GLOSSARY
10-year moving average price/earnings
A price-to-earnings ratio in which the numerator (in a U.S. context) is defined as the real S&P 500 price index and the denominator as the moving average of the preceding 10 years of real reported earnings on the S&P 500.
Abnormal returns
The amount by which a security’s actual return differs from its expected return, given the security’s risk and the market’s return.
Accelerated book build
An offering of securities by an investment bank acting as principal that is accomplished in only one or two days.
Active investment
An approach to investing in which the investor seeks to outperform a given benchmark.
Active return
The return on a portfolio minus the return on the portfolio’s benchmark.
Allocationally efficient
Said of a market, a financial system, or an economy that promotes the allocation of resources to their highest value uses.
All-or-nothing order
An order that includes the instruction to trade only if the trade fills the entire quantity (size) specified.
Alternative trading system
Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers, except with respect to the conduct of the subscribers’ trading in their trading systems.
American depository receipt
A U.S. dollar-denominated security that trades like a common share on U.S. exchanges.
American depository share
The underlying shares on which American depository receipts are based. They trade in the issuing company’s domestic market.
American-style contract
An option that can be exercised at any time until its expiration date.
Arbitrage
A risk-free operation that earns an expected positive net profit but requires no net investment of money.
Arbitrage pricing theory
A theoretical model that proposes a linear relationship between expected return and risk.
Arbitrageur
A trader who engages in arbitrage (see arbitrage).
Arithmetic or mean return
The average return on an investment over time.
Arms index (or TRIN)
A flow-of-funds indicator applied to a broad stock market index to measure the relative extent to which money is moving into or out of rising and declining stocks.
Ask (offer)
The price at which a dealer or trader is willing to sell an asset, typically qualified by a maximum quantity (ask size).
Ask size
The maximum quantity of an asset that pertains to a specific ask price from a trader. For example, if the ask for a share issue is $30 for a size of 1,000 shares, the trader is offering to sell at $30 up to 1,000 shares.
Asset allocation
The process of determining how investment funds should be distributed among asset classes.
Asset-based valuation model
Valuation based on estimates of the market value of a company’s assets.
Asset class
A group of assets that have similar characteristics, attributes, and risk/return relationships.
Bar chart
A price chart with four bits of data for each time interval—the high, low, opening, and closing prices. A vertical line connects the high and low. A cross-hatch left indicates the opening price and a cross-hatch right indicates the close.
Basket of listed depository receipts
An exchange-traded fund (ETF) that represents a portfolio of depository receipts.
Behavioral finance
A field of finance that examines the psychological variables that affect and often distort the investment decision making of investors, analysts, and portfolio managers.
Behind the market
Said of prices specified in orders that are worse than the best current price; e.g., for a limit buy order, a limit price below the best bid.
Best bid
The highest bid in the market.
Best efforts offering
An offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee that a specific amount will be sold.
Best offer
The lowest offer (ask price) in the market.
Beta
A measure of systematic risk that is based on the covariance of an asset’s or portfolio’s return with the return of the overall market.
Bid price
The price at which a dealer or trader is willing to buy an asset, typically qualified by a maximum quantity.
Bid size
The maximum quantity of an asset that pertains to a specific bid price from a trader.
Block broker
A broker (agent) that provides brokerage services for large-size trades.
Blue chip companies
Widely held large market capitalization companies that are considered financially sound and are leaders in their respective industry or local stock market.
Bollinger Bands
A price-based technical analysis indicator consisting of a moving average plus a higher line representing the moving average plus a set number of standard deviations from average price (for the same number of periods as used to calculate the moving average) and a lower line that is a moving average minus the same number of standard deviations.
Book building
Investment bankers’ process of compiling a “book” or list of indications of interest to buy part of an offering.
Book value (or carrying value)
The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company’s excess of total assets over total liabilities.
Bottom up
With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe, i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations.
Broker
An agent of a trader in executing trades.
Broker-dealer
A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.
Brokered market
A market in which brokers arrange trades among their clients.
Buyout fund
A fund that buys all the shares of a public company so that, in effect, the company becomes private.
Buy side firm
An investment management company or other investor that uses the services of brokers or dealers (i.e., the client of the sell-side firms).
Callable (or redeemable) common shares
Shares that give the issuing company the option (or right), but not the obligation, to buy back the shares from investors at a call price that is specified when the shares are originally issued.
Call market
A market in which trades occur only at a particular time and place (i.e., when the market is called).
Call money rate
The interest rate that buyers pay for their margin loan.
Call option
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Candlestick chart
A price chart with four bits of data for each time interval. A candle indicates the opening and closing price for the interval. The body of the candle is shaded if the opening price was higher than the closing price, and the body is clear if the opening price was lower than the closing price. Vertical lines known as wicks or shadows extend from the top and bottom of the candle to indicate the high and the low prices for the interval.
Capital allocation line
A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
Capital asset pricing model
An equation describing the expected return on any asset (or portfolio) as a linear function of its beta.
Capital market expectations
An investor’s expectations concerning the risk and return prospects of asset classes.
Capital market line
Financial markets that trade securities of longer duration, such as bonds and equities.
CBOE Volatility Index
A measure of near-term market volatility as conveyed by S&P 500 stock index option prices.
Change in polarity principle
A tenet of technical analysis that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.
Clearinghouse
An entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
Clearing instructions
Instructions that indicate how to arrange the final settlement (“clearing”) of a trade
Closed-end fund
A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.
Cobb-Douglas production function (Cobb-Douglas model)
A production function (model for economic output) based on factors of labor and capital that exhibits constant returns to scale.
Commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
Common shares
A type of security that represents an ownership interest in a company.
Company analysis
Analysis of an individual company.
Competitive strategy
A company’s plans for responding to the threats and opportunities presented by the external environment.
Complete market
Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.
Constant returns to scale
A characteristic of a production function such that a given percentage increase in capital stock and labor input results in an equal percentage increase in output.
Constituent securities
With respect to an index, the individual securities within an index.
Continuation pattern
A type of pattern used in technical analysis to predict the resumption of a market trend that was in place prior to the formation of a pattern.
Continuous trading market
A market in which trades can be arranged and executed any time the market is open.
Convergence
In technical analysis, a term that describes the case when an indicator moves in the same manner as the security being analyzed.
Convertible preference shares
A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.
Correlation
A number between −1 and +1 that measures the co-movement (linear association) between two random variables.
Correlation coefficient
A number between −1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.
Counterparty risk
The risk that the other party to a contract will fail to honor the terms of the contract.
Covariance
A measure of the co-movement (linear association) between two random variables.
Crossing network
Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.
Cumulative preference shares
Preference shares for which any dividends that are not paid accrue and must be paid in full before dividends on common shares can be paid.
Cumulative voting
Voting that allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates.
Currency
The notes and coins held by individuals and businesses.
Currency swap
A swap in which each party makes interest payments to the other in different currencies.
Cyclical company
A company whose profits are strongly correlated with the strength of the overall economy.
Dark pool
Alternative trading systems that do not display the orders that their clients send to them.
Data mining (or data snooping)
The practice of determining a model by extensive searching through a dataset for statistically significant patterns.
Day order
An order that is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled.
Dead cross
A technical analysis, a term that describes a situation where a short-term moving average crosses from above a longer-term moving average to below it; this movement is considered bearish.
Dealer
A financial intermediary who acts as a principal in trades.
Defensive (or stable) company
A company whose revenues and profits are least affected by fluctuations in the overall economic activity.
Defined benefit
A pension plan that specifies the plan sponsor’s obligations in terms of the benefit to plan participants.
Defined contribution
A pension plan that specifies the sponsor’s obligations in terms of contributions to the pension fund rather than benefits to plan participants.
Depository institution
Commercial banks, savings and loan banks, credit unions, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.
Depository receipt
A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company.
Derivative pricing rule
A pricing rule used by crossing networks in which a price is taken (derived) from the price that is current in the asset’s primary market.
Discriminatory pricing rule
A pricing rule used in continuous markets in which the limit price of the order or quote that first arrived determines the trade price.
Display size
The size of an order displayed to public view.
Divergence
In technical analysis, a term that describes the case when an indicator moves differently from the security being analyzed.
Diversification ratio
The ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security.
Dividend discount model
A present value model that estimates the intrinsic value of an equity share based on the present value of its expected future dividends.
Divisor
A number (denominator) used to determine the value of a price return index. It is initially chosen at the inception of an index and subsequently adjusted by the index provider, as necessary, to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities.
Double bottom
In technical analysis, a reversal pattern that is formed when the price reaches a low, rebounds, and then sells off back to the first low level; used to predict a change from a downtrend to an uptrend.
Double top
In technical analysis, a reversal pattern that is formed when an uptrend reverses twice at roughly the same high price level; used to predict a change from an uptrend to a downtrend.
Earnings surprise
The portion of a company’s earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.
Economic profit
A company’s total revenue minus its total cost.
Efficient market
See informationally efficient market.
Elliott wave theory
A technical analysis theory that claims that the market follows regular, repeated waves or cycles.
Enterprise value
A measure of a company’s total market value from which the value of cash and short-term investments have been subtracted.
Equal weighting
An index weighting method in which an equal weight is assigned to each constituent security at inception.
Equity q
The ratio of a company’s equity market capitalization divided by net worth measured at replacement cost.
Equity risk premium
The expected return on equities minus the risk-free rate; the premium that investors demand for investing in equities.
Equity swap
A swap in which the rate is the return on a stock or stock index.
European-style contract
An option that can only be exercised on its expiration date.
Exchange
Places where traders can meet to arrange their trades.
Execution instructions
Instructions that indicate how to fill an order.
Exercise
The process of using an option to buy or sell the underlying.
Expected return
The return an investor anticipates earning in the future.
Experience curve
A curve that shows the direct cost per unit of good or service produced or delivered as a typically declining function of cumulative output.
Fed model
An equity valuation model that relates the earnings yield on the S&P 500 to the yield to maturity on 10-year U.S. Treasury bonds.
Fibonacci sequence
A sequence of numbers starting with 0 and 1, and then each subsequent number in the sequence is the sum of the two preceding numbers. In Elliott Wave Theory, it is believed that market waves follow patterns that are the ratios of the numbers in the Fibonacci sequence.
Financial leverage
The extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income; also, short for the financial leverage ratio.
Flag
A technical analysis continuation pattern formed by parallel trendlines, typically over a short period.
Float-adjusted market-capitalization weighting
An index weighting method in which the weight assigned to each constituent security is determined by adjusting its market capitalization for its market float.
Foreign exchange gains (or losses)
Gains (or losses) that occur when the exchange rate changes between the investor’s currency and the currency that foreign securities are denominated in.
Forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract.
Free-cash-flow-to-equity models
Valuation model based on discounting expected future free cash flow to equity.
Free float
The number of shares that are readily and freely tradable in the secondary market.
Fundamental analysis
The examination of publicly available information and the formulation of forecasts to estimate the intrinsic value of assets.
Fundamental (or intrinsic) value
The underlying or true value of an asset based on an analysis of its qualitative and quantitative characteristics.
Fundamental weighting
An index weighting method in which the weight assigned to each constituent security is based on its underlying company’s size. It attempts to address the disadvantages of market-capitalization weighting by using measures that are independent of the constituent security’s price.
Futures contract
A variation of a forward contract that has essentially the same basic definition but with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and an organized electronic or floor trading facility.
Geometric mean return
A measure of returns that assumes the investment amount is not reset at the beginning of each year and accounts for the compounding of returns.
Global depository receipt
A depository receipt that is issued outside of the company’s home country and outside of the United States.
Global minimum-variance portfolio
The portfolio on the minimum-variance frontier with the smallest variance of return.
Global registered share
A common share that is traded on different stock exchanges around the world in different currencies.
Golden cross
A technical analysis term that describes a situation where a short-term moving average crosses from below a longer-term moving average to above it; this movement is considered bullish.
Good-on-close
An execution instruction specifying that an order can only be filled at the close of trading.
Good-on-open
An execution instruction specifying that an order can only be filled at the opening of trading.
Good-till-cancelled
An order specifying that it is valid until the entity placing the order has cancelled it (or, commonly, until some specified amount of time such as 60 days has elapsed, whichever comes sooner).
Gross return
The return earned by an asset manager prior to deductions for management expenses, custodial fees, taxes, or any other expenses related to the management and administration of an investment.
Growth cyclical
A term sometimes used to describe companies that are growing rapidly on a long-term basis but that still experience above-average fluctuation in their revenues and profits over the course of a business cycle.
Head and shoulders pattern
In technical analysis, a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder; used to predict a change from an uptrend to a downtrend.
Hedge funds
Private investment vehicles that typically use leverage, derivatives, and long and short investment strategies.
Herding
Clustered trading that may or may not be based on information.
Hidden order
An order that is exposed not to the public but only to the brokers or exchanges that receive it.
Historical return
The return an investor actually earned in the past.
H-model
A variant of the two-stage dividend discount model in which growth begins at a high rate and declines linearly throughout the supernormal growth period until it reaches a normal growth rate that holds in perpetuity.
Holding period return
The return that an investor earns during a specified holding period; a synonym for total return.
Homogeneity of expectations
The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.
Iceberg order
An order in which the display size is less than the order’s full size.
Immediate or cancel (fill or kill) orders
An order that is valid only upon receipt by the broker or exchange. If such an order cannot be filled in part or in whole upon receipt, it cancels immediately.
Income trust
A type of equity ownership vehicle established as a trust issuing ownership shares known as units.
Indifference curve
The graph of risk–return combinations that an investor would be willing to accept to maintain a given level of utility.
Industry
A group of companies offering similar products and/or services.
Industry analysis
The analysis of a specific branch of manufacturing, service, or trade.
Informationally efficient market (efficient market)
A market in which asset prices reflect new information quickly and rationally.
Information cascade
The transmission of information from those participants who act first and whose decisions influence the decisions of others (see also herding).
Information-motivated trader
Traders who trade to profit from information that they believe allows them to predict future prices.
Initial margin
The amount that must be deposited in a clearinghouse account when entering into a futures contract.
Initial margin requirement
The margin requirement on the first day of a transaction as well as on any day in which additional margin funds must be deposited.
Initial public offering (IPO)
The first issuance of common shares to the public by a formerly private corporation.
Interest rate swap
A swap in which the underlying is an interest rate. Can be viewed as a currency swap in which both currencies are the same and can be created as a combination of currency swaps.
Intermarket analysis
A field within technical analysis that combines analysis of major categories of securities—namely, equities, bonds, currencies, and commodities—to identify market trends and possible inflections in a trend.
Internal rate of return
The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).
Intrinsic value
See fundamental value.
Investment banks
Financial intermediaries that provide advice to their mostly corporate clients and help them arrange transactions such as initial and seasoned securities offerings.
Investment policy statement
A written planning document that describes a client’s investment objectives and risk tolerance over a relevant time horizon, along with constraints that apply to the client’s portfolio.
January effect (also turn-of-the-year effect)
Calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months of the year, with most of the abnormal returns reported during the first five trading days in January.
Justified P/E
The price-to-earnings ratio that is fair, warranted, or justified on the basis of forecasted fundamentals.
Kondratieff wave
A 54-year-long economic cycle postulated by Nikolai Kondratieff.
Kurtosis
The statistical measure that indicates the peakedness of a distribution.
Law of one price
The condition in a financial market in which two equivalent financial instruments or combinations of financial instruments can sell for only one price. Equivalent to the principle that no arbitrage opportunities are possible.
Leverage
In the context of corporate finance, leverage refers to the use of fixed costs within a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.
Leveraged buyout
A transaction whereby the target company management team converts the target to a privately held company by using heavy borrowing to finance the purchase of the target company’s outstanding shares.
Life-cycle stage
The stage of the life cycle: embryonic, growth, shakeout, mature, declining.
Limit order
Instructions to a broker or exchange to obtain the best price immediately available when filling an order, but in no event accept a price higher than a specified (limit) price when buying or accept a price lower than a specified (limit) price when selling.
Limit order book
The book or list of limit orders to buy and sell that pertains to a security.
Linear scale
A scale in which equal distances correspond to equal absolute amounts.
Line chart
In technical analysis, a plot of price data, typically closing prices, with a line connecting the points.
Liquidity
The ability to purchase or sell an asset quickly and easily at a price close to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.
Liquid market
Said of a market in which traders can buy or sell with low total transaction costs when they want to trade.
Load fund
A mutual fund in which, in addition to the annual fee, a percentage fee is charged to invest in the fund and/or for redemptions from the fund.
Logarithmic scale
A scale in which equal distances represent equal proportional changes in the underlying quantity.
Long position
A position in an asset or contract in which one owns the asset or has an exercisable right under the contract.
M2
A measure of what a portfolio would have returned if it had taken on the same total risk as the market index.
Maintenance margin
The minimum amount that is required by a futures clearinghouse to maintain a margin account and to protect against default. Participants whose margin balances drop below the required maintenance margin must replenish their accounts.
Maintenance margin requirement
The margin requirement on any day other than the first day of a transaction.
Management buyout
An event in which a group of investors consisting primarily of the company’s existing management purchase all of its outstanding shares and take the company private.
Margin call
A notice to deposit additional cash or securities in a margin account.
Margin loan
Money borrowed from a broker to purchase securities.
Market
A means of bringing buyers and sellers together to exchange goods and services.
Marketable limit order
A buy limit order in which the limit price is placed above the best offer, or a sell limit order in which the limit price is placed below the best bid. Such orders generally will partially or completely fill right away.
Market anomaly
Change in the price or return of a security that cannot directly be linked to current relevant information known in the market or to the release of new information into the market.
Market bid–ask spread
The difference between the best bid and the best offer.
Market-capitalization weighting
An index weighting method in which the weight assigned to each constituent security is determined by dividing its market capitalization by the total market capitalization (sum of the market capitalization) of all securities in the index.
Market float
The number of shares that are available to the investing public.
Market model
A regression equation that specifies a linear relationship between the return on a security (or portfolio) and the return on a broad market index.
Market order
Instructions to a broker or exchange to obtain the best price immediately available when filling an order.
Market value
The price at which an asset or security can currently be bought or sold in an open market.
Markowitz efficient frontier
The graph of the set of portfolios offering the maximum expected return for their level of risk (standard deviation of return).
Minimum variance portfolio
The portfolio with the minimum variance for each given level of expected return.
Modern portfolio theory
The analysis of rational portfolio choices based on the efficient use of risk.
Momentum oscillator
A graphical representation of market sentiment that is constructed from price data and calculated so that it oscillates either between a high and a low or around some number.
Money-weighted return
The internal rate of return on a portfolio, taking account of all cash flows.
Moving average
The average of the closing price of a security over a specified number of periods. With each new period, the average is recalculated.
Moving-average convergence/divergence oscillator
A momentum oscillator that is constructed based on the difference between short-term and long-term moving averages of a security’s price.
Multifactor model
A model that explains a variable in terms of the values of a set of factors.
Multimarket index
An index comprised of indices from different countries, designed to represent multiple security markets.
Multiplier models (or market multiple models)
Valuation models based on share price multiples or enterprise value multiples.
Mutual fund
A professionally managed investment pool in which investors in the fund typically each have a pro-rata claim on the income and value of the fund.
Net return
A measure of what the investment has earned for the investor after deducting all managerial and administrative expenses.
No-load fund
A mutual fund in which there is no fee for investing in the fund or for redeeming fund shares, although there is an annual fee based on a percentage of the fund’s net asset value.
Noncumulative preference shares
Preference shares for which dividends that are not paid in the current or subsequent periods are forfeited permanently (instead of being accrued and paid at a later date).
Noncyclical company
A company whose performance is largely independent of the business cycle.
Nonparticipating preference shares
Preference shares that do not entitle shareholders to share in the profits of the company. Instead, shareholders are only entitled to receive a fixed dividend payment and the par value of the shares in the event of liquidation.
Nonsystematic risk
Unique risk that is local or limited to a particular asset or industry that need not affect assets outside of that asset class.
Normal distribution
A continuous, symmetric probability distribution that is completely described by its mean and its variance.
Open-end fund
A mutual fund that accepts new investment money and issues additional shares at a value equal to the net asset value of the fund at the time of investment.
Operationally efficient
Said of a market, a financial system, or an economy that has relatively low transaction costs.
Option contract
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time. Also referred to as contingent claims.
Order
A specification of what instrument to trade, how much to trade, and whether to buy or sell.
Order-driven market
A market (generally an auction market) that uses rules to arrange trades based on the orders that traders submit; in their pure form, such markets do not make use of dealers.
Order precedence hierarchy
With respect to the execution of orders to trade, a set of rules that determines which orders execute before other orders.
Overbought
A market condition market sentiment that is thought to be unsustainably bullish.
Oversold
A market condition market sentiment that is thought to be unsustainably bearish.
Participating preference shares
Preference shares that entitle shareholders to receive the standard preferred dividend plus the opportunity to receive an additional dividend if the company’s profits exceed a prespecified level.
Passive investment
A buy-and-hold approach in which an investor does not make portfolio changes based on short-term expectations of changing market or security performance.
Passive portfolios
Portfolios that replicate and track market indices, which are passively constructed on the basis of market prices and market capitalizations.
Peer group
A group of companies engaged in similar business activities whose economics and valuation are influenced by closely related factors.
Pennant
A technical analysis continuation pattern formed by trendlines that converge to form a triangle, typically over a short period.
Performance evaluation
The measurement and assessment of the outcomes of investment management decisions.
Point and figure chart
A technical analysis chart that is constructed with columns of X’s alternating with columns of O’s such that the horizontal axis represents only the number of changes in price without reference to time or volume.
Portfolio planning
The process of creating a plan for building a portfolio that is expected to satisfy a client’s investment objectives.
Position
The quantity of an asset that an entity owns or owes.
Preference shares
A type of equity interest that ranks above common shares with respect to the payment of dividends and the distribution of the company’s net assets upon liquidation. They have characteristics of both debt and equity securities.
Preferred stock
A form of equity (generally nonvoting) that has priority over common stock in the receipt of dividends and on the issuer’s assets in the event of a company’s liquidation.
Present value models (or discounted cash flow models)
Valuation models that estimate the intrinsic value of a security as the present value of the future benefits expected to be received from the security.
Price multiple
A ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company’s stock.
Price priority
The principle that the highest priced buy orders and the lowest priced sell orders execute first.
Price return
Measures only the price appreciation or percentage change in price of the securities in an index or portfolio.
Price return index (or price index)
An index that reflects only the price appreciation or percentage change in price of the constituent securities.
Price weighting
An index weighting method in which the weight assigned to each constituent security is determined by dividing its price by the sum of all the prices of the constituent securities.
Primary capital market (primary market)
The market where securities are first sold and the issuers receive the proceeds.
Principal business activity
The business activity from which a company derives a majority of its revenues and/or earnings.
Private equity securities
Securities that are not listed on public exchanges and have no active secondary market. They are issued primarily to institutional investors via nonpublic offerings, such as private placements.
Private investment in public equity
An investment in the equity of a publicly traded firm that is made at a discount to the market value of the firm’s shares.
Private placement
When corporations sell securities directly to a small group of qualified investors, usually with the assistance of an investment bank.
Putable common shares
Common shares that give investors the option (or right) to sell their shares (i.e., “put” them) back to the issuing company at a price that is specified when the shares are originally issued.
Put/call ratio
A technical analysis indicator that evaluates market sentiment based upon the volume of put options traded divided by the volume of call options traded for a particular financial instrument.
Put option
An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.
Quote-driven market
A market in which dealers acting as principals facilitate trading.
Random walk
A time series in which the value of the series in one period is the value of the series in the previous period plus an unpredictable random error.
Rebalancing
Adjusting the weights of the constituent securities in an index.
Rebalancing policy
The set of rules that guide the process of restoring a portfolio’s asset class weights to those specified in the strategic asset allocation.
Relative strength analysis
A comparison of the performance of one asset with the performance of another asset or a benchmark based on changes in the ratio of the securities’ respective prices over time.
Relative strength index
A technical analysis momentum oscillator that compares a security’s gains with its losses over a set period.
Resistance
In technical analysis, a price range in which selling activity is sufficient to stop the rise in the price of a security.
Retracement
In technical analysis, a reversal in the movement of a security’s price such that it is counter to the prevailing longer-term price trend.
Return-generating model
A model that can provide an estimate of the expected return of a security given certain parameters and estimates of the values of the independent variables in the model.
Return on equity
A profitability ratio calculated as net income divided by average shareholders’ equity.
Reversal pattern
A type of pattern used in technical analysis to predict the end of a trend and a change in direction of the security’s price.
Risk averse
The assumption that an investor will choose the least risky alternative.
Risk aversion
The degree of an investor’s inability and unwillingness to take risk.
Risk budgeting
The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.
Risk neutral
Said of an investor who does not care about risk, so higher return investments are more desirable even if they come with higher risk.
Risk premium
The expected return on an investment minus the risk-free rate.
Risk tolerance
The amount of risk an investor is willing and able to bear to achieve an investment goal.
Seasoned offering
An offering in which an issuer sells additional units of a previously issued security.
Seasoned security
A security that an issuer has already issued.
Secondary market
The market where securities are traded among investors.
Secondary precedence rules
Rules that determine how to rank orders placed at the same time.
Sector
A group of related industries.
Sector indices
Indices that represent and track different economic sectors—such as consumer goods, energy, finance, health care, and technology—on either a national, regional, or global basis.
Security characteristic line
A plot of the excess return of a security on the excess return of the market.
Security market index
A portfolio of securities representing a given security market, market segment, or asset class.
Security market line
The graph of the capital asset pricing model.
Security selection
Skill in selecting individual securities within an asset class.
Self-investment limits
With respect to investment limitations applying to pension plans, restrictions on the percentage of assets that can be invested in securities issued by the pension plan sponsor.
Sell-side firm
A broker or dealer that sells securities to and provides independent investment research and recommendations to investment management companies.
Semistrong-form efficient market hypothesis
The belief that security prices reflect all publicly known and available information.
Separately managed account
An investment portfolio managed exclusively for the benefit of an individual or institution.
Sharpe ratio
The average return in excess of the risk-free rate divided by the standard deviation of return; a measure of the average excess return earned per unit of standard deviation of return.
Shelf registration
A registration of an offering well in advance of the offering; the issuer may not sell all shares registered in a single transaction.
Short position
A position in an asset or contract in which one has sold an asset one does not own, or in which a right under a contract can be exercised against oneself.
Short selling
A transaction in which borrowed securities are sold with the intention to repurchase them at a lower price at a later date and return them to the lender.
Skewness
A quantitative measure of skew (lack of symmetry); a synonym of skew.
Solow residual
A measure of the growth in total factor productivity that is based on an economic growth model developed by economist Robert M. Solow.
Special purpose vehicle (or special purpose entity)
A nonoperating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trust, limited liability, or partnership formed to facilitate a specific type of business activity.
Sponsored depository receipt
A type of depository receipt in which the foreign company whose shares are held by the depository has a direct involvement in the issuance of the receipts.
Standard deviation
The positive square root of variance.
Standing limit order
A limit order at a price below market and which therefore is waiting to trade.
Statutory voting
A common method of voting where each share represents one vote.
Stop order (or stop-loss order)
An order in which a trader has specified a stop price condition.
Strategic analysis
Analysis of the competitive environment with an emphasis on the implications of the environment for corporate strategy.
Strategic asset allocation
The set of exposures to IPS-permissible asset classes that is expected to achieve the client’s long-term objectives given the client’s investment constraints.
Strategic groups
Groups sharing distinct business models or catering to specific market segments in an industry.
Strong-form efficient market hypothesis
The belief that security prices reflect all public and private information.
Support
In technical analysis, a price range in which buying activity is sufficient to stop the decline in the price of a security.
Swap contract
An agreement between two parties to exchange a series of future cash flows.
Systematic risk
Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Systematic risk is also known as nondiversifiable or market risk.
Tactical asset allocation
The decision to deliberately deviate from the strategic asset allocation in an attempt to add value based on forecasts of the near-term relative performance of asset classes.
Technical analysis
A form of security analysis that uses price and volume data, which is often graphically displayed, in decision making.
Technical indicator
Any measure based on price, market sentiment, or funds flow that can be used to predict changes in price.
Terminal stock value (or terminal value)
The expected value of a share at the end of the investment horizon—in effect, the expected selling price.
Tobin’s q
An asset-based valuation measure that is equal to the ratio of the market value of debt and equity to the replacement cost of total assets.
Top down
With reference to investment selection processes, an approach that starts with macro selection (i.e., identifying attractive geographic segments and/or industry segments) and then addresses selection of the most attractive investments within those segments.
Total factor productivity
A variable that accounts for that part of Y not directly accounted for by the levels of the production factors (K and L).
Total return
Measures the price appreciation, or percentage change in price of the securities in an index or portfolio, plus any income received over the period.
Total return index
An index that reflects the price appreciation or percentage change in price of the constituent securities plus any income received since inception.
Tracking risk (tracking error)
The standard deviation of the differences between a portfolio’s returns and its benchmark’s returns; a synonym of active risk.
Trend
A long-term pattern of movement in a particular direction.
Treynor ratio
A measure of risk-adjusted performance that relates a portfolio’s excess returns to the portfolio’s beta.
Triangle pattern
In technical analysis, a continuation chart pattern that forms as the range between high and low prices narrows, visually forming a triangle.
Triple bottom
In technical analysis, a reversal pattern that is formed when the price forms three troughs at roughly the same price level; used to predict a change from a downtrend to an uptrend.
Triple top
In technical analysis, a reversal pattern that is formed when the price forms three peaks at roughly the same price level; used to predict a change from an uptrend to a downtrend.
Turn-of-the-year effect
See January effect.
Two-fund separation theorem
The theory that all investors regardless of taste, risk preferences, and initial wealth will hold a combination of two portfolios or funds: a risk-free asset and an optimal portfolio of risky assets.
Underwritten offering
An offering in which the (lead) investment bank guarantees the sale of the issue at an offering price that it negotiates with the issuer.
Unsponsored depository receipt
A type of depository receipt in which the foreign company whose shares are held by the depository has no involvement in the issuance of the receipts.
Validity instructions
Instructions that indicate when the order may be filled.
Value at risk (VAR)
A money measure of the minimum value of losses expected during a specified time period at a given level of probability.
Variance
The expected value (the probability-weighted average) of squared deviations from a random variable’s expected value.
Variation margin payment
Additional margin that must be deposited in an amount sufficient to bring the balance up to the initial margin requirement.
Venture capital
Investments that provide “seed” or start-up capital, early-stage financing, or mezzanine financing to companies that are in the early stages of development and require additional capital for expansion.
Venture capital fund
A fund for private equity investors that provides financing for development-stage companies.
Volatility
As used in option pricing, the standard deviation of the continuously compounded returns on the underlying asset.
Vote by proxy
A mechanism that allows a designated party—such as another shareholder, a shareholder representative, or management—to vote on the shareholder’s behalf.
Weak-form efficient market hypothesis
The belief that security prices fully reflect all past market data, which refers to all historical price and volume trading information.
Yardeni model
An equity valuation model, more complex than the Fed model, that incorporates the expected growth rate in earnings.