# Glossary

## Absolute Return

Absolute Return is an assets result or performance, irrespective of any comparisons with other assets in the same asset class.

Adjusted Cost Base is the cost calculation used when calculating an asset value for tax debt purposes.

## Asset Backed Securities

These are the securities that derive their values from an underlying asset or pool of assets. In other words, a financial security backed by any other form, like a lease, loan or receivables is an asset backed security.

## Average Annual Growth Rate

The arithmetic mean (average) of the growth of investment value (portfolio value), over a period of years, to yield a particular rate that will give growth information at first glance.

## Average Annual Return

The percentile metric used to measure historical returns on an investment or portfolio and to evaluate the quality of potential investments.

## Captive Fund

These are usually held by investment banks, insurance companies and institutional asset managers. These funds deal solely with the institution that has ownership and provides them with investment services.

## Conversion

It refers to the exchange of a convertible asset (like a convertible bond) into another type of asset at a fixed price, on or before a fixed date.

## Discounted Cash Flow

A valuation method used to estimate the profitability of a particular investment option. DCF analysis uses future free cash flow projections and discounts them, using weighted average cost of capital, to get the present value used to analyze the competence of investment.

## DDM

A process to value the price of a stock using estimated dividends and discounting them back to the current value. The stock is considered to be undervalued if the DDM value is higher than the current trading value of the shares. It can be calculated as: Value of Stock = Dividend Per Share/difference of Discount Rate and Dividend Growth Rate.

## Debt Equity Ratio

The measurement of the company’s financial position which is calculated by dividing the total liabilities and the shareholder’s equity. It estimates or measures the proportion of debt and equity the company is using, for financing its assets.

## Earnings Retention

Setting aside a percentage of net earnings to be reinvested in the business as opposed to being used to pay out dividends is called earnings retention.

## Equivalent Annual Cost

A cost that is used to evaluate projects with different life spans, equivalent annual cost is the present value of all costs of a project divided by the annuity factor for the project life.

## Erasure Guarantee

This guarantee is made by accredited financial institution to lend authenticity and legitimacy to any changes made to bonds and securities.

## Flat Yield Curve

This yield curve signifies that an investor cannot gain any extra compensation for holding on to an investment as both the short and long term rates are exactly the same.

## Guaranteed Bond

A guaranteed bond is a bond issued by one firm, and the payment of interest and principal on the bond is guaranteed by another firm.

## Hedge

To invest in a low risk investment option so that the risk of adverse price movement for a high risk asset is reduced.

## Holding Period

Refers to the expected amount of time for which an investor holds on to an investment.

## IMF

The acronym for International Monetary Fund.

## Impact Fee

A fee which is imposed on property developers by the municipalities for new infrastructure that is being built or increased due to new property development.

## Incentive Stock Option

The part of the total share capital of the employing company which is given to the employee as a performance bonus.

## Index Amortization Note

A financial instrument whose payment schedule is determined by the prevailing interest rates.

## Joint and Survivor Annuity

Also known as ‘joint life annuity’, it is an annuity that pays a lifetime income to two or more beneficiaries, usually the annuitant and his or her spouse.

## Junk Bond

A high risk bond, which is ranked below investment grade by the major bond rating agencies. Such rating is usually given to the bonds when the bond issuer is undergoing financial problems, for which it may not be able to pay interest or repay the entire loan. The bond issuer usually offers a very high interest rate on such bonds in order to offset the high risk of default.

Also referred to as high yield bonds (grade BB or below) and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above.  They generally should be part of a diversified portfolio for sophisticated investors.

## Keogh Plan

A retirement plan for self-employed and individuals working in unincorporated businesses, where they can keep a specified amount of their pre-tax income. No tax is imposed on the contributions as well as the investment earning of this account, until withdrawals are made during retirement. Keogh plan is a federally approved retirement program and there are several types of investment opportunities like mutual funds, certificate of deposit, etc., that are offered.

## Key Rate Duration

The measure of portfolio or security sensitivity. It basically measures the value of a portfolio or a security’s sensitivity in relation to a 1% change in the yield for a given maturity, while holding all other maturities constant.

An option where investors can lock-in gains on the underlying asset or security, once its price reaches a predetermined price level.

## LBO

Stands for ‘leveraged buyout’, which is a method of acquiring a company with a substantial amount of borrowed money. Usually, the acquiring company uses its own assets as well as the assets of the acquired company as ‘collateral’ to secure such a large loan.

## Margin of Safety

An investing principle that states that an investor should only buy a security if the market price is significantly lower than its intrinsic value.

## Market Arbitage

Theoretically, earning a riskless profit with zero investment, by simultaneously buying a security in one market and selling the same in another is termed as a market arbitrage.

## Market Momentum

A measure of market sentiment and is calculated by multiplying the change in market index value with the aggregate trading volumes.

This serves as the slope of the security market line (SML) and is the difference between the expected return on market portfolio and the risk free rate.

## Negative Amortization

When the installments paid by the debtor, fail to cover the interest on the principal, the principal balance increases and this is termed as negative amortization.

## Negative Gearing

When money is borrowed to buy an investment asset, with the investment not making enough money to even cover the interest expenses and other maintenance costs, it is termed as negative gearing.

## Negotiated Market

A secondary market transaction where prices of the securities traded are negotiated between the buyers and the sellers.

## Net Position

The status of the trader’s overall position after netting all his long positions and short positions in various securities is called his net position.

## Net Present Value Rule

An investment rule that states that, an investment can only be accepted if its net present value (NPV) is greater than 0. An NPV less than 0 signifies that the investment will actually decrease shareholder’s wealth instead of increasing it.

## Obligation Bond

A municipal bond with a face value higher than the value of the asset who’s mortgage it is used to secure.

## Original Issue Discount Bond (OID Bond)

The discount on par value (difference between the redemption price and issue price) at the time of bond issue is termed as an original issue discount, and such a bond is called an original issue discount bond.

## Paired Shares

These are stocks of two sister concern companies, that is, different companies under the same management. There shares are sold as one unit and mostly appear on the same certificate.

## Participating Preferred Stock

The type of stock where an additional dividend based on predetermined conditions, that is paid along with the normally specified rate that are to be received by preferred dividends, is known as participating preferred stock. The additional dividends are paid only to preferred shareholders, if the common shareholders receive dividends that exceed a specified per-share amount. The preferred stock holders also have a right to receive the stock’s purchasing price and also the pro-rata share of any remaining proceeds that the common shareholder’s receive in case of liquidation.

## Payout Ratio

The shareholders receiving an earning paid out in dividends is known as payout ratio. The payout ratio is used by the investors to determine what the company does with their earnings. The pay out ratio is calculated as: Payout Ratio = Dividends per Share/ Earnings per Share.

## Peer Perform

The investment rating in which a security that is expected to provide returns which are consistent with the securities provided by other companies within its sector and is used by analyst is known as peer perform. This is a neutral assessment and attempts to predict the movement of the security along with similar companies.

## Performance Based Index

The stock index in which all dividends and other cash events are paid out to shareholders is known as performance based index. The performance based index added in any dividend amounts to the net share price before calculating the index return, during the performance measurements over a given period of time.

## Perpetual Preferred Stock

Adjusted The stock without a maturity date is known as perpetual preferred stock. The redemption privileges on such shares are always provided to the issuers of perpetual stock. The dividends are paid indefinitely on the issued perpetual preferred stocks.

## Profit Warning

The advice issued by a company regarding the earnings that won’t be meeting the exceptions of the analysts is known as profit warnings.

The variables (more than 100) used in a stock valuation system in seven major categories, to help determine the value of a stock. A weighted average of all 100 variables is used to determine the overall score for a particular stock

## Absolute Return

Absolute Return is an assets result or performance, irrespective of any comparisons with other assets in the same asset class.

## Qualified Dividend

A type of dividend that applies the capital gains tax rates. The regular income tax rates are usually higher than these tax rates.

## Renounceable Right

Stocks that have a value and are trade-able. These are issued by a corporation to shareholders to purchase more shares from the corporation’s stocks at a discount.

## Restricted Stock

The kind of sales restrictions on insider holdings is known as restricted stocks. The trading of such stocks should be carried out in compliance with the special SEC regulations. The section 1244 of the Internal Revenue Code outlines the regulations to be followed.

## Return On Average Equity (ROAE)

The adapted version of the return on equity (ROE) where the shareholder’s equity is changed to average shareholder’s equity is known as Return On Average Equity (ROAE).

## Risk Measures

The historical predictors of investment risk and volatility and the components in the modern portfolio theory (MPT) statistical measures is known as risk measures.

## Reverse Stock Split

The increase in par value of stocks or earnings per share by reduction in the number of a corporation’s shares outstanding. The market value of the total number of shares does not change.

## Sales per Share

The ratio of total revenue earned per share over 12 months. The total revenue earned in a fiscal year by the weighted average of shares outstanding for the fiscal year is used to calculate the sales per share. It is also known as ‘revenue per share’. Sales per Share= (Total Revenue/Sales)/ Average Shares Outstanding.

## Seasoned Issue

An established company that has earned a good reputation with its existing shares that have stable price movements and substantial trading volume, issues securities that are known as seasoned issue.

## Secondary Liquidity

The public offering as a part of liquidity when shares are distributed to retail and institutional investors, is known as secondary liquidity. The shares are then sold off to other interested buyers by these secondary parties.

## Secular Market

The rise and fall of particular investment or asset class over a period of time caused by a market that is driven by forces that are in place over many years. The strong investor sentiment drives prices higher in a secular bull market and weal sentiment causes selling pressure in a secular bear market.

## Seed Capital

The fund raised from company founder’s personal assets, friends, family, etc. to start a new business is known as seed capital.

## Settlement Period

The time period given to parties that is required to satisfy the transaction’s obligations between the settlement date and the transaction date. The seller must deliver the security within the settlement period and the buyer must settle all payments within the settlement period.

## Share Capital

The cash or other considerations that help raise funds by issue of shares is known as share capital. The share capital increases every time the company sells new shares to public in return for cash.

## Short Selling

The sale of security that is not owned by the seller or the sale that is completed by the delivery of a security borrowed by the seller, is called short selling.

## Small Cap

The stocks with a small market capitalization are known as small cap. The capitalization of a company that is between USD 300 million to USD 2 billion comes under small cap.

## Speculative Capital

The investors earmarking funds for the purpose of speculation is known as speculative capital. Extreme volatility and a high probability of loss is associated with speculative capital.

## Split Off

Absolute The stock of a subsidiary that is exchanged for shares on a parent company in a type of corporate reorganization is known as split off.

## Stock

A security type which can signify the ownership in a capital and claim on corporation’s assets and earnings is known as stocks.

## Synthetic Dividend

The dividend-like payment stream that resembles the periodic cash receipts from a dividend-paying stock that is created by an investor with certain financial securities is known as a synthetic dividend.

## Tender Offer

The offer of purchasing a few or all the shareholder’s shares in a corporation is known as a tender offer. The price offered is mostly slightly higher than the market price.

## Thin Market

The market with low number of buyers and sellers, with very few transactions is known as a thin market. The prices in a thin market are more volatile and assets are less liquid. It is also known as a ‘narrow market’.

## Tick Index

The number of stocks that are trading on an uptick subtracted by the number of stocks trading on a downtick is called tick index.

## Timing Risk

The risk taken by an investor in buying or selling a stock based on future price predictions is known as timing risk. The potential beneficial movements missed, are explained under timing risk, that may occur due to an error in timing.

## Top-Down Analysis

The analysis of macro-economic trends and then analysis of the details of the micro components is known as top-down analysis.

## Under Reporting

An illegal process that is done to avoid payment of taxes. Under reporting is the deliberate showing of income less than what has been actually earned.

## Undercapitalization

A company is said to be in undercapitalization when it does not have sufficient cash to conduct its business smoothly. It is also not in a condition to pay its creditors. When a company goes through undercapitalization, the chances of it going bankrupt increases.

## Universe of Securities

A set of securities with a common feature is called the universe of securities. The common feature can be the index, the market capitalization or the industry.

## VAMI

The abbreviation for Value Added Monthly Index. It is given by Previous VAMI x (1 + Current Rate of Return). It is the index that is used to chart the monthly performance of a hypothetical USD 1000 investment.

## VPT

A VPT or Volume Price Trend indicator is a technical indicator that consists of a cumulative volume line that shows the addition or subtraction of change in share price trend and current volume depending upon the upward or downward trend of the market.

## WAI

WAI or Wealth Added Index is a metric system that attempts to measure the wealth created or destroyed for the shareholders of a company. This was a metric system designed by Stern Stewart & Co. which takes into account more variables than just the profits or share growth of the company.

## Warrant Coverage

An agreement between a company and its shareholders in which the company issues warrants equal to some percentage of the dollar amount of the shareholders investment.

The premium paid for the rights associated with a warrant.

## Wasting Asset

Can be defined as a derivative security that loses value with time.

## Workout Period

The time span within which the discrepancies in fixed income securities are adjusted.

## WTO

WTO stands for the World Trade Organization. This is an international organization that handles or deals with the rules for the trades between different nations.

## Yield

The income return on an investment that is represented annually as a percentage based on the investment cost is referred to as the yield from that investment.

## Yield to Call

The yield to call is the yield of the bond or note that holds the security until the call date. This yield remains valid if, and only if, the security is called prior to maturity.