Glossary of Technical Terms - Fund Accounting
Certificates issued by a U.S. depositary
bank, representing foreign shares held by the bank, usually by a branch or
correspondent in the country of issue. One ADR may represent a portion of a
foreign share, one share or a bundle of shares of a foreign corporation. If the
ADR's are "sponsored," the corporation provides financial information
and other assistance to the bank and may subsidize the administration of the
ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign
share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept
essentially identical by arbitrage. American depositary shares(ADSs) are a
similar form of certification.
American
option
An option that may be exercised at any time
up to and including the expiration date.
American Stock Exchange (AMEX)
The second-largest stock exchange in the United States.
It trades mostly in small-to medium-sized companies.
American-style option
An option contract that can be exercised at
any time between the date of purchase and the expiration date. Most
exchange-traded options are American style.
Date on which particular news concerning a
given company is announced to the public. Used in event studies, which
researchers use to evaluate the economic impact of events of interest.
The simultaneous buying and selling of a security
at two different prices in two different markets, resulting in profits without
risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly
efficient markets seldom exist.
Arm's length price
The price at which a willing buyer and a
willing unrelated seller would freely agree to transact.
Asian
option
Option based on the average price of the
asset during the life of the option.
Ask
This is the quoted ask, or the lowest price
an investor will accept to sell a stock. Practically speaking, this is the quoted
offer at which an investor can buy shares of stock; also called the offer
price.
Ask
price
A dealer's price to sell a security; also
called the offer price.
A security that is collateralized by loans, leases,
receivables, or installment contracts on personal property, not real estate.
At-the-money
An option is at-the-money if the strike price
of the option is equal to the market price of the underlying security. For
example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money
Barrier options
Contracts with trigger points that, when
crossed, automatically generate buying or selling of other options. These are
very exotic options.
In the bond market, the smallest measure used
for quoting yields is a basis point. Each percentage point of yield in bonds
equals 100 basis points. Basis points also are used for interest rates. An
interest rate of 5% is 50 basis points greater than an interest rate of 4.5%.
Basket
options
Packages that involve the exchange of more
than two currencies against a base currency at expiration. The basket option
buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot
market rate or at a prearranged rate of exchange. A basket option is generally
used by multinational corporations with multicurrency cash flows since it is
generally cheaper to buy an option on a basket of currencies than to buy
individual options on each of the currencies that make up the basket.
Bear
An investor who believes a stock or the
overall market will decline. A bear market is a prolonged period of falling
stock prices, usually by 20% or more..
Bid
price
This is the quoted bid, or the highest price
an investor is willing to pay to buy a security. Practically speaking, this is
the available price at which an investor can sell shares of stock.
Bid-asked
spread
The difference between the bid and asked
prices.
Binomial option pricing model
An option pricing model in which the
underlying asset can take on only two possible, discrete values in the next
time period for each value that it can take on in the preceding time period.
Black-Scholes option-pricing model
A model for pricing call options based on arbitrage
arguments that uses the stock price, the exercise price, the risk-free interest
rate, the time to expiration, and the standard deviation of the stock return.
in the domestic sterling market.
Broker
An individual who is paid a commission for executing
customer orders. Either a floor broker who executes orders on the floor of the
exchange, or an upstairs broker who handles retail customers and their orders.
Call option
An option contract that gives its holder the
right (but not the obligation) to purchase a specified number of shares of the
underlying stock at the given strike price, on or before the expiration date of
the contract.
Call
premium
Premium in price above the par value of a bond
or share of preferred stock that must be paid to holders to redeem the bond or
share of preferred stock before its scheduled maturity date.
Capital
gain
When a stock is sold for a profit, it's the
difference between the net sales price of securities and their net cost, or
original basis. If a stock is sold below cost, the difference is a capital loss.
A dividend paid in cash to a company's
shareholders. The amount is normally based on profitability and is taxable as
income. A cash distribution may include capital gains and return of capital in
addition to the dividend.
The fee paid to a broker to execute a trade,
based on number of shares, bonds, options, and/or their dollar value. In 1975,
deregulation led to the creation of discount brokers, who charge lower
commissions than full service brokers. Full service brokers offer advice and
usually have a full staff of analysts who follow specific industries. Discount
brokers simply execute a client's order -- and usually do not offer an opinion
on a stock. Also known as a round-turn.
Common
stock
These are securities that represent equity
ownership in a company. Common shares let an investor vote on such matters as
the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.
The risk that the other party to an agreement
will default. In an options contract, the risk to the option buyer that the option
writer will not buy or sell the underlying as agreed.
Covered
call
A short call option position in which the writer
owns the number of shares of the underlying stock represented by the option
contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that
option decides to exercise it.
Covered
Put
A put option position in which the option
writer also is short the corresponding stock or has deposited, in a cash
account, cash or cash equivalents equal to the exercise of the option. This
limits the option writer's risk because money or stock is already set aside. In
the event that the holder of the put option decides to exercise the option, the
writer's risk is more limited than it would be on an uncovered or naked put
option.
The process of analyzing information on
companies and bond issues in order to estimate the ability of the issuer to
live up to its future contractual obligations.
The risk that an issuer of debt securities or
a borrower may default on his obligations, or that the payment may not be made
on a negotiable instrument.
The practice of hedging with a futures
contract that is different from the underlying being hedged.
The exchange rate between two currencies
expressed as the ratio of two foreign exchange rates that are both expressed in
terms of a third currency.
An entry in a translated balance sheet in
which gains and/or losses from translation have been accumulated over a period
of years. The CTA account is required under the FASB No. 52 rule.
Taking advantage of divergences in exchange
rates in different money markets by buying a currency in one market and selling
it in another market.
A financial future contract for the delivery
of a specified foreign currency.
Currency
option
An option to buy or sell a foreign currency.
Value of cash, accounts receivable, inventories,
marketable securities and other assets that could be converted to cash in less
than 1 year.
Amount owed for salaries, interest, accounts
payable and other debts due within 1 year.
Under this currency translation method, all
of a foreign subsidiary's current assets and liabilities are translated into
home currency at the current exchange rate while noncurrent assets and
liabilities are translated at the historical exchange rate, that is, the rate
in effect at the time the asset was acquired or the liability incurred.
Fees charged by an institution that holds
securities in safekeeping for an investor.
Date dividend checks are mailed.
Date
of record
Date on which holders of record in a firm's
stock ledger are designated as the recipients of either dividends or stock
rights.
An order to buy or sell stock that automatically
expires if it can't be executed on the day it is entered.
Day
trading
Refers to establishing and liquidating the
same position or positions within one day's trading.
IOUs created through loan-type transactions -
commercial paper, bank CDs, bills, bonds, and other instruments.
Earnings before interest and income taxes
plus one-third rental charges, divided by interest expense plus one-third
rental charges plus the quantity of principal repayments divided by one minus
the tax rate.
Debt
swap
A set of transactions (also called a
debt-equity swap) in which a firm buys a country's dollar bank debt at a
discount and swaps this debt with the central bank for local currency that it
can use to acquire local equity.
Declaration
date
The date on which a firm's directors meet and
announce the date and amount of the next dividend.
A differential in promised yield that
compensates the investor for the risk inherent in purchasing a corporate bond
that entails some risk of default.
Default
risk
Also referred to as credit risk (as gauged by
commercial rating companies), the risk that an issuer of a bond may be unable
to make timely principal and interest payments.
A non-cash expense that provides a source of
free cash flow. Amount allocated during the period to cover tax liabilities
that have not yet been paid.
The options available to the seller of an
interest rate futures contract, including the quality option, the timing
option, and the wild card option. Delivery options make the buyer uncertain of
which Treasury Bond will be delivered or when it will be delivered.
A transaction in which the buyer's payment
for securities is due at the time of delivery (usually to a bank acting as
agent for the buyer) upon receipt of the securities. The payment may be made by
bank wire, check, or direct credit to an account.
DTC is a user-owned securities depository
which accepts deposits of eligible securities for custody, executes book-entry
deliveries and records book-entry pledges of securities in its custody, and
provides for withdrawals of securities from its custody.
Contracts such as options and futures whose
price is derived from the price of the underlying financial asset.
Derivative markets
Markets for derivative instruments.
Derivative security
A financial security, such as an option, or
future, whose value is derived in part from the value and characteristics of
another security, the underlying security.
Detachable warrant
A warrant entitles the holder to buy a given
number of shares of stock at a stipulated price. A detachable warrant is one
that may be sold separately from the package it may have originally been issued
with (usually a bond).
For foreign exchange, the number of U.S.
dollars needed to buy one unit of a foreign currency.
The interest rate that the Federal Reserve
charges a bank to borrow funds when a bank is temporarily short of funds.
Collateral is necessary to borrow, and such borrowing is quite limited because
the Fed views it as a privilege to be used to meet short-term liquidity needs,
and not a device to increase earnings.
A dividend is a portion of a company's profit
paid to common and preferred shareholders. A stock selling for
$20 a share with an annual dividend of $1 a
share yields the investor 5%.
Dividend
clawback
With respect to a project financing, an
arrangement under which the sponsors of a project agree to contribute as equity
any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.
Dividend payout ratio
Percentage of earnings paid out as dividends.
Dividends per share
Amount
of cash paid to shareholders expressed as dollars per share.
Dividend policy
An
established guide for the firm to determine the amount of money it will pay as
dividends.
Dividend rate
The
fixed or floating rate paid on preferred stock based on par value.
Dividend rights
A
shareholders' rights to receive per-share dividends identical to those other
shareholders receive.
Dividends per share
Dividends paid for the past 12 months divided
by the number of common shares outstanding, as reported by a company. The
number of shares often is determined by a weighted average of shares
outstanding over the reporting term.
A financial measure defined as revenues less
cost of goods sold and selling, general, and administrative expenses. In other
words, operating and non-operating profit before the deduction of interest and
income taxes.
Earnings per share (EPS)
EPS, as it is called, is a company's profit
divided by its number of outstanding shares. If a company earned $2 million in
one year had 2 million shares of stock outstanding, its EPS would be $1 per
share. The company often uses a weighted average of shares outstanding over the
reporting term.
Effective annual interest rate
An annual measure of the time value of money
that fully reflects the effects of compounding.
Effective annual yield
Annualized interest rate on a security
computed using compound interest techniques.
Effective call price
The strike price in an optional redemption
provision plus the accrued interest to the redemption date.
Effective
date
In an interest rate swap, the date the swap
begins accruing interest.
Effective
margin (EM)
Used with SAT performance measures, the
amount equaling the net earned spread, or margin, of income on the assets in
excess of financing costs for a given interest rate and prepayment rate
scenario.
Effective
rate
A measure of the time value of money that
fully reflects the effects of compounding.
The transfer of funds between bank accounts
through the Automated Clearing House (ACH) system.
An option that is part of the structure of a
bond that provides either the bondholder or issuer the right to take some
action against the other party, as opposed to a bare option, which trades
separately from any underlying security.
Emerging
markets
The financial markets of developing
economies.
Employee stock fund
A firm-sponsored program that enables
employees to purchase shares of the firm's common stock on a preferential
basis.
Equity
Represents ownership interest in a firm. Also
the residual dollar value of a futures trading account, assuming its liquidation
at the going market price.
Equity
cap
An agreement in which one party, for an
upfront premium, agrees to compensate the other at specific time periods if a
designated stock market benchmark is greater than a predetermined level.
Equity
options
Securities that give the holder the right to
buy or sell a specified number of shares of stock, at a specified price for a
certain (limited) time period. Typically one option equals 100 shares of stock.
Equity
swap
A swap in which the cash flows that are
exchanged are based on the total return on some stock market index and an interest
rate (either a fixed rate or a floating rate).
Eurobond
A bond that is (1) underwritten by an
international syndicate, (2) offered at issuance simultaneously to investors in
a number of countries, and (3) issued outside the jurisdiction of any single
country.
The marketplace in which shares, options and futures
on stocks, bonds, commodities and indices are traded. Principal US stock
exchanges are: New York Stock Exchange (NYSE), American Stock Exchange (AMEX)
and the National Association of Securities Dealers (NASDAQ)
The
Exchange
A nickname for the New York stock exchange. Also known as the Big
Board. More than 2,000 common and preferred stocks are traded. The exchange is
the oldest in the United
States, founded in 1792, and the largest. It
is located on Wall Street in New York
City.
Also called currency risk, the risk of an
investment's value changing because of currency exchange rates.
The process of completing an order to buy or
sell securities. Once a trade is executed, it is reported by a Confirmation
Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1
(mutual funds) and 5 (stocks) days after an order is executed. Settlement times
for exchange listed stocks are in the process of being reduced to three days in
the U. S.
Execution
costs
The difference between the execution price of
a security and the price that would have existed in the absence of a trade,
which can be further divided into market impact costs and market timing costs.
Ex-dividend
This literally means "without dividend."
The buyer of shares when they are quoted ex-dividend is not entitled to receive
a declared dividend.
Ex-dividend
date
The first day of trading when the seller,
rather than the buyer, of a stock will be entitled to the most recently
announced dividend payment. This date set by the NYSE (and generally followed
on other US
exchanges) is currently two business days before the record date. A stock that
has gone ex-dividend is marked with an x in newspaper listings on that date.
Ex-rights
In connection with a rights offering, shares
of stock that are trading without the rights attached.
Ex-rights
date
The date on which a share of common stock
begins trading ex-rights.
Amount at which an asset would change hands
between two parties, both having knowledge of the relevant facts. Also referred
to as market price.
Long-lived property owned by a firm that is
used by a firm in the production of its income. Tangible fixed assets include
real estate, plant, and equipment. Intangible fixed assets include patents,
trademarks, and customer recognition.
Forward
contract
A cash market transaction in which delivery
of the commodity is deferred until after the contract has been made. It is not
standardized and is not traded on organized exchanges. Although the delivery is
made in the future, the price is determined at the initial trade date.
A term used to designate all contracts
covering the sale of financial instruments or physical commodities for future delivery
on a commodity exchange.
Agreement to buy or sell a set number of shares
of a specific stock in a designated future month at a price agreed upon by the
buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the
right to buy or sell, whereas a futures contract is the promise to actually
make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth
of an underlying investment.
A fund that may employ a variety of
techniques to enhance returns, such as both buying and shorting stocks based on
a valuation model.
A strategy designed to reduce investment risk
using call options, put options, short selling, or futures contracts. A hedge
can help lock in existing profits. Its purpose is to reduce the volatility of a
portfolio, by reducing the risk of loss.
A statement showing the revenues, expenses,
and income (the difference between revenues and expenses) of a corporation over
some period of time.
An investment/trading strategy that exploits
divergences between actual and theoretical futures prices.
A call or put option based on a stock market
index.
Initial margin requirement
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.
Initial public offering (IPO)
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
very large risks for the possibility of large gains. IPO's by investment
companies (closed-end funds) usually contain underwriting fees which
represent a load to buyers.
Interest
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.
Interest
payments
Contractual debt payments based on the coupon rate of interest and the principal amount.
Interest rate swap
A binding agreement between counterparties to
exchange periodic interest payments on some predetermined dollar principal,
which is called the notional principal amount. For example, one party will pay fixed
and receive variable.
Interest
subsidy
A firm's deduction of the interest payments
on its debt from its earnings before it calculates its tax bill under current
tax law.
In-the-money
A put option
that has a strike price higher than the
underlying futures price, or a call option
with a strike price lower than the
underlying futures price. For example, if the March COMEX silver futures contract is trading at $6 an ounce, a March call
with a strike price of $5.50 would be considered in-the-money by $0.50 an
ounce.
A method of
valuing inventory that uses the cost of the most recent item in
inventory first.
Liability
A financial
obligation, or the cash outlay that must be made at a specific time to
satisfy the contractual terms of such an obligation.
LIBOR
The London
Interbank Offered Rate; the rate of interest that major international banks in London charge each other
for borrowings. Many variable interest rates in the U.S. are based on spreads off of
LIBOR. There are many different LIBOR tenors.
LIFO (Last-in-first-out)
The
last-in-first-out inventory valuation methodology. A method of valuing
inventory that uses the cost of the most recent item in inventory first.
A market is
liquid when it has a high level of trading activity, allowing buying and
selling with minimum price disturbance. Also a market characterized by the
ability to buy and sell with relative ease.
Value of
property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records
of a company, usually on a "cost" basis and thus does not necessarily reflect the
market value of the assets.
An investment
advisory fee charged by the financial advisor to a fund based on the fund's average assets, but sometimes determined on a sliding
scale that declines as the dollar amount of the fund increases.
Margin
This allows
investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of
a stock and the loan a broker makes.
Margin account (Stocks)
A leverageable
account in which stocks can be purchased for a combination of cash and a loan.
The loan in the margin account is collateralized by the stock and, if
the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock.
Margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
Margin call
A demand for
additional funds because of adverse price movement. Maintenance margin requirement, security deposit maintenance
Marked-to-market
An arrangement
whereby the profits or losses on a futures contract are settled each day.
Market capitalization
The total
dollar value of all outstanding shares. Computed as shares times current market
price. It is a measure of corporate size.
Market prices
The amount of
money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated
by only commercial consideration.
Market return
The return on the market portfolio.
Market value
(1) The price
at which a security is trading and could presumably be purchased
or sold. (2) The value investors believe a firm is worth; calculated by
multiplying the number of shares outstanding by the current market price of a
firm's shares.
For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.
A loan secured
by the collateral of some specified real estate property which obliges the
borrower to make a predetermined series of payments.
Mutual fund
Mutual funds
are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter.
Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor's money.
Still others seek to invest in companies that are growing at a rapid pace.
Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose
no sales charge. Mutual funds are investment companies
regulated by the Investment Company Act of 1940.
National
Association of Securities Dealers Automatic Quotation System. An electronic
quotation system that provides price quotations to market participants about
the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included
in the NASDAQ system.
Net asset value (NAV)
The value of a
fund's investments. For a mutual fund, the net asset value per share usually represents the fund's
market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may
vary significantly from the net asset value.
Net assets
The difference
between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on
the other hand.
Net income
The company's
total earnings, reflecting revenues adjusted for costs of
doing business, depreciation, interest, taxes and other expenses.
Net investment
Gross, or
total, investment minus depreciation.
Net present value (NPV)
The present value of the expected future cash flows minus the cost.
Option
Gives the buyer the right, but not the
obligation, to buy or sell an asset at a set price on or before a given date.
Investors, not companies, issue options. Investors who purchase call options
bet the stock will be worth more than the price set by the option (the strike
price), plus the price they paid for the option itself. Buyers of put options
bet the stock's price will go down below the price set by the option. An option
is part of a class of securities called derivatives, so named because these
securities derive their value from the worth of an underlying investment.
Options
contract
A contract that, in exchange for the option
price, gives the option buyer the right, but not the obligation, to buy (or
sell) a financial asset at the exercise price
from (or to) the option seller within a specified time period, or on a
specified date (expiration date).
Out-of-the-money
option
A call option
is out-of-the-money if the strike price
is greater than the market price of the underlying security.
A put option is out-of-the-money if the strike price is less than the market price of the
underlying security.
Assume XYZ Co.
sells for $25.50 per share and has earned $2.55 per share this year;
$25. 50 = 10
times $2. 55
XYZ stock
sells for 10 times earnings. P/E = Current stock price divided by trailing
annual earnings per share or expected annual earnings per share.
The date on
which each shareholder of record will be sent a check for the declared dividend.
Portfolio
A collection
of investments, real and/or financial.
Preferred shares
Preferred
shares give investors a fixed dividend from the company's earnings. And more importantly: preferred shareholders
get paid before common shareholders.
Preferred stock
A security that shows ownership in a corporation and
gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to
the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares characteristics of both common stock and debt.
Premium
(1) Amount
paid for a bond above the par value. (2) The price of an option contract; also,
in futures trading, the amount the futures price exceeds
the price of the spot commodity.
To buy, to be long, to have an ownership position.
An option granting the right to sell the underlying futures contract. Opposite of a call.
This security gives investors the right to sell (or put)
fixed number of shares at a fixed price within a given time frame. An
investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain
time in order to protect, or hedge, an existing investment.
Quotation
The bid and offered
prices a dealer is willing to buy or sell at.
The rate, as a proportion of the principal,
at which interest is computed.
Record
date
(1) Date by which a shareholder must
officially own shares in order to be entitled to a dividend. For example, a
firm might declare a dividend on Nov 1, payable Dec 1 to holders of record Nov
15. Once a trade is executed an investor becomes the "owner of
record" on settlement, which currently takes 5 business days for securities,
and one business day for mutual funds. Stocks trade ex-dividend the fourth day before the record date,
since the seller will still be the owner of record and is thus entitled to the
dividend. (2) The date that determines who is entitled to payment of principal
and interest due to be paid on a security. The record date for most MBSs is the
last day of the month, however the last day on which they may be presented for
the transfer is the last business day of the month. The record date for CMOs
and asset-backed securities vary with each issue.
Redeemable
Eligible for redemption under the terms of
the indenture.
The market
where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market. The New York stock Exchange, as well as all
other stock exchanges, the bond markets, etc., are secondary markets. Seasoned
securities are traded in the secondary market.
Security
Piece of paper
that proves ownership of stocks, bonds and other investments.
When payment is
made for a trade.
Settlement date
The date on
which payment is made to settle a trade. For stocks traded on US exchanges, settlement
is currently 3 business days after the trade. For mutual funds, settlement usually occurs in the U.S.the day
following the trade. In some regional markets, foreign shares may require months to settle.
Settlement price
A figure
determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries.
Shareholders' equity
This is a
company's total assets minus total liabilities. A company's net worth is the same thing.
Short position
Occurs when a
person sells stocks he or she does not yet own. Shares must be borrowed, before the sale, to make
"good delivery" to the buyer. Eventually, the shares must be bought
to close out the transaction. This technique is used when an investor believes the stock price will go down.
Spread
(1) The gap
between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of
separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an
underwriter buys an issue from a firm and the price at which
the underwriter sells it to the public. (4) The price an issuer pays above a
benchmark fixed-income yield to borrow money.
Stock
Ownership of a
corporation which is represented by shares which represent a piece of the corporation's assets and earnings.
Stock dividend
Payment of a
corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in
a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate
the business. Unlike a cash dividend, stock dividends are not taxed until sold.
Stock exchanges
Formal
organizations, approved and regulated by
the Securities and Exchange Commission (SEC), that are made up of members that use
the facilities to exchange certain common stocks. The two major national
stock exchanges
are the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE or AMEX). Five regional stock exchanges
include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati.
The Arizona
stock exchange is an after hours electronic marketplace where anonymous participants
trade stocks via personal
computers.
Stock option
An option in which the underlying is the common stock of
a corporation.
Stock split
Occurs when a
firm issues new shares of stock but in turn lowers the current market price of
its stock to a level that is proportionate to pre-split prices. For example, if
IBM trades at $100 before a 2-for-1 split, after the split it will trade at $50
and holders of the stock will have twice as many shares than they had before
the split.
To buy
or sell short; that is, to have some amount that is owned or owed on an asset
or derivative security.
In an interest rate swap, the date that the counterparties
commit to the swap. Also, the date on which a trade occurs. Trades generally
settle (are paid for) 1-5 business days after a trade date. With stocks, settlement
is generally 3 business days after the trade.
Trading
Buying and selling securities.
Transactions costs
The time, effort, and money necessary,
including such things as commission fees and the cost of physically moving the
asset from seller to buyer.
Underlying
The
"something" that the parties agree to exchange in a derivative contract.
Underlying asset
The asset that
an option gives the option holder the right to buy or to sell.
Underlying security
Options: the security
subject to being purchased or sold upon exercise of an option contract. For
example, IBM stock is the underlying security to IBM options. Depository
receipts: The class, series and number of the foreign shares represented by the
depository receipt.
Value-added tax
Method of
indirect taxation whereby a tax is levied at each stage of production on the
value added at that specific stage.
Value-at-Risk model (VAR)
Procedure for
estimating the probability of portfolio losses exceeding some specified
proportion based on a statistical analysis of historical market price trends, correlations,
and volatilities.
A security entitling the holder to buy a proportionate amount of stock
at some specified future date at a specified price, usually one higher than
current market. This "warrant" is then traded as a security, the
price of which reflects the value of the underlying stock. Warrants are issued
by corporations and often used as a "sweetener" bundled with another
class of security to enhance the marketability of the latter. Warrants are like
call options, but with much longer time spans -- sometimes years. In addition,
warrants are offered by corporations whereas exchange traded call options are
not issued by firms.
A tax levied
by a country of source on income paid, usually on dividends remitted to the
home country of the firm operating in a foreign country. Tax levied on dividends
paid abroad.
The seller of
an option, usually an individual, bank, or company, that issues the option and
consequently has the obligation to sell the asset ( if a call) or to buy the
asset (if a put) on which the option is written if the option buyer exercises
the option.
Yield
curve
The graphical depiction of the relationship
between the yield on bonds of the same credit quality but different maturities.
Yield
ratio
The quotient of two bond yields.
Yield
to maturity
The percentage rate of return paid on a bond,
note or other fixed income security if you buy and hold it to its maturity date.
The calculation for YTM is based on the coupon rate, length of time to maturity
and market price. It assumes that coupon interest paid over the life of the bond
will be reinvested at the same rate.
