuing requirements of the foreign country
where the stock is to be traded. The US version
of the IDR is the American
Depository Receipt (ADR).
Association established to stimulate country development; it was especially suited for less prosperous nations, since it provided loans at low interest rates.
The attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns.
A corporation owned by the World Bank that produces a number of well-known stock indexes for emerging markets. Its major role is to provide financing for projects in less developed countries.
A subsidiary incorporated in the US,
usually in Delaware, whose sole purpose once was to issuedebentures overseas and invest the
proceeds in foreign operations, with the interest
paid to foreign bondholders not subject
to US withholding tax. Elimination of the corporate withholding
tax has ended the need for this type of subsidiary.
Theory that nominalinterest rates and inflation rates in different countries are connected. The Fisher equation says the nominal interest rate is the product of one plus the real interest rate times one plus the expected rate of inflation.
An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.
A mutual fund that invests strictly in securities markets throughout the world, excluding the United States. A global fund, on the other hand, invests in both foreign and domestic securities.
Swiss law association located in Zurich that regroups all the participants on the Eurobondprimary and secondary markets. Establishes uniform trading procedures in the international bond markets.
Organization that is the worldwide federation of national standards bodies. The ISO 4217 are the standard three letter currency codes. These codes are usually composed of the ISO 3166 two letter country code plus a third letter representing the name of the currency.
Effected when payment and receipt both occur within the budget, or when payment is made from off-budget federal entities whose budget authority and outlays are excluded from the budget totals.
For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO (First in, first out), LIFO (Last in, first out) or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For securities firms: Securities bought and held by a broker or dealer for resale.
Used in the context of factoring and general finance to refer to loans to consumer product producers that use inventory as collateral. See also: Inventory loan.
The ratio of annual sales to average inventory, which measures the speed at which inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.
Legislation passed in 1940 requiring financial advisers to register with the Securities and Exchange Commission. The measure was enacted to protect the public from fraud or misrepresentation by investment advisers.
Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. See: Underwriters.
A bond that is assigned a rating in the top four categories by commercial credit rating companies. S&P classifies investment-grade bonds as BBB or higher, and Moody's classifies investment grade bonds as Baa or higher. Related: High-yield bond.
The basic mathematical technique of finance that calculates the value of an investment as the present value of all future cash flows expected to be generated by the investment.
A strategy, or plan of attack, an investor uses when deciding how to allocate capital among several options including stocks, bonds, cash equivalents, commodities, and real estate. The strategy should take into account the investor's tolerance for risk as well as future needs for capital.
A closed-end fund regulated by
the Investment Company Act of 1940. These funds have a fixed number of shares
that are traded on the secondary markets,
like corporate stock. The market price may exceed the net asset
value per share, in which case shares are selling at a premium.
When the market price falls below the (NAV)/share,
shares are selling at a discount. Many
closed-end funds are of a specialized
nature; the portfolio represents a particular
industry or, country. These funds are usually listed on US and foreign
exchanges.
Applies mainly to dealer securities. Fixed income value of a convertible, the price at which the convert would have to sell as a straight debt instrument relative to the yield of other bonds of like maturity, or size, and quality; represents a presumed floor to the bond, assuming the continued creditworthiness of the issuer and the general level of interest rates. Bond value. See: conversion value.
In the mortgage pipeline, risk that occurs when the originator commits loan terms to the borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.
Special accounts that allow saving taxes deferred until money is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of contributions. Withdrawals of tax-deferred contributions are taxed as income, including the capital gains from such accounts.
The implied call imbedded in a MBS. Irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance), and sometimes exercised when it is not in the money. Option exercise like this affects payments on the MBS.
The Milan-based stock exchange, which came into effect after the unification of Italy's ten national exchanges in 1991. All listed securities are traded electronically. The main indexes are the MIB and the MIBTEL, based on the prices of all listed shares, and the MIB 30, based on a sample of the 30 most liquid and highly capitalized shares.