Investopedia Term Of The Day

Independent 401(k)

A 401(k) plan set up for an individual running a sole proprietorship or a small business with a spouse/immediate family member. Plan contribution limits for the individual are equal to a typical company-sponsored 401(k), but the sole proprietor can also make an employer contribution to an independent 401(k), thereby raising the total contribution allowed. The independent 401(k) may also be called a "solo 401(k)" or an "indie K"

Base Year

A base year is the first of a series of years in an economic or financial index. A base year in an index is normally set to an arbitrary level of 100. New, up-to-date base years are periodically introduced to keep data current in a particular index. Any year can serve as a base year, but analysts typically choose recent years.

Bond Ladder

A bond ladder is a portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of purchasing several smaller bonds with different maturity dates rather than one large bond with a single maturity date is to minimize interest-rate risk and to increase liquidity. In a bond ladder, the bonds' maturity dates are evenly spaced across several months or several years so that the bonds are maturing and the proceeds are being reinvested at regular intervals. The more liquidity an investor needs, the closer together his bond maturities should be.

Breakup Fee

A breakup fee is a common fee used in takeover agreements if the seller backs out of a deal to sell to the purchaser. A breakup fee, or termination fee, is required to compensate the prospective purchaser for the time and resources used to facilitate the deal. Breakup fees are normally 1-3% of the deal's value.

Return On Invested Capital - ROIC

A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively. One way to calculate ROIC is: (Net Income - Dividends)/Total Capital Return On Invested Capital (ROIC) This measure is also known as "return on capital."

Call Option

A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. It may help you to remember that a call option gives you the right to call in, or buy, an asset. You profit on a call when the underlying asset increases in price.

Cash Advance

A cash advance is a service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency. Cash advances typically carry a high interest rate - even higher than credit card itself - and the interest begins to accrue immediately. On the plus side, cash advances are quick and easy to obtain in a pinch.

Command Economy

A command economy is a system where the government, rather than the free market, determines what goods should be produced, how much should be produced and the price at which the goods will be offered for sale. The command economy is a key feature of any communist society. China, Cuba, North Korea and the former Soviet Union are examples of countries that have command economies. Also known as a planned economy, command economies are unable to efficiently allocate goods because of the knowledge problem - the central planner's inability to discern how much of a good should be produced. Shortages and surpluses are a common consequence of command economies. A free-market price system, on the other hand, signals to producers what they should be creating and in what quantities, resulting in a much more efficient allocation of goods.

Dodd-Frank Wall Street Reform and Consumer Protection Act

A compendium of federal regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as simply "Dodd-Frank", is supposed to lower risk in various parts of the U.S. financial system. It is named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank because of their significant involvement in the act's creation and passage. Dodd-Frank established new government agencies such as the Financial Stability Oversight Council and Orderly Liquidation Authority, which monitors the performance of companies deemed "too big to fail" in order to prevent a widespread economic collapse. The new Orderly Liquidation Fund provides money to assist with the liquidation of financial companies that have been placed in receivership because of their financial weakness. Additionally, the council can break up large banks that may pose a risk to the financial system because of their size. It can also quickly and neatly liquidate or restructure firms it deems too financially weak. Similarly, the new Federal Insurance Office identifies and monitors insurance companies that may pose a systemic risk. The new Consumer Financial Protection Bureau (CFPB) is tasked with preventing predatory mortgage lending, improving the clarity of mortgage paperwork for consumers and reducing incentives for mortgage brokers to push home buyers into more expensive loans. The CFPB has also changed the way credit card companies and other consumer lenders disclose their terms to consumers. It requires loan terms to be presented in a new, easy-to-read-and-understand format. The Volcker Rule, another key component of Dodd-Frank, restricts the ways banks can invest and regulates trading in derivatives. The goal of the new SEC Office of Credit Ratings is to improve the accuracy of ratings provided by the agencies that evaluate the financial strength of businesses and governments.

Convertible Bond

A convertible bond is a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs."

Credit Default Swap - CDS

A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap's seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security's premium as well as all interest payments that would have been paid between that time and the security's maturity date. A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds. A credit default swap is also often referred to as a credit derivative contract.

Cyclical Stock

A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession. Contrast cyclical stocks with counter-cyclical stocks, which tend to move in the opposite direction from the overall economy, and with consumer staples, which people continue to demand even during a downturn.

Deferred Interest

A deferred interest is the amount of interest that is added to the principal balance of a loan when the contractual terms of that loan allow for a scheduled payment to be made that is less than the interest due. When a loan's principal balance increases because of deferred interest, it is known as negative amortization.

Hawk

A hawk is a policymaker or advisor who is predominantly concerned with interest rates as they relate to fiscal policy. A hawk generally favors relatively high interest rates in order to keep inflation in check. In other words, they are less concerned with economic growth than they are with recessionary pressure brought to bear by high inflation rates. Also known as "inflation hawk."

Hedge

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. Hedging is analogous to taking out an insurance policy. If you own a home in a flood-prone area, you will want to protect that asset from the risk of flooding - to hedge it, in other words - by taking out flood insurance. There is a risk-reward tradeoff inherent in hedging; while it reduces potential risk, it also chips away at potential gains. Put simply, hedging isn't free. In the case of the flood insurance policy, the monthly payments add up, and if the flood never comes, the policy holder receives no payout. Still, most people would choose to take that predictable, circumscribed loss rather than suddenly lose the roof over their head. A perfect hedge is one that eliminates all risk in a position or portfolio. In other words, the hedge is 100% inversely correlated to the vulnerable asset. This is more an ideal than a reality on the ground, and even the hypothetical perfect hedge is not without cost. Basis risk refers to the risk that an asset and a hedge will not move in opposite directions as expected; "basis" refers to the discrepancy.

Peak Oil

A hypothetical date referring to the world's peak crude oil production, whereby following this day, production rates will begin to diminish. This concept is derived from geophysicist Marion King Hubbert's "peak theory", which proclaims that oil production follows a bell-shaped curve.

Knockout Option

A knock-out option is an option with a built-in mechanism to expire worthless if a specified price level is exceeded. A knock-out option sets a cap to the level an option can reach in the holder's favor. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation.

Margin Call

A margin call is a broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when the account value depresses to a value calculated by the broker's particular formula. An investor receives a margin call from a broker if one or more of the securities he had bought with borrowed money decreases in value past a certain point. The investor must either deposit more money in the account or sell off some of his assets.

Russel 3000 Index

A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market. More specifically, this index encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S.

Society for Worldwide Interbank Financial Telecommunications - SWIFT

A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) uses a standardized proprietary communications platform to facilitate the transmission of information about financial transactions. This information, including payment instructions, is securely exchanged between financial institutions.

Perpetual Bond

A perpetual bond is a bond with no maturity date. Perpetual bonds are not redeemable but pay a steady stream of interest forever. Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars (1814). Some in the U.S. believe it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates. A perpetual bond is also known as a 'consol'.

Put Option

A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.

Real Rate of Return

A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time.

Security

A security is a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.

Sharing Economy

A sharing economy is an economic model in which individuals are able to borrow or rent assets owned by someone else. The sharing economy model is most likely to be used when the price of a particular asset is high and the asset is not fully utilized all the time. Communities of people have shared the use of assets for thousands of years, but the advent of the Internet has made it easier for asset owners and those seeking to use those assets to find each other. This sort of lending is sometimes referred to as a peer-to-peer (P2P) rental market. Sharing economies allow individuals and groups to make money from underused assets. In this way, physical assets are shared as services. For example, a car owner may allow someone to rent out her vehicle while she is not using it, or a condo owner may rent out his condo while he's on vacation. Criticism of the sharing economy often involves regulatory uncertainty. Businesses offering rental services are often regulated by federal, state or local authorities; unlicensed individuals offering rental services may not be following these regulations or paying the associated costs, giving them an "unfair" advantage that enables them to charge lower prices.

Sin Stock

A stock of a company either directly involved in or associated with activities widely considered to be unethical or immoral. Sin stocks are found in sectors whose activities are frowned upon by some or most of society, because they are perceived as making money from exploiting human weaknesses and frailties. Sin stock sectors therefore include alcohol, tobacco, gambling, sex-related industries, weapons manufacturers and the military. Also known as "sinful stocks", they are the polar opposite of ethical investing and socially responsible investing, whose proponents emphasize investments that benefit society.

Stop-Limit Order

A stop-limit order is an order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.

Tangible Asset

A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets.

Bid And Asked

A two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time.The bid price represents the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security. A trade or transaction occurs when the buyer and seller agree on a price for the security. The difference between the bid and asked prices, or the spread, is a key indicator of the liquidity of the asset - generally speaking, the smaller the spread, the better the liquidity. Also known as bid and ask, bid-ask or bid-offer.

Reverse Mortgage

A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan. Often, the lender will require that there can be no other liens against the home. Any existing liens must be paid off with the proceeds of the reverse mortgage.

Moving Average - MA

A widely used indicator in technical analysis that helps smooth out price action by filtering out the "noise" from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two basic and commonly used MAs are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives bigger weight to more recent prices. The most common applications of MAs are to identify the trend direction and to determine support and resistance levels. While MAs are useful enough on their own, they also form the basis for other indicators such as the Moving Average Convergence Divergence (MACD).

Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

AAA

AAA is the highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has an exceptional degree of creditworthiness and can easily meet its financial commitments. Ratings agencies such as Standard & Poor's and Fitch Ratings use the AAA nomenclature to indicate the highest credit quality, while Moody's uses Aaa.

After Hours Trading - AHT

After-hours trading (AHT) is trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks (ECNs) has greatly facilitated after-hours trading, which is no longer restricted only to large institutional investors but is now available to any investor. Also known as the "after-hours market."

Annuity

An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Keynesian Economics

An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, the term "Keynesian economics" was used to refer to the concept that optimal economic performance could be achieved - and economic slumps prevented - by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a "demand-side" theory that focuses on changes in the economy over the short run.

Goldilocks Economy

An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. There are no exact markers of a Goldilocks economy, but it is characterized by a low unemployment rate, increasing asset prices (stocks, real estate, etc.), low interest rates, brisk but steady GDP growth and low inflation.

Intangible Asset

An intangible asset is an asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

Omnibus Account

An omnibus account is an account between two futures merchants (brokers). It involves the transaction of individual accounts that are combined in this type of account, allowing for easier management by the futures merchant. This protects the identities of the individual account holders, because the futures merchant transacts for them.

Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

Basis Point (BPS)

Basis point (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

Brazil, Russia, India And China - BRIC

Brazil, Russia, India and China (BRIC) refer to the idea that China and India will, by 2050, become the world's dominant suppliers of manufactured goods and services, respectively, while Brazil and Russia will become similarly dominant as suppliers of raw materials. Due to lower labor and production costs, many companies also cite BRIC as a source of foreign expansion opportunity, and promising economies in which to invest.

Brexit

Brexit is an abbreviation of "British exit" that mirrors the term Grexit. It refers to the possibility that Britain will withdraw from the European Union. The country will hold an in-out referendum on its EU membership on June 23.

Capital Budgeting

Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature. These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the potential returns generated meet a sufficient target benchmark, also known as "investment appraisal."

Days Sales Outstanding - DSO

Days sales outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured. The formula for calculating days sales outstanding can be represented with the following formula: (Accounts Receivable/Total Credit Sales) x Number of Days Days Sales Outstanding (DSO) A low DSO value means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. Days sales outstanding is also often referred to as "days receivables" and is an element of the cash conversion cycle.

Diversification

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

Dove

Dove refers to an economic policy advisor who promotes monetary policies that involve low interest rates, based on the belief that low interest rates increase employment. Derived from the placid nature of the bird of the same name, the term is the opposite of "hawk." Statements that suggest that inflation has few negative effects are called dovish.

Duration

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices

Equilibrium Quantity

Economic quantity is the quantity of an item that will be demanded at the point of economic equilibrium. This point is determined by observing the intersection of supply and demand curves. Basic micro-economic theory provides a path for finding the optimal quantity and price of a good or service. This theory is based on the supply and demand model, which is the fundamental basis of market capitalism. This theory rests on some caveats: That producers and consumers behave predictably and consistently That neither of these agents have other factors influencing their decisions.

Economies Of Scale

Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal - arising from within the company; and External - arising from extraneous factors such as industry size.

Enterprise Value (EV)

Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Often times, the minority interest and preferred equity is effectively zero, although this need not be the case.

Equity Risk Premium

Equity risk premium, also referred to as simply equity premium, is the excess return that investing in the stock market provides over a risk-free rate, such as the return from government treasury bonds. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium will vary depending on the level of risk in a particular portfolio and will also change over time as market risk fluctuates. As a rule, high-risk investments are compensated with a higher premium.

Estate Planning

Estate planning is the collection of preparation tasks that serve to manage an individual's asset base in the event of their incapacitation or death, including the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law. Some of the major estate planning tasks include: - Creating a will - Limiting estate taxes by setting up trust accounts in the name of beneficiaries - Establishing a guardian for living dependents - Naming an executor of the estate to oversee the terms of the will - Creating/updating beneficiaries on plans such as life insurance, IRAs and 401(k)s - Setting up funeral arrangements - Establishing annual gifting to reduce the taxable estate - Setting up durable power of attorney (POA) to direct other assets and investments

Ex-Dividend

Ex-dividend is a classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be given ex-dividend status if a person has been confirmed by the company to receive the dividend payment. A stock trades ex-dividend on or after the ex-dividend date (ex-date). At this point, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock. After the ex-date has been declared, the stock will usually drop in price by the amount of the expected dividend.

File and Suspend

File and suspend is a Social Security claim strategy that allows married couples of full retirement age to receive spousal benefits and delayed retirement credits at the same time. Many couples are not aware of this strategy and how it can maximize their Social Security income. In our current Social Security system, a spouse can only claim spousal benefits when the main beneficiary (the higher-earning spouse) claims them first. When the beneficiary reaches the age of retirement, he or she can file for benefits but delay receiving those benefits until a date in the future. In this case, since the beneficiary has in fact filed for benefits, his or her spouse can also file for spousal benefits. Meanwhile, the main beneficiary's retirement benefits continue to grow the longer they are pushed into the future. Further, the spouse can also reap the benefits of delayed retirement credits. Couples who were married for at least 10 years and then divorced are also eligible for file and suspend benefits, as they can claim ex-spousal benefits.

Foreign Aid

Foreign aid is money that one country voluntarily transfers to another, which can take the form of a gift, a grant or a loan. In the United States, the term usually refers only to military and economic assistance the federal government gives to other governments. Broader definitions of aid include money transferred across borders by religious organizations, non-government organizations (NGOs) and foundations. Some have argued that remissions should be included, but they are rarely assumed to constitute aid.

Free On Board - FOB

Free on board (FOB) is a trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfills its obligations to deliver when the goods have passed over the ship's rail. When used in trade terms, the word "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier.

Frexit

Frexit - short for "French exit" - is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to leave the European Union in June of 2016. Other countries with fringe parties that have similarly acknowledged the possibility of leaving the EU include the Netherlands (Nexit), Italy (Italeave) and Austria (Auxit or Oexit). The specific terms of referendum differ depending on each country's interests.

Front Running

Front running is the unethical practice of a broker trading an equity in his personal account based on advanced knowledge of pending orders from the brokerage firm or from clients, allowing him to profit from the knowledge. It can also occur when a broker buys shares in his personal account ahead of a strong buy recommendation that the brokerage firm is going to make to its clients.

GBP

GBP is the abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories of South Georgia, the South Sandwich Islands and British Antarctic Territory and the U.K. crown dependencies: the Isle of Man and the Channel Islands. The African country of Zimbabwe also uses the pound. The British pound is pegged to the Falkland Islands pound, Gibraltar pound, Saint Helenian pound, Jersey pound (JEP), Guernsey pound (GGP), Manx pounds, Scotland notes and Northern Ireland notes.

Generally Accepted Accounting Principles - GAAP

Generally Accepted Accounting Principles (GAAP) are a common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Goodwill

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company's brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet.

Italexit (Italeave)

Italexit, short for "Italy exit," also known as Italeave, is an Italian derivative of the term Brexit, which refers to the June 2016 United Kingdom vote to leave the European Union. Other countries with extremist parties that have acknowledged their own versions of the possibility of leaving the EU include France (Frexit), Austria (Oustria) and the Czech Republic (Czech-out). Each country's specific political interests depend on the country's situation and the extremist party's values.

Market Capitalization

Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures. Frequently referred to as "market cap."

Mercantilism

Mercantilism was the main economic system of trade used during the 16th to 18th centuries. The goal was to increase a nation's wealth by imposing government regulation that oversaw all of the nation's commercial interests. It was believed national strength could be maximized by limiting imports via tariffs and maximizing exports.

Merger Arbitrage

Merger arbitrage is a hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit. A merger arbitrageur looks at the risk that the merger deal will not close on time, or at all. Because of this slight uncertainty, the target company's stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur's profit.

Monetary Policy

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves). The Federal Reserve is in charge of the United States' monetary policy.

Oustria

Oustria, short for "Oust Austria," is an Austrian version of the term Brexit, which originated in June of 2016 when the United Kingdom voted to leave the European Union. Other countries in the EU have similarly adopted nicknames for the possibility of their breaking away from the EU, including France (Frexit), Italy (Italexit or Italeave), the Czech Republic (Czech-out) and Portugal (Departugal).

Outstanding Shares

Outstanding shares refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. Outstanding shares are shown on a company's balance sheet under the heading "Capital Stock." The number of outstanding shares is used in calculating key metrics such as a company's market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS). A company's number of outstanding shares is not static, but may fluctuate widely over time. Also known as "shares outstanding."

Over-The-Counter - OTC

Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

Physical Capital

Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist in the production process, like machinery, office supplies, transportation and computers.

Price Elasticity Of Demand

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

Pro Forma

Pro forma, a Latin term, literally means "for the sake of form" or "as a matter of form." In the world of investing, pro forma refers to a method by which financial results are calculated. This method of calculation places emphasis on present or projected figures. Financial statements that utilize the pro forma method of calculation are often designed to draw focus to specific figures when an earnings announcement is issued by a company and made available to the public, particularly potential investors. These pro forma statements may also be designed to indicate a change proposed by a company, such as an acquisition or a merger. Investors should be aware a company's pro forma financial statements may hold figures or calculations that are not in compliance with generally accepted accounting principles (GAAP). In some instances, pro forma figures are vastly different than those generated with GAAP.

Ratchet Effect

Ratchet effect refers to escalations in production or price that tend to self-perpetuate. Once productive capacities have been added or prices have been raised, it is difficult to reverse these changes, because people tend to be influenced by the previous best or highest level or production.

Sensex

Sensex is an abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock index in India.

Par

Short for "par value," par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case it means the face value, or value at which the bond will be redeemed at maturity. This is usually $1,000 for corporate issues and can be more for government issues. A bond can trade above or below par, reflecting the broader interest rate environment and the issuer's perceived credit worthiness.

Tax Efficiency

Tax efficiency is an attempt to minimize tax liability when given many different financial decisions. There are a variety of ways to obtain tax efficiency, including selecting tax efficient vehicles such as many exchange traded funds (ETFs) and municipal bonds, locating assets in the accounts such as Traditional or Roth IRAs and offsetting taxable capital gains with capital losses. Other options to reduce tax liability include tax-efficient mutual funds, irrevocable trusts and tax-exempt commercial paper

DuPont Analysis

The DuPont analysis is a method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things: - Operating efficiency, which is measured by profit margin - Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

European Union (EU)

The European Union (EU) is a group of 27 countries that operates as a cohesive economic and political block. Nineteen of the countries use the euro as their official currency. The EU grew out of a desire to form a single European political entity to end the centuries of warfare among European countries that culminated with World War II, which decimated much of the continent. The European Single Market was established by 12 countries in 1993 to ensure the so-called four freedoms: the movement of goods, services, people and money.

Eurozone

The Eurozone is a geographic and economic region that consists of all the European Union countries that have fully incorporated the euro as their national currency. Also referred to as "euroland".

Standard & Poor's 500 Index - S&P 500

The Standard & Poor's 500 Index (S&P 500) is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index - each stock's weight is proportionate to its market value.

VIX - CBOE Volatility Index

The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." There are three variations of volatility indexes: the VIX tracks the S&P 500, the VXN tracks the Nasdaq 100 and the VXD tracks the Dow Jones Industrial Average.

Cash Conversion Cycle - CCC

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. The CCC is also referred to as the "cash cycle." The metric is calculated as: CCC = DIO + DSO - DPO Cash Conversion Cycle (CCC) Where: DIO represents days inventory outstanding, DSO represents days sales outstanding and DPO represents days payable outstanding.

European Central Bank (ECB)

The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.

Cost Of Debt

The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity.

Discount Rate

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank's discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term "discount rate" is the rate used by pension plans and insurance companies for discounting their liabilities.

Intrinsic Value

The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. 2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero.

Labor Market

The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. It is a major component of any economy, and is intricately tied in with markets for capital, goods and services. At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population, and education levels. Relevant measures include unemployment, productivity, participation rates, total income and GDP. At the microeconomic level, individual firms interact with employees, hiring them, firing them, and raising or cutting wages and hours. The relationship between supply and demand influences the hours the employee works and compensation she receives in wages, salary and benefits.

Law Of Demand

The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers' opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.

Price/Earnings To Growth - PEG Ratio

The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio can tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. The calculation is as follows: P/E ratio ÷ Annual EPS Growth

Production Possibility Frontier - PPF

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently. Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve or the transformation curve.

Transatlantic Trade and Investment Partnership (TTIP)

The proposed Transatlantic Trade and Investment Partnership is a comprehensive trade deal between the European Union and the United States, with the aim to promote trade and boost economic growth. If the partnership is finalized, it will open a market among over 800 million consumers and become the biggest trade agreement ever negotiated. The negotiations by the European Commission and the Executive Branch in the U.S. are ongoing, and few specifics about the deal have been made public, aside from the general objectives. The agreement was set to be finalized in 2014, but is now estimated to take until 2019-2020, which means the next President of the United States will inherit the negotiations.

Rule Of 72

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72: Years required to double investment = 72 ÷ compound annual interest rate Note that a compound annual return of 8% is plugged into this equation as 8, not 0.08, giving a result of 9 years (not 900).

Underground Economy

The underground economy refers to illegal economic activity. Transactions in the underground economy are illegal either because the good or service being traded is itself illegal or because an otherwise licit transaction does not comply with government reporting requirements. The first category includes drugs and prostitution in most jurisdictions. The second includes untaxed labor and sales, as well as smuggling goods to avoid duties. The underground economy is also referred to as the shadow economy, black market (not gray market) and informal economy.

Weighted Average Life - WAL

The weighted average life (WAL) is the average length of time that each dollar of unpaid principal on a loan, a mortgage or an amortizing bond remains outstanding. Calculating the WAL shows an investor, an analyst or a portfolio manager how many years it will take to receive half the amount of the outstanding principal.

Treasury Inflation Protected Securities - TIPS

Treasury inflation protected securities (TIPS) refer to a treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed. Interest on TIPS is paid semiannually. TIPS can be purchased directly from the government through the TreasuryDirect system in $100 increments with a minimum investment of $100 and are available with 5-, 10-, and 30-year maturities.

Underweight

Underweight refers to a situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and underweighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark. 2. An analyst's opinion regarding the future performance of a security. Underweight will usually mean that the security is expected to underperform either its industry, sector, or even the market altogether.

Unlevered Beta

Unlevered beta compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage. This number provides a measure of how much systematic risk a firm's equity has when compared to the market. Unlevered beta provides the same information as beta, but it removes the impact of debt from the equation. The more debt or leverage a company has, the more earnings are committed to paying back that debt. This increases the risk associated with the stock. While leverage is an aspect of risk that should be monitored, it is not an aspect of market risk. Unlevered beta is a metric that removes the impact of debt from beta. It is calculated by dividing the levered beta by 1 and then subtracting the tax rate, multiplied by the ratio of debt to equity, plus 1. As a mathematical formula, it looks like this: unlevered beta = beta / 1 + (1 - tax rate) x (debt / equity). The tax rate is the firm's corporate tax rate. Debt and equity are both found on the balance sheet.

White Squire

Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in the target firm.

Weighted Average Cost of Capital (WACC)

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation. A firm's WACC increases as the beta and rate of return on equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk. To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula: Weighted Average Cost Of Capital (WACC) WACC = (E/V)*Re + (D/V)*Rd*(1-Tc)