Financial Terms.txt

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Financial Terms.txt
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Financial Terms
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  1. What is Market Value?
    The price at which a security is trading and could presumably be purchased. Calculated by multiplying the number of shares outstanding by the current market price of a firm's shares. Investors often times look for companies with market values below their book values, believing these companies to be undervalued.
  2. What is Market Value Excluding Accrued Income?
    The price at which a security is trading minus any debts its customers owe but haven't paid yet (ie, month telephone bill)
  3. What is Accrued Income?
    The income a company earns over a period of time but has not collected by the end of a reporting period. For example, if a company earns $1 million but has not collected $250,000 before it must make its quarterly statement, it lists that amount as its accrued income.
  4. What is an FX Rate?
    The price of a currency in terms of another currency. The US has many countries it trades currencies with and would therefor have a constant number of currency conversions for every business day. Another country, say like Japan, has few trading partners, would also have a constant number of currency conversions approved for that day. Every day, each currency is updated so that the two countries can do business together.
  5. Describe the difference between LONG/SHORT and BUY/SELL
    A LONG is an expression used to buy and/or hold onto a security...whereas a SHORT is an expression to sell that security.
  6. What is a Fair Market Value?
    A subjective estimate of what a willing buyer would pay a willing seller for a given asset, assuming both have a reasonable knowledge of the asset's worth. Fair market value is important in both law and accounting. In the former, it is often used in assessing damages as the result of a lawsuit. In the latter, determining the fair market value of an asset (e.g. after depreciation) is important to determining the amount of tax owed on it.
  7. What's the difference between Realized and Unrealized Gain/Loss?
    Also know as Realized Gain/Loss (or profit/loss), this occurs when an investor finally sees the profit or loss from an investment (which only occurs AFTER the investment has been BOTH
  8. bought & sold). If the investor hasn't sold his investment, then we call it an Unrealized Gain/Loss since it is only on paper and no real profit/loss has occurred. For example, if an investor buys a $100 stock and the price goes up to $175, then he would have an unrealized gain of $75. If the stock then went went down to $110 then he would have an unrealized gain of $10 (even though in his mind he just lost $65). If he then sells his stock, he would have a realized gain of $10.
  9. What is a Security? Give a few examples.
    A security is a piece of paper proving ownership of a stock, bond, or other investment. Securities are tradable.
  10. What is a derivative?
    A financial contract whose value is based on (or 'derived') traditional securities such as stocks or bonds. The most common type are called futures, forward contracts, options, and swaps.
  11. What is a Future?
    Also known as a Future Contract, it is an agreement to buy or sell an asset at a certain date at a certain price. For example, an investor (A) may sign a contract with Farmer (B) that states he will buy 100 bushels of B's corn at $15 a bushel come next November. Futures can help reduce volatility in certain markets, but still contain risks nonetheless (perhaps a bad season and crops are destroyed).
  12. What is the difference between a Trade Date and a Settlement Date?
    The Trade Date (AKA Transaction Date) is the date at which a security is bought and the date at which ownership begins for the buying party. However, even though bought, the funds have not yet been paid. The buyer typically has 1-5 days (trades) or 3 days (stocks) to complete the transaction (pay the bill).
  13. What is an Effective Date?
    Can be (a) the date the interest rate swap begins accruing interest or (b) the date on which a new stock offering registered with the SEC my be sold to underwriters.
  14. What is a Valuation Date?
    A valuation is a determination of a company's stock based on its earnings and the market value of its assets; the valuation date is the date this determination is evaluated.
  15. Describe a Share.
    The smallest unit of ownership in a stock, mutual fund, or other investment vehicle, evidenced by this certificate (share) of ownership.
  16. What is a Trade?
    A trade (aka Transaction) is an exchange of a security from one party to another.
  17. What's the difference between a Security, Trade, and Holding?
    A Security is an ownership of an asset evidence by a piece of paper (stocks, bonds, etc), that is, a tangible item of worth; A Trade is an exchange of a security between two parties, hence, it is an action/verb, and a Holding is also a verb, the act of not selling, that is, to continue owning a security.
  18. What is a Local Currency?
    Local currency is a bit of a misnomer, that is, in simple terms, it implies the currency of a given area. However, the reality is that a local currency can mean different things to different people and at different times. There is local, regional, alternative, auxillary, private business and a host of other currency types. In addition, because of civil war or economic hardship, the currency can also fluctuate or change. In the US, our local currency is based on the US Dollar which is the currency many countries choose to do business in since it is considered very stable--however, Ukraine or Congo, the currency type used to do business will likely fluctuate more often.
  19. What is a Ticker?
    A record of the transactions occurring on an exchange on a given trading day, updated in real time or with only a slight delay. Before electronic tickers became common, most records of trading were printed out on strips of paper known as tape. It is more common now to refer to an exchange's live record as a ticker. When tape was common, trading volume sometimes became so heavy for a security that the tape publicly announcing quotes was delayed by a significant amount of time, usually a minute or two. This was called a tape is late situation.
  20. In finances, what is a Sector/Industry (GICS)?
    Both describe a category. An industry is used to describe the primary business activity of a company (largest revenue), for example Software. A Sector use used to categorize a group of securities that are similar with respect to type, rating, industry, maturity, and more. For example, all automotive companies in the US are said to belong to the American automotive sector.
  21. Describe Broker:
    An individual or firm who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders. Also, person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded.
  22. What is a Benchmark?
    The performance of a predetermined set of securities, used for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.
  23. What is a Strategy? How is it used?
    The principles guiding investment practices. A strategy may be simple, such as buy low, sell high, or complex, like many option strategies. The basic aim of any strategy is to make money, but each takes a different (sometimes very different) approach to achieve this goal.
  24. Describe a Turnover:
    (1) In accounting, the number of times an asset is replaced during a financial period. (2) The number of shares traded in a specific period expressed as a percentage of the total shares in a portfolio or traded on an exchange.(2) In accounting, turnover often refers to inventory or accounts receivable. A quick turnover is desired because it means that inventory is not sitting on the shelves for too long. (3) In a portfolio, a low turnover is desired because it means that the investor is paying less in trading commissions. Excessive trading by a broker for the sole purpose of generating commissions is called churning. This practice is both unethical and illegal.
  25. What is a Vehicle?
    AKA an investment vehicle, a specific investment having attributes that are intended to accomplish certain goals. Examples of investment vehicles include common stock, preferred stock, bonds, options, futures, annuities, and collectibles.
  26. What is a Proxy?
    Authorization, whether written or electronic, that shareholders' votes may be cast by others. Shareholders can and often do give management their proxies, delegating the right and responsibility to vote their shares as specified.
  27. What are Voting Rights?
    The right to vote on matters that are put to a vote of security holders. For example the right to vote for directors.
  28. Describe Amortization:
    Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage loan or credit card balance.
  29. What is a Most Favored Nation status?
    A status in which a country assesses the lowest possible tariffs that it can assess on another country. For example, if a country's lowest tariff is a certain percentage of the value of a good, it charges this percentage on an import from a country with most favored nation status.
  30. Describe a Dividend:
    A portion of a company's profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.
  31. Describe a Split:
    • A proportionate increase in the number of shares of outstanding stock without a corresponding increase in assets or in funds available, as would be the case in a new stock offering or in
    • an acquisition that uses stock as payment. Essentially, a firm splits its stock to reduce the market price and make the shares attractive to a larger pool of investors, although it is questionable if the firm's stockholders actually benefit from a split because share prices are reduced proportionately with the increase in shares outstanding. A 4-for-1 split would result in an owner of 100 shares receiving 300 additional shares, or an after-split total of 4 shares for every 1 share owned before the split. Also called split up, stock split.
  32. Describe a Spot Rate:
    For investors dealing with foreign investments, the 'spot rate' (AKA Benchmark rate) is the value of an asset at the moment a quote is made using its FX Rate (foreign exchange rate). In business, this rate fluctuates once a daily and can be determine using a numeric value with 15 precision points.
  33. What is Equity?
    Ownership interest in a firm. Also, the residual dollar value of a futures trading account, assuming its liquidation is at the going trade price. In real estate, it is the difference between what the property could be sold for minus the debts claimed against it.
  34. What is a Maturity Date?
    For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.
  35. What does 'Shares Outstanding' mean?
    The number of shares an issuing entity, such as a publicly-traded company, has not repurchased and that are available for trade by the general public. This is sometimes known as collection float or float.
  36. Describe a SEC Fee:
    The Securities and Exchange Commission (SEC) charges a small fee to seller's of equity transactions on an exchange (Stock Market). Set during the Great Depression at 1% of 1/300 of the dollar amount of the transaction, it was reduced in 2007 to 1% of 1/800. Fee is collected by brokerages involved in the transaction and forwarded to SEC top help pay its operating expenses. The fee is not assessed on debt instruments such as school, government, or corporate bonds.
  37. What is Net Cash?
    The amount of money in an account. It is calculated by adding the initial deposit to all subsequent deposits and then subtracting all disbursements. A positive net cash balance indicates that money is present and available in the account, while a negative one indicates that the account is overdrawn.
  38. Describe a Portfolio:
    A group of two or more open investments (ie, shares, trades, bonds, mutual funds). Essentially, all investors seek to gain the highest return on their investment ($$$) while minimizing or eliminating risk. However, all investments inherently contain risks, so to combat this, an investor will diversify his investments, thereby spreading his risk out among many investments.
  39. What is a Profit/Loss?
    Also know as Realized Gain/Loss, this occurs when an investor finally sees the profit or loss from an investment (which only occurs AFTER the investment has been BOTH bought & sold). If the investor hasn't sold his investment, then we call it an Unrealized Gain/Loss since it is only on paper and no real profit/loss has occurred. For example, if an investor buys a $100 stock and the price goes up to $175, then he would have an unrealized gain of $75. If the stock then went went down to $110 then he would have an unrealized gain of $10 (even though in his mind he just lost $65). If he then sells his stock, he would have a realized gain of $10.
  40. What are twelve common types of currency used? Name each and give their abbreviation.
    US Dollar (USD), Australian Dollar (AUD), Euro (EUR), Pound Sterling (GBP), Danish Krone (DKK), Botswana Pula (BWP), Special Drawing Right (XDR), Swiss Franc (CHF), Hong Kong Dollar (HKD), Yen (JPY), Canadian Dollar (CAD), Singapore Dollar (SGD)
  41. Give the approximate conversion rate between one US Dollar and (a) Euro, (b) Pound Sterling, (c) Yen, (d) Australian Dollar, and (e) Swiss Franc, Euro (0.768), Pound Sterling (0.655), Yen (100.090), Australian Dollar (1.101), and Swiss Franc (0.946)
  42. What is a Hedge Fund?
    A very specialized, volatile, open-end investment company that permits the manager to use a variety of investment techniques usually prohibited in other types of funds. These techniques include borrowing money, selling short, and using options. Hedge funds offer investors the possibility of extraordinary gains with above-average risk.
  43. What is a Benchmark Rate?
    For investors dealing with foreign investments, the 'spot rate' (AKA Benchmark rate) is the value of an asset at the moment a quote is made. In business, this rate fluctuates once a daily and can be determine using a numeric value with 15 precision points.

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