Investing in the correct capital assets and creating an optimum portfolio with the correct mix of assets is always a tough decision to make. Doing the same long-term financial security gets even more complicated even for professionals like myself.
In an attempt to make it relatively simpler for everyone, I have created this finance terminology glossary for you to understand what all can be involved in making the correct choice to park your hard earned money.
I hope you enjoy improving you financial vocabulary. Please feel free to reach out to me in case of any clarifications. All the best!
An investment approach used to exploit pricing anomalies in securities markets that are believed to be exposed to mispricing by utilizing fundamental and/or technical analysis for forecasting of future events and timing of purchases and sales of securities. Synonym: Market Timing.
The total demand for goods and services within an economy.
The amount of output firms are prepared to supply in aggregate at each price level in an economy, assuming the price of inputs are fixed, in order to meet the aggregate demand.
The return generated from a security or a portfolio in excess of its risk-adjusted benchmark return. Synonym: Jensen’s Alpha.
Alternative Investments or Alternative Investment Funds (AIF)
Investments which fall outside the traditional asset classes of equities, property, fixed interest, cash and money market instruments. These are classified into Category I (Private Equity, Venture Funds and Angel Funds), Category II (Infrastructure Debt Funds) and Category III (Hedge Funds).
Annual General Meeting (AGM)
The mandatory annual meeting of directors and ordinary shareholders of a company. The shareholders
receive the company’s report and accounts and have the opportunity to vote on various corporate actions.
An investment that provides a series of pre-specified periodic payments over a specific term or until the occurrence of a pre-specified event. Example: Pension payouts until death.
The process of deriving a risk-free profit by simultaneously buying and selling the same asset in two related markets where a pricing inconsistency exists.
Articles of Association
The legal document which sets out the internal constitution of a company. Included within the Articles will be details of shareholder voting rights and company borrowing powers.
The process of investing an international portfolio’s assets geographically and between asset classes before deciding upon sector and stock selection.
The status required by firms to provide financial services within an economy.
When the futures price is discounted to the price of the underlying asset.
Balance of Payments
Summary of all transactions in between a country and the rest of the world or the difference between a country’s imports and exports.
The first currency quoted in a currency pair on the Forex (foreign exchange) markets. Example: In a USD/INR quote, the base currency is USD.
The difference between the futures price and the price of the underlying asset.
A declining phase in any securities market.
The beneficial owners named is a trust.
The covariance in between the returns from a security/asset and that of the market relative to the variance of returns from the market.
Securities paying out regular interests (fixed or floating) which entitle holders to annual interest and repayment at maturity. Issued by both companies and governments.
The free issue of new ordinary shares to a company’s ordinary shareholders in proportion to their existing shareholdings through the conversion, or capitalization, of the company’s reserves. A bonus issue makes the shares more marketable and cheaper to purchase. Synonym: Capitalization Issue or Scrip Issue.
A rising securities market.
A derivative option that confers a right on the holder to buy a specified amount of an asset at a pre- specified price on or before a pre-specified date.
Capital Gains Tax (CGT)
Tax payable by individuals on profit made on the disposal of certain assets. 2 types: Short term capital gains tax (STCG) and long term capital gains tax (LTCG).
The public institution that regulates a country’s financial system. Central banks typically have responsibility for setting a country’s monetary policies including, short-term interest rate, acting as banker and lender of last resort to the banking system, controlling the money supply and managing the national debt. They usually perform independent of government control.
Ownership designated by certificate.
Certificates of Deposit (CD)
Certificates issued by a financial institution as evidence that interest-bearing funds have been deposited with it. CDs are traded in the money market.
The quoted price of a gilt. The clean price excludes accrued interest or interest to be deducted, as appropriate.
Organizations such as companies which are a fixed size as determined by their share capital.
The process of terminating an open position in a derivatives contract by entering into an equal and opposite transaction to that originally undertaken.
Commercial Paper (CP)
Unsecured bearer securities issued at a discount to par by fully stock exchange listed public limited companies (PLCs). This security does not pay coupons but is redeemed at par.
Amount of money charged for acting as a broker or agent of a security.
Items like gold, sugar, wheat, oil and copper. Derivatives of commodities are exchange traded (Example: oil futures on BSE).
A commodity is a complement for another commodity if a hike in the price of one results in a reduction in demand for the other.
Consumer Price Index (CPI)
Weighted inflation index targeted by the RBI.
When the futures price stands at a premium to the price of the underlying asset.
A standard unit of trading in the derivatives securities segment.
A mechanism which ensures that companies are run in the best interests of their shareholders.
The degree of co-movement between two securities. Correlation does not prove that a steady relation exists between two securities, as correlations can also arise from pure chance.
The predetermined rate of interest applying to a bond over its term. It is expressed as a percentage of the bond’s nominal or par value.
The correlation coefficient between two variables multiplied by their individual standard deviations.
Expansion of loans, which increases the money supply.
Current Account Deficit (CAD)
When imports of goods for current consumption exceed exports.
A corporate bond issued in the domestic bond market and secured on the issuing company’s assets by way of a fixed or a floating charge.
Dematerialized (Form) or Demat
A system where securities are held or owned electronically without usage of physical certificates.
The reduction or drop in nominal value of an assets over the accounting period.
An instrument whose value is based on the price of an underlying asset. Derivatives can be based equity, currency or commodity assets.
The difference in the spot and forward exchange rate that arises when interest rates in the quoted currency are higher than those in the base currency.
The rate of interest used to establish the present value of a sum of money receivable in the future.
Investment strategy of spreading risk by investing in a range of investments.
The distribution of a proportion of a company’s distributable profit to its shareholders.
The most recent paid out dividend expressed as a percentage of the securities current share price.
The weighted average time, expressed in years, for the present value of a bond’s cash flows to be received. Synonym: Macaulay Duration.
The course which an economy conventionally takes as economic growth fluctuates over time. Its 4 stages are recession, depression, recovery and expansion (in order of occurrence).
The growth of Gross Domestic Product (GDP) or Gross National Product (GNP) expressed in real terms, over a financial year.
Economies of Scale
The resulting reduction in a firm’s unit costs as the firm’s productive capacity and output increases. Beyond this point, diseconomies of scale set in.
The annualized compound rate of interest applied to a cash deposit. Synonym: the Annual Equivalent Rate (AER) or Compound Annualized Growth Rate (CAGR).
A condition where demand is equal to supply. Theoretically called perfect balance.
The security which confers a direct stake (or part ownership) in a company’s fortunes. Synonym: Ordinary share capital.
Marketplace for trading investments and securities.
The rate at which one currency is exchanged for another currency.
The period during which the purchase of shares or bonds (on which a dividend or coupon payment has been declared) does not entitle the new holder to this next dividend or interest payment.
Exercise an Option
To take up the right to buy or sell the underlying asset in an option.
See Strike Price.
The period during which the purchase of a company’s shares does not entitle the new shareholder to participate in a rights issue announced by the issuing company.
The theoretical price of a futures contract.
The use of taxation, government borrowing and spending policies to either boost or restrain domestic demand in the economy in order to maintain price stability. Synonym: Stabilization Policy.
Fixed Interest Security
A tradable negotiable instrument, issued by a borrower for a fixed term, during which a regular and predetermined fixed rate of interest based upon a nominal value is paid to the holder until it is redeemed and the principal is repaid.
The simple rate of interest per annum applicable to a cash deposit.
See Running Yield.
Flight to Quality
The movement of capital to a safe haven during periods of market turmoil to avoid capital loss.
Floating Rate Notes (FRNs)
Bonds or debt securities issued with a periodically floating coupon referenced to a benchmark interest rate.
Forex or FX
Abbreviation for foreign exchange.
A derivatives contract that creates a legally binding obligation between two parties for one to buy and the other to sell a pre-specified amount of an asset at a pre-specified price on a pre-specified future date.
These are not traded on a derivatives exchange.
Forward Exchange Rate
An exchange rate set today, embodied in a forward contract, that will apply to a foreign exchange transaction at some pre-specified point in the future.
The implied annual compound rate of interest that links one spot rate to another assuming no interest payments are made over the investment period.
The publically traded companies admitted to the Stock Exchange’s official list (NSE or BSE in India).
Firm or person that invests money on behalf of clients.
Fund of Funds
A fund of funds has one overall manager that invests in a portfolio of other existing investment funds and seeks to harness the best investment manager talent available within a diversified portfolio.
The interpretation of financial ratios and yields by studying income statements, cash flow statements and balance sheets of a company. This analysis seeks to establish the intrinsic value of a security or the correct valuation of the broader market.
Further Public Offer (FPO)
A public offer issued by a company whose securities are already listed.
A derivatives contract that creates a legally binding obligation between two parties for one to buy and the other to sell a pre-specified amount of an asset on a pre-specified future date at a price agreed today.
The accumulated value of money invested today at an interest rate over a specific term.
Gross Domestic Product (GDP)
GDP is the total market value of all final goods and services produced domestically in an economy in a financial year.
Global Financial Crisis (GFC)
The economic slump in 2007–08 that was caused by the loans by mortgage banks to substandard borrowers, which had a cascading effect on the banking system, financial markets and spread outside US to Europe and the rest of the world. Low interest rates especially since 2004 and predatory home loan lending, led to easy liquidity which, in turn, led to the GFC.
The latest example of a GFC is the COVID19 induced market crash.
Gross National Product (GNP)
Gross Domestic Product adjusted for income earned by residents from overseas investments and income earned by the economy via foreign investors.
Gross Redemption Yield (GRY)
The annual compound return from holding a bond to maturity, taking into account both interest payments and any capital gain or loss at maturity. Synonym: Yield to Maturity (YTM).
A technique employed to reduce the impact of adverse price movements in financial assets held, typically by using derivatives.
Investor who buys put or call options or owner of a security.
Passive bond management techniques which include cash matching and duration based immunization.
Income Elasticity of Demand (YED)
The effect of a small percentage change in income on the quantity of a good demanded.
A single number that summarizes the collective movement of certain variables at a point in time
in relation to their average value on a base date or a single variable in relation to its base date value.
The rate of change in the general price level or the downfall of the purchasing power of money.
Inflation Risk Premium (IRP)
The additional return demanded by bond investors based on the volatility of inflation in the recent past.
Inheritance Tax (IHT)
Tax on the value of a person’s estate levied upon his/her death (Not applicable in India).
The collateral deposited with the clearing house by the exchange clearing members when opening certain derivative transactions.
Initial Public Offering (IPO)
A new issue of ordinary shares by a company on the stock exchanges for public purchase. Synonym: New Issue.
A financial crime by people who deal, advise to deal or pass the information on unpublished price- sensitive information
The third and final stage of money laundering (a financial crime).
Put option where exercise price is above current market price (or call option where exercise or strike price is below current market price).
Internal Rate of Return (IRR)
The discount rate or rate of interest which when applied to a series of cash flows results in a Net Present Value (NPV) of zero. Synonym: Discounted Cash Flow (DCF) Yield.
A financial services business that specializes in raising equity and debt for companies.
Investment Company with Variable Capital (ICVC)
Alternate terminology used for an open-ended investment company (OEIC).
A company which invests in diversified range of investments (not to be confused with trust).
A security issued without any pre-specified redemption timeling or maturity date.
A financial institution that facilitates the issue of securities.
Long-term economic cycles of 50 years+ duration that result from innovation and investment in new technology.
The second stage in money laundering (a financial crime)
Order type used on a system in trading to buy or sell a security at a specified price or better.
The ease with which a security can be traded in a market or converted into cash. Also commonly described as the cash available in hand in times of emergency for retail investors.
Liquidity Preference Theory
The proposition that investors have a natural preference for short term investments and, therefore, demand a liquidity premium in the form of a higher return the longer the term of the investment.
The risk that securities may be difficult to sell at a reasonable price at the immediate time.
Companies whose securities are listed on the stock exchanges and available to be traded.
A corporate bond that is issued without any underlying collateral or security in the domestic bond market.
The position following the purchase of a security or buying a derivative.
The study of how the aggregation of decisions taken in individual markets determines variables such as national income, employment and inflation. Macroeconomics is also concerned with explaining the relationship between these variables, their rates of change over time and the impact of monetary and fiscal policy on the general level of economic activity.
Manager of Managers Fund (MoM)
A multi-manager fund. It does not invest in other existing retail collective investment schemes. Instead it entails the MoM fund arranging segregated mandates with individually chosen fund managers.
Marginal Cost (MC)
The change in a firm’s total cost resulting from producing one additional unit of output.
Marginal Revenue (MR)
The change in the total revenue generated by a firm from the sale of one additional unit of output.
An organized destination (electronic or physical meeting places) where assets are bought or sold.
Market Capitalization (Market Cap)
The total market value of a company’s shares or other securities in issued publically . Market capitalization is equal to the multiplication of the number of shares (or other securities) by the market price of those shares (or securities).
A stock exchange (BSE/NSE) member firm which quotes prices and trade stocks during the mandatory quote period.
Marking to Market
The process of valuing a position taken by a security either in real-time at the close of the market.
The date at which the capital on a bond is repaid.
A measure of central tendency established by the middle value within an ordered distribution.
A firm or company that is a member of a clearing house or stock exchange.
Memorandum of Association
A legal document that defines a traded company’s powers and its relationship with the outside world.
Micro-economics is the study of the decisions made by individuals and firms the impact of these decisions on the relative prices and quantities of factors of goods and services demanded and supplied.
A measure of central tendency indicating the value that occur most frequently within a data distribution.
Modern Portfolio Theory (MPT)
As per the MPT, it is possible to construct an ‘efficient frontier’ of optimal portfolios offering the maximum possible expected return for all given levels of risk.
The economists who believe that markets are self-correcting, that the level of economic activity can be regulated by controlling the money supply and that fiscal policy is ineffective and possibly harmful as a macroeconomic policy tool. Synonym: New Classical Economists.
The setting of short-term interest rates by a central bank in order to manage domestic demand and achieve price stability in the economy. Monetary policy is Synonym: Stabilization Policy.
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in any given economy or country.
Money Weighted Rate of Return (MWRR)
The internal rate of return (IRR) that equates the value of a portfolio at the start of an investment period plus the net new capital invested during the investment period with the value of the portfolio at the end of this period. The MWRR, therefore, measures the fund growth resulting from both the underlying performance of the portfolio and the size and timing of cash flows to and from the fund over this period.
A fund that offers a portfolio of separately managed funds. There are two main types: fund of funds and manager of managers.
This is the second-largest stock exchange in the US after the New York Stock Exchange (NYSE). The full form is National Association of Securities Dealers Automated Quotations. NASDAQ also operates a stock exchange in Europe (NASDAQ-OMX Europe).
A government’s total outstanding borrowing that is owed to other economies or parties.
The securities whose ownership can be passed freely from one party to another.
Net Present Value (NPV)
The result of subtracting the discounted, or present, value of a project’s expected cash outflows from the present value of its expected cash inflows.
Net Redemption Yield (NRY)
The annual compound return from holding a bond to maturity taking account of both the coupon payments net of income tax and the capital gain or loss to maturity.
The price at which a bond is issued and/or the price below which a company’s ordinary shares cannot be issued.
A distribution whose values are evenly, or symmetrically, distributed about the arithmetic mean. Depicted graphically, a normal distribution is plotted as a symmetrical, continuous bell-shaped curve.
The required rate of return for a firm to remain in business, taking account of all opportunity costs.
The price at which a broker, dealer or agent sell a stock.
The action of initiating a transaction.
Country with no restrictions on trading with other countries.
Type of investment such as OEICs or unit trusts which can expand without limit. See ‘Closed-Ended’.
Open-Ended Investment Company (OEIC)
Collective investment vehicle similar to unit trusts. Alternatively described as an ICVC (Investment Company with Variable Capital).
The cost of forgoing the next best alternative course of action. In economics, costs are defined not as financial but as opportunity costs.
A derivatives contract that confers from one party (the writer) to another (the holder) the right but not the obligation to either buy (call option) or sell (put option) an asset at a pre-specified price on, and sometimes before, a pre-specified future date, in exchange for the payment of a premium.
A call option (derivative) where the strike price is above the market price or a put option (derivative) where it is below.
Over-the-Counter (OTC) Derivatives
Derivatives that are not traded on a derivatives exchange. This happens due to their non-standardized contract specifications.
An investment approach used securities markets which are believed to be price efficient.
A theoretical concept wherein an investment provides an indefinite stream of equal pre-specified periodic payments.
The first stage of money laundering (a financial crime).
A statistical term applied to a particular group where every member or constituent of the group is included.
Potential Output Level
The sustainable level of output produced by an economy when all of its resources are productively employed. Synonym: the Full Employment Level of Output.
The shares issued by a company that rank ahead of ordinary shares for the payment of dividends and for capital repayment in the event of the company going into liquidation.
The amount of cash paid by the holder of an option to the writer in exchange for conferring a right. Also the difference in the spot and forward exchange rate that arises when interest rates in the base currency are higher than those in the quoted currency.
The value of a sum of money receivable at a known future date expressed in terms of its value today. A present value is obtained by discounting the future sum by a known rate of interest.
The function of a stock exchange in bringing securities to the market and raising funds.
Pull to Maturity
A term used to explain why the price of short dated bonds are less affected by interest-rate changes than that of long dated bonds.
Purchasing Power Parity (PPP)
The nominal exchange rate between two countries that reflects the difference in their respective rates of inflation.
An option that confers a right but not the obligation on the holder to sell a specified amount of an asset at a pre-specified price on or sometimes before a pre-specified date.
Qualified Institutional Placement (QIP)
A private placement of already listed securities to institutional investors known as QIBs.
Dealing system driven by securities firms who quote buying and selling prices.
The repayment of principal to the owner of a security.
An official of a stock exchange listed company who maintains the share register.
The inability to reinvest coupons at the same rate of interest as the gross redemption yield (GRY).
Rematerialization or Remat
Conversion of electronic dematerialized shares back into physical securities.
The sale and repurchase of bonds between two parties. The repurchase is executed at a date and price, fixed in advance.
The proportion of deposits held by banks as reserves to meet depositor withdrawals and the Central Bank’s credit control requirements.
A technical analysis term used to describe the ceiling put on the price of a security due to persistent investor-selling at that price level.
Proposal on which shareholders vote.
An organization that provides banking services to individuals and small to medium sized businesses.
The issue of new ordinary shares to a company’s shareholders in proportion to each shareholder’s existing shareholding, usually at a price deeply discounted to that prevailing in the market. Also see Pre-emption Rights.
A statistical term used to describe a subset of a particular population.
Marketplace for trading in existing securities.
Bonds and equities.
The party or individual that creates the trust.
The redemption and cancellation by a company of a proportion of its irredeemable ordinary shares subject to the permission of the High Court and agreement from HM Revenue & Customs.
The nominal value of a company’s equity or ordinary shares.
The position following sale of a security not owned or selling a derivative.
A compound annual fixed rate of interest that applies to an investment over a specific time period. Also see Forward Rate.
Difference between a buying (bid) and selling (ask or offer) price. It is the amount the broker earns in settling a trade.
A measure of dispersion of the data. Mathematically, Standard deviation is the square root of the distribution’s variance.
A marketplace for issuing and trading securities by members of that exchange.
The price at which the right conferred by an option can be exercised by the holder against the writer.
An over-the-counter (OTC) derivative wherein two parties exchange a series of periodic payments based on a notional principal amount over an agreed term.
The term T+2 identifies the settlement time of a trade (in days). T refers to the trade date and T+2 identifies that the transaction will settle two business days after the trade date.
When one company purchases more than 50% of the shares of another company.
The analysis of charts depicting historic price and volume movements to determine the future course of a market or the price of a security. Mostly used for short-term investment decisions.
The minimum price movement of a derivatives contract as specified by the exchange on which the product is traded.
The monetary value of one tick.
A sum of money which, by accounting for an existing interest rate and the term over which the sum is to be invested or received, can be expressed as either a future value or as a present value, respectively.
Short-term government-backed securities issued at discount to par via a RBI auction.
The legal owners of the assets named in a trust. They owe a duty to the trust’s beneficiaries.
The asset from which a derivative is derived.
The percentage of the employable labour force registered as available to work at the current wage rate but do not possess a source of earning.
A system whereby money from investors is pooled together and invested collectively on their behalf into an open-ended trust.
The mathematical measure of the extent to which asset prices, investment returns and other economic variables fluctuate.
Wealth Management Association
The trade association that represents stockbrokers’ interests.
Party selling an option in the derivative market.