Glossary of Terms

This list is based on the glossary from Bill Cara's book, Lessons from the Trader Wizard. If the word you want is not here, just ask in the Discourse.

A note to readers:
While many of these definitions are meant as a reference section for readers, some definitions are a reflection of my blog, and are, therefore, tongue-in-cheek.

alternate PPT

in China known as the Pork Protection Team similar in concept to the US Strategic Petroleum Reserve, but focuses on hog reserves to control pork prices from escalating out of control.

American depository receipts (ADRs)

a negotiable certificate issued by a US bank representing a specified number of shares (or one share) in a foreign stock that is traded on a US exchange. ADRs are denominated in US dollars, with the underlying security held by a US financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

arbitrage

the simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges
or marketplaces. Also known as a “riskless profit”.

arbitrageur

a type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits.

backwardation

a downward sloping forward curve (as in an inverted yield curve); one says that the forward curve is in backwardation. The opposite market condition is known as contango.

basis

1. The variation between the spot price of a deliverable commodity and the relative price of the futures contract for the same actual that has the shortest duration until maturity. 2. A security’s basis is the purchase price after commissions or other expenses. Also known as “cost basis” or “tax basis”. 3. In the context of IRAs, basis is the after-tax balance in the IRA, which originates from nondeductible IRA contributions and rollover of after-tax amounts. Earnings on these amounts are tax-deferred, similar to earnings on deductible contributions and rollover of pretax amounts.

basis points (bp)

a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points and 0.01% = 1 basis point.

bear market

a prolonged period in which investment prices fall, accompanied by widespread pessimism. If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead called a correction. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly.

bear spread

1. An option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options; puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date. 2. A trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses.

book value

1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. 3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on. In the UK, book value is known as “net asset value”.

BRIC

an acronym for the economies of Brazil, Russia, India and China combined. The general consensus is that the term was first prominently used in a Goldman Sachs report from 2003, which speculated that by 2050 these four economies would be wealthier than most of the current major economic powers.

bull market

a prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology.

call

1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process. 2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.

CAPEX (Capital Expenditure)

funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operation. These expenditures can include everything from repairing a roof to building a brand new factory.

certificate of deposit (CD)

a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

cheapest to deliver

the least expensive underlying product that can be delivered upon expiry to satisfy the requirements of a derivative contract.

Chinese Wall concept

the ethical (not physical) barrier between different divisions of a financial (or other) institution to avoid conflict of interest. A Chinese Wall is said to exist, for example, between the corporate-advisory area and the brokering department to separate those giving corporate advice on takeovers from those advising clients about buying shares. The “wall” is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, and allow staff to take advantage of facts that are not yet known to the general public.

closed-ended funds

a mutual fund that has been closed — either temporarily or permanently — to new investors because the investment advisor has determined that the fund’s asset base is getting too large to effectively execute its investing style.

combination

when an investor holds a position in both call and put options on the same asset.

commercial paper

an unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from two to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing, and usually have a limited or nonexistent secondary market.

Commodity Research Bureau (CRB Index)

an index that measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodity trades.

compound annual growth rate (CAGR)

the year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

contract for difference (CFD)

an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.

convertible bonds

a bond that can be converted into a predetermined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called “CVs”.

convertible securities (CVs)

a debt instrument that combines a coupon paying bond with the option to convert the bond into common stock at a set price. These are frequently described as hybrid securities because they combine features of debt and equity, converting to ordinary shares at a set date based on a pre-determined ratio.

counter-cyclical stock

a type of stock in which the underlying company belongs to an industry or niche with financial performance that is negatively correlated to the overall state of the economy. As a result, the stock’s price will also tend to move in a direction that is opposite to the general economic trend, meaning appreciation occurs during times of recession and depreciations in value occur in times of economic expansion.

covered call

an options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium. This is also known as a “buywrite”.

debenture

unsecured debt backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.

debt instrument

a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower.

discretionary or free cash flow

measure of financial performance calculated as operating cash flow minus capital expenditures. In other words, free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it’s tough to develop new products, make acquisitions, pay dividends and reduce debt.

disinflation

a drop in the inflation rate, ie, a reduction in the rate at which prices rise.

Dow Jones Industrial Average (DJIA)

the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.

Dow 30 / Dow 30 Industrials Index

the Dow Jones Industrial Index top 30 companies.

equity, debt, commodity or currency derivative

a derivative instrument with underlying assets based on equity securities. An equity derivative’s value will fluctuate with changes in its underlying asset’s equity, which is usually measured by share price.

exchange-traded funds (ETFs)

a fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index; they never track actively managed mutual fund portfolios (because most actively managed funds only disclose their holdings a few times a year, so the ETF would not know when to adjust its holdings most of the time). Investors can do just about anything with an ETF that they can do with a normal stock, such as short selling. Because ETFs are traded on stock exchanges, they can be bought and sold at any time during the day (unlike most mutual funds).

the Fed

the Federal Reserve Bank. These are banks that carry out federal operations, including controlling the money supply and regulating member banks. There are 12 District Feds, headquartered in Boston, New York, Philadelphia, Cleveland, St. Louis, San Francisco, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas.

FETV

financial entertainment television. Also known as CNBC.

Financial Accounting Standards Board (FASB)

a seven-member independent board consisting of accounting professionals who establish and communicate standards of financial accounting and reporting in the United States. FASB standards, known as generally accepted accounting principles (GAAP), govern the preparation of corporate financial reports and are recognized as authoritative by the Securities and Exchange Commission.

Forex

an over-the-counter market where buyers and sellers conduct foreign exchange transactions. It is also called the foreign exchange market.

generally accepted accounting principles (GAAP)

the common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

greater fool theory

belief held by one who makes a questionable investment, with the assumption that he/she will be able to sell it later to a bigger fool.

Global Industry Classification Standard (GICS®)

a standardized classification system for equities developed jointly by Morgan Stanley Capital International (MSCI) and Standard & Poor’s. The GICS methodology is used by the MSCI indexes, which include domestic and international stocks, as well as by a large portion of the professional investment management community. The GICS hierarchy begins with 10 sectors and is followed by 24 industry groups, 67 industries and 147 sub-industries. Each stock that is classified will have a coding at all four of these levels.

son of gnomes

the movers and shakers of capital markets who control HB&B, mainstream media, the largest corporations and, some say, Presidents and Prime Ministers.

going concern value (sometimes called enterprise value, fair value or equity value)

the value of a company as an ongoing entity. This value differs from the value of a liquidated company’s assets, because an ongoing operation has the ability to continue to earn profit, while a liquidated company does not.

goldilocks

term used to describe the US economy, implying that it is “not too hot, not too cold”, an optimal environment for equity prices to rise. This term is used extensively by Larry Kudlow and his cohorts at CNBC.

HB&B

humungous banks and brokers, the Goldman Sachs and Lehman Bros of the world. The HB&B control large amounts of capital that can be used to manipulate market prices.

HBOP

humungous bail-out package.

hedging

making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

high-yield bonds or junk bonds

a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Based on the two main credit rating agencies, high-yield bonds carry a rating of ‘BBB’ or lower from S&P, and ‘Baa’ or lower from Moody’s. Bonds with ratings above these levels are considered investment grade.Credit ratings can be as low as ‘D’ (currently in default), and most bonds with ‘C’ ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high.

hold

be in possession of or have in one’s portfolio; or an analyst rating which (paradoxically) usually means don’t hold.

HPEC

humungous private equity corporation.

initial public offering (IPO)

the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. Also referred to as a “public offering”.

J6P

Joe 6-pack.

junior issues

generally speaking, any issue that ranks lower in claim to another issue in terms of dividends, interest, principal, etc.

kicker

a right, warrant or some other feature added to a debt instrument to make it more desirable to potential investors.

law of large numbers

in statistical terms, a rule that assumes that as the number of samples increases, the average of these samples is likely to reach the mean of the whole population. When relating this concept to finance, it suggests that as a company grows, its chances of sustaining a large percentage in growth diminish. This is because as a company continues to expand, it must grow more and more just to maintain a constant percentage of growth.

Lehman Brothers US Aggregate Index

an index used by bond funds as a benchmark to measure their relative performance. It includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year.

limit order

an order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being cancelled.

London Interbank Offered Rate (LIBOR)

an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.

long-term MA

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.

market order

an order to buy or sell a stock immediately at the best available current price. A market order is sometimes referred to as an “unrestricted order”.

mini-bubble

1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs. 3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts. A mini-bubble has these characteristics, but on a shorter, smaller scale.

Morgan Stanley Capital International (MSCI)

a leading provider of equity, fixed-income and hedge fund indexes. MSCI has been providing global equity indexes for more than 30 years. In 2003, it launched a new family of US equity indexes. Morgan Stanley’s global equity benchmarks have become the most widely used international indexes by institutional investors across 23 developed and 27 emerging markets.

moving average convergence divergence (MACD) or moving average
departure analysis

a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

naked call

an options strategy in which an investor writes (sells) call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the security shares that are eligible to be exercised under the options contract. This strategy is sometimes referred to as an “uncovered call” or a “short call”.

naked shorting

the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. However, some professional investors and hedge funds take advantage of loopholes in the rules to sell shares without making any attempt to borrow the stock.

net asset value (NAV)

the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. NAVs are calculated at the end of each business day.

New York Stock Exchange (NYSE)

the largest stock exchange in the US, located on Wall Street in New York City. The NYSE is responsible for setting policy, supervising member activities, listing securities, overseeing the transfer of member seats, and evaluating applicants. Of the exchanges, the NYSE has the most stringent set of requirements in place for the companies whose stocks it lists, and even meeting these requirements is not a guarantee that the NYSE will list the company.

open-ended fund

a type of mutual fund where there are no restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell.

OPM

other peoples’ money.

organic growth

the growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and therefore, are not considered organic.

Organisation for Economic Co-operation and Development (OECD)

the OECD is a group of 30 member countries who discuss and develop economic and social policy.

par

1. The face value of a bond. Generally $1,000 for corporate issues, with higher denominations such as $10,000 for many government issues. 2. A dollar amount assigned to a security when first issued.

penny dreadful

a negative cash-flow development company (always with a great story to hook the punters!).

PE ratio

a valuation ratio of a company’s current share price compared to its per-share earnings. Also sometimes known as “price multiple” or “earnings multiple”.

Plunge Protection Team (PPT)

created in 1989 as an outgrowth of the President’s Working Group on Financial Markets, this group of government agencies, stock exchanges and HB&B are primarily responsible for preventing destabilizing stock market declines. Their footprints can be regularly seen in market manipulations.

POG

price of gold.

preferred stock

a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The precise details as to the structure of preferred stock is specific to each corporation.

premium

1. The total cost of an option. 2. The difference between the higher price paid for a fixed-income security and the security’s face amount at issue. 3. The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. The premium is paid by the insured party to the insurer, and primarily compensates the insurer for bearing the risk of a payout should the insurance agreement’s coverage be required.

Producer Price Index (PPI)

a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

profit margin (PM)

a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.

punter

a risk-taker who trades the penny dreadfuls.

put

an option contract giving the owner the right, but not the obligation,
to sell a specified amount of an underlying asset at a set price within a
specified time. The buyer of a put option estimates that the underlying
asset will drop below the exercise price before the expiration date.

range-bound (ie, side-tracking) trading

a trading strategy that identifies stocks trading in channels. By finding major support and resistance levels with technical analysis, a trend trader buys stocks at the lower level of support (bottom of the channel) and sells them near resistance (top of the channel).

registered representative (RR)

an individual who is licensed to sell securities and has the legal power of an agent, having passed the Series 7 and Series 63 examinations.

relative strength

a measure of price trend that indicates how a stock is performing relative to other stocks in its industry.

relative strength index (RSI)

a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. RSI 7, 14 and 28 can be seen on some charting services versus RSI 7 Daily, Weekly and Monthly.

restructuring

a significant modification made to the debt, operations or structure of a company. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy.

rights

a security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire.

rule of 72

the estimation of doubling time on an investment, for which the compounded annual rate of return times the number of years must equal roughly 72 for the investment to double in value.

Standard & Poor’s 500 (S&P 500)

a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value, and its performance is thought to be representative of the stock market as a whole. It provides a broad snapshot of the overall US equity market, over 70% of all US equity is tracked by the S&P 500. The index selects its companies based upon their market size, liquidity, and sector. Most of the companies in the index are solid mid-cap or large-cap
corporations.

US Securities and Exchange Commission (SEC)

a government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the US. The SEC is composed of five commissioners appointed by the US President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets.

Sharpe Ratio

a risk-adjusted measure developed by William F. Sharpe, calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance.

short-interest ratio (SIR)

a sentiment indicator that is derived by dividing the short interest by the average daily volume for a stock. This indicator is used by both fundamental and technical traders to identify the prevailing sentiment the market has for a specific stock. Also known as the “short ratio”.

sinking fund

a means of repaying funds that were borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market.

spread

1. The difference between the bid and the ask price of a security or asset. 2. An options position established by purchasing one option and selling another option of the same class but of a different series.

stop order

an order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order. Also referred to as a “stop” and/or “stop-loss order”.

straddle

an options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

strap

an options strategy created by being long in one put and two call options, all with the exact same strike price, maturity and underlying asset. Also referred to as a “triple option”.

strip

1. For bonds, the process of removing coupons from a bond and then selling the separate parts as a zero coupon bond and interest paying coupons. Also known as a stripped bond or zero coupon bond. 2. In options, a strategy created by being long in one call and two put options, all with the exact same strike price.

Subchapter S corporations

a form of corporation, allowed by the IRS for most companies with 75 or fewer shareholders, which enables the company to enjoy the benefits of incorporation but be taxed as if it were a partnership.

swap

traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps.

switch

a futures-trading strategy involving the offset of one contract with entry into another position that has nearly identical details but a longer expiration. Commonly referred to as a “roll forward”.

synthetic put

an investment strategy of short selling a security and entering a long position on its call.

T-bill rate

a negotiable debt obligation issued by the US government and backed by its full faith and credit, having a maturity of one year or less. US Treasury Bills are exempt from state and local taxes. These securities do not pay a coupon rate of interest, and the interest earned is estimated by taking the difference between the price paid and the par value of the bond, and calculating that rate of return on an annual basis.

Temporary Open Market Injections (TOMOs)

trillions of Federal Reserve bank monies that are “loaned” to the HB&B, who in turn use the funds to manipulate prices, up or down, in various market sectors.

tickee

consumers money for discretionary spending.

Treasury Bills (T-bills)

a short-term debt obligation backed by the US government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

Federal Funds Rate

the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.

trend trading

a trading strategy that attempts to capture gains through the analysis of an asset’s momentum in a particular direction. The trend trader enters into a long position when a stock is trending upward (successively higher highs). Conversely, a short position is taken when the stock is in a down trend (successively lower highs).

warrant

a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.

year-over-year

compared to the same time period in the previous year.

yield

the annual rate of return on an investment, expressed as a percentage.

yield curve

a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year US Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. It can be positive, negative, normal, steep, inverted or flat.

zero-sum game

a situation in which one participant’s gains result only from another participant’s equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.