Financial Dictionary

The annual percentage rate (APR) is a yearly rate, expressed as a percentage, that is charged for borrowing money, or accrued by investing money. This rate represents the cost of the amount borrowed over the term of the loan. Any additional costs or fees that are associated with this loan will be included in the APR.

At first glance, credit card agreements and loan terms can be confusing. There can be a variance in transaction fees, interest rate structure, and penalties.

The APR is a standardized calculation that gives the borrower that absolute bottom line amount for which they are responsible. This information can then be used to compare rates and find the best options with potential lenders. Credit card companies and lenders are required by law to disclose the APR to customers, and give clear detail on the actual rates applied to their agreements.

You will often see credit card companies advertising low monthly interest rates, but they must also disclose the APR (example: 1.9% per month over 12 months = 22.8% APR) before any agreements are signed.

What is the difference between APR and Interest Rate?

The Interest Rate is an amount calculated by the lender (a percentage of the principle loan amount) that is charged to the borrower as a fee for use of the funds.

The APR (Annual Percentage Rate) is the total amount of fees for use of the loaned funds, shown as a percentage charged on a yearly basis. The APR reflects the Interest Rate, as well as other fees and charges associated with the loan.

What does 0% APR mean?

0% APR means that for a specified amount of time, you will not be charged interest on your purchases or loan amount.

When the introductory period is over (usually anywhere from 6-12 months in), your APR will go up and you will see an increase in your monthly payment amount.

What should I watch out for when comparing mortgage options?

When looking at mortgage options, be careful when comparing APRs on fixed-rate and adjustable-rate loans.

When looking at adjustable-rate loans, the APR will not reflect the maximum interest rate of the loan and will require you to look at other factors when making your decision.

An Appraisal is the estimated valuation, or estimated current worth, of property by an authorized person. Items that often require appraisal include private homes, commercial properties, apartment complexes, businesses, and antique items.  The person performing the appraisal must be authorized by a governing body in the jurisdiction in which the appraisal is taking place.

An appraisal might be necessary for a couple of reasons: to determine the estimated fair selling price of a property or item, and for taxation purposes.

For a property appraisal, factors included in determining an appropriate value include valuation models, current market value of comparable properties, and quality or condition of property. For taxation purposes, properties are appraised to determine worth or value. Taxes due to a governing body are then based off of property value.

For the appraisal of a business, the appraiser will look at factors such as the company’s current management, market value of assets, potential future earnings and the makeup of its’ capital structure.

What role does an appraiser play in the sale of my home?

An appraiser is an impartial third party, who provides objective, impartial opinions related to the value of a property and submit this information to the property owner, seller, prospective lender, or real estate agency involved in the sale of your home.

Where does an appraiser get the information needed to appraise my property?

Besides the inspection of your property, the appraiser with tour your neighborhood to search for comparable properties and see what their estimated values are.

They will also look at MLS (Multiple Listing Service) listings, local and county tax assessor and court records,  and local real estate professionals who have knowledge of the property and the area. All of the information gathered from these sources is used in determining your property value.

What is the difference between a house inspector and home appraiser?

While the appraiser is looking at the property to determine its’ value, a home inspector determines the condition of the structure, or structures. Inspections are often conducted by the potential buyer of a property to identify any structural defects, or any defects in electrical, plumbing or HVAC systems.

The information from these inspections is then used to determine the cost of repairs, and help the potential buyer make an informed decision.

An asset is something owned or purchased by a person or company that has monetary value. Assets can also refer to balance sheet items showing the total worth of a person or company.

Assets are purchased to increase the value of an individual or company. Assets are things that will increase cash flow. Common examples of assets are an individual’s rental property, or the equipment a company uses to do business. In accounting terms, assets are either current or fixed.

A current asset is generally one that will be consumed or traded in the span of one operating year cycle. Current assets are things like cash, inventories, accounts receivable, professional fees, rental income and prepaid expenses.

Fixed, or non-current, assets are long-term and are useful outside of the one year operating time frame. Some fixed assets include long term investments, land or property that is not for sale, an owned building used as a place of business, equipment, patents and trademarks.

What are net assets?

Net assets are the total of all current and fixed assets, minus total liabilities (debts and financial obligations). In business, this amount is know as owners’/shareholders’ equity or net worth.

What is the difference between non-current liabilities and non-current assets?

Non-current, or fixed, assets are assets that will not be liquidated within the next year-long operating cycle. Non-current liabilities are monies or services borrowed by a company but are not due to be payed back in the current fiscal year.

What is a liquid asset?

A liquid asset is cash on hand, or items that can immediately be converted into cash. It is important to note that for a tangible item to be considered a liquid asset, its’ value must not be significantly impacted by the sale.

Stocks, bonds, mutual funds and money market funds are also considered to be liquid assets because they can immediately be converted to cash in a short amount of time, if necessary.

An Automated Teller Machine, commonly referred to as an ATM, is a portable banking location that provides cash and other limited banking services. Using an ATM requires the customer to have a bank issued card with a magnetic strip or chip and a personalized identification code.

ATM, also known as Automated Teller Machines allow customers to conveniently perform some banking activities without the hassle of standing in line at a bank. ATMs can be found throughout cities, on street corners, in stores and in bank lobbies.

There are two basic types of ATMs. More simplistic units allow users to check account balances and withdraw cash. The more complex units allow users to make balance inquiries, withdraw cash, pay credit card bills, and accept deposits. These units are usually associated with specific banks, and require the user to be a member of that bank to access the premier functions.

There can be fees associated with ATM use, but these fees are generally waived if a customer uses an ATM associated with the bank that they keep their accounts with.

Is there a limit on how much I can withdraw from an ATM?

When you open your bank account or receive your debit card from your bank you will receive information on your daily account limits, including ATM withdrawals and PIN based purchases. Most checking accounts have limitations on how much money you can withdraw from an ATM per day, but this amount varies by bank and type of account.

example: if your ATM withdrawal limit per day is $400 and you withdraw $400 at an ATM, you will not be able to withdraw any or funds from an ATM that same day.

Can I withdraw money from my account if I’ve already withdrawn my daily max from an ATM?

If you have already withdrawn your daily maximum from an ATM, and are still in need of funds, you may visit one of your banks’ branches to withdraw money directly from your account.

Can I deposit coins at an ATM?

No. ATMs that have the functionality to accept deposits can accept cash and checks, but not coins. ATMs also do not dispense coins.

An audit is an objective evaluation of an individual’s or company’s financials to ensure that what has been reported is an accurate representation of all transactions that have occurred. Audits may be performed internally by an employee, by a third party firm, or by the IRS.

Most companies complete an audit once a year, though some large corporations complete quarterly or monthly audits. This transparency gives stakeholders a piece of mind about the status and performance of their investments. Using a third party firm to perform the audit can remove the appearance of internal bias, and can lessen the strain on interpersonal work relationships.

Individuals are less frequently involved in audits of personal finances. These audits are performed by the Internal Revenue Service to ensure tax compliance.Though many see an individual audit as a sign of wrong-doing, the IRS does also conducts some random audits.

Auditors fall in to two categories: internal and external. Internal auditors are employed by a company to conduct regular audits,and provide this information to boards, stakeholders, and managers. Contracted auditors work under the same protocols as internal auditors. External auditors work independently to evaluate a company’s financial reporting and evaluate cost statements to make sure there isn’t any fraud.

What are internal auditors looking for?

Internal auditors are looking at how performance is meeting up with company fiscal policies and regulatory law compliance. Internal auditors may also look at improvements made from previous years, or make suggestions for future improvements.

Why am I being audited?

There are multiple reasons that you may be audited, including:

• Reported forms, such as W-2s and 1099s, that don’t match the income you have reported, high deductions in relation to your income level, or a large variance in earnings from the previous year.
• Your involvement in business or transactions where the other party is being audited.
• Flags, such as above average withholdings.
• Random selection.

Who can help me if I am being audited?

Whether your business or personal taxes are being audited, you are likely to be stressed or have questions about the process.

Contact the tax professional who prepared your taxes for information about the process. If you are still feeling uneasy about the process, you may retain a tax attorney.

Bankruptcy is a legal proceeding that occurs when either a person or company can not repay their debts. The process is usually started by the debtor (or person/company that owes money), and is started with a filing in court.

The process is less commonly initiated by the creditors. Once the proceeding has started, the assets of the person or company in question are evaluated to see what can be used to pay off some of the outstanding debts. At the conclusion of the bankruptcy proceedings, the debtor is relieved of any debt obligations that were incurred prior to the filing.

In a situation where a debtor cannot repay what they owe, bankruptcy can offer a clean a slate by wiping current debt, while offering creditors some portion of repayment based on what assets are available. This practice benefits the economy by offering a portion of repayment in situations where repayment of any kind would otherwise be impossible.

There are multiple kinds of bankruptcy filings. In the United States, there are multiple chapters of the Bankruptcy Code. Chapter 7 calls for liquidation of assets to pay off debts, Chapter 11 calls for individual or company reorganization, and Chapter 13 calls for debt consolidation and lowered payment plans to pay off existing debt.

Will my spouse be affected if I file for bankruptcy?

For any credit items in which your spouse co-signed, they will be affected by your bankruptcy proceedings. These items could include home loans, vehicle loans, and credit cards that you have jointly. He or she will not be affected by any items that are in your name only.

If I file for bankruptcy, who will find out?

Bankruptcy proceedings are a matter of public record. This means that anyone searching could find this information. Your credit report will also reflect your bankruptcy for 10 years.

What are some common reason individuals file for bankruptcy?

An individual may file for bankruptcy because of large, unforeseen medical bills, unemployment or the loss of income unexpectedly, change in marital status, and seriously overextended credit.

Can you file for bankruptcy more than once?

While this is something that is possible, if you have ever filed for Chapter 7 Bankruptcy, you must wait 8 years before you are allowed to file again. Remember that a bankruptcy stays on your credit report for 10 years from the date of filing.

A Bear Market is a situation in which the prices of securities are falling, and a widespread attitude of pessimism prevails. The attitude of pessimism will increase as investors expect future losses. To be considered a bear market, there is usually a downturn of 20% or more over broad indexes, such as the Dow Jones Industrial Average (DJIA), over a period of at least two months.

Market corrections should not be confused with bear markets, since corrections are short-term trends that occur over periods of less than two months. Bear markets can be triggered by investors losing faith in the market during times of recession, high unemployment rates, and rising inflation.

Unlike during a correction, bear markets are not the best time for market entry, since it can be hard to time the bottom. It can be hard for an investor to make gains in this market unless he is a short seller. Bear markets can be stressful as an investor, but historically they only last for about 10 months before the tides change.

What are some ways to tell if a bear market is ending?

To pinpoint the end of a bear market, investors look for at least a 20% gain over a period of 6 months or more.

How can you spot the beginning of a bear market?

Though there is not one specific indicator, there are some precursors to the beginning of a bear market, including:

• An exponential rise in prices
• Fear of ‘missing out’ on hot stocks
• Increased involvement of private investors, and increased trade volume
• An increase in interest rates

What are the phases of a bear market?

1. The initial, sharp drop in the market
2. A rally in prices, with investors seeing this lull as a market improvement, but the trade volume is still low.
3. A long, slow dip in prices, along with low volume. In this phase, very few investors are entering the market.

A balance sheet is a financial summary of a companies’ assets, liabilities, and shareholder equity at a given point in time. The formula used on balance sheets is: Assets = Liabilities + Shareholders’ Equity. These three segments give investors a view of what a company owns, what they owe, and the amount invested by shareholders.

A balance sheet is a snapshot of the health of a company’s finances. Trends can be determined by comparing the balance sheets over a span of multiple years. The name, “balance sheet”, comes from the principle that both sides of the equation MUST add up.

When assets are listed on a balance sheet, they are listed from top to bottom in order of liquidity (or how quickly they can be converted to cash). Assets are divided into ‘current’ and ‘long term’ assets.

The order of assets is usually as follows:

• Cash
• Marketable Securities
• Accounts Receivable (with an allowance for doubtful accounts, or accounts not expected to pay)
• Inventory
• Prepaid Expenses
• Long-term investments
• Fixed assets
• Intangible assets

Monies owed by a company to outside parties are considered liabilities. Liabilities include bills that need to be paid, interest on loans, rent, utilities, salaries, pension fund liability, and deferred tax liability.

Funds attributed to business owners/shareholders is known as shareholders’ equity, or ‘net assets’. This amount is equal to the company’s total assets minus the total liability.

Will a balance sheet show a company’s financial trends?

Looking at a single balance sheet will not give you enough information to chart trends, as a single sheet is a glance at financial health in a specific time frame. If you compare balance sheets over several years, trends will become apparent.

What are some examples of fixed assets?

• Land
• Buildings
• Vehicles
• Tools
• Office Equipment

What is the Acid-Test Ratio?

The Acid-Test Ratio is: (cash + accounts receivable + short-term investments)/current liabilities. The Acid-Test Ratio is a strong indicator of whether or not a company has enough short-term assets to cover immediate liabilities.

A bridge loan is a short term loan given to a person or company until they can secure permanent financing or removes another financial obligation. This kind of financing provides immediate cash flow for users to meet current financial obligations. Interest rates are usually high, and backed by collateral such as real estate or inventory. Bridge loans are short-term, usually up to one year.

Bridge loans are also commonly known as interim financing, swing loans, or gap financing. As the name implies, a bridge loan is filling a gap. These loans do not provide long term solutions, but can be used in a variety of situations by individuals and companies.

Individuals use bridge loans most frequently in real estate. Many people who are involved in selling one property and purchasing another, face a lag time between the closing of the property they are buying, and the closing of the property they are selling. Securing a bridge loan gives the individual some breathing room to purchase the new home, while waiting for the sale of the original home to be completed.

Companies use bridge loans to secure working capital until funding can be secured. This is a common scenario in start ups and new or expanding businesses.

Why are bridge loans so expensive?

Bridge loans are accompanied by a steep interest rate to compensate for the high risk involved in this type of lending. Lenders are taking a bigger risk giving out this type of loan, compared to secured long term financing.

What is the most common way to pay back a bridge loan?

Since bridge loans are generally large amounts of money due back over a short period of time, bridge loans are frequently payed off with borrowed funds from secured conventional financing.

Are there construction applications for bridge loans?

Yes, bridge loans are often used by developers while they are waiting for permits to be approved. It can be hard for developers to obtain conventional financing before the permits are approved. Before permit approval, lenders see construction projects as very high risk.

A Bull Market, plainly put, is a market on the rise. It is a financial market where the prices of securities are climbing, or are expected to climb. This term can be applied to any market where trades are taking place. The most common application is the stock market, but it can also be applied to bonds, currencies and commodities.

During a bull market, investor confidence increases, driving positive outlooks  and optimism about the market. These feelings will drive strong demand and low supply for securities. Many investors will want to buy up available securities, but very few will be willing to sell.

As with a bear market, it is hard to determine when the tides will change. The goal for investors is to buy up securities at relatively low prices, and sell as the prices go up to gain a profit. Since it is hard to know when prices will fall again, investors run the risk of taking a loss on securities they have purchased during this time.

Can I make a profit during a bull market?

While it is possible to sell securities at a higher price than you purchased them for, this unpredictable market can leave you with a lighter purse than you started with.

It is best to choose securities based on the quality of the investments, and have a good understanding of long term market trends before you start making purchases.

How long does a bull market last?

Though bull markets last, on average, 5 times longer than bear markets, they are unpredictable and the tides could shift at any time.

How can a bull market be measured?

A common measure is an 80% rise in across all stock prices over an extended length of time.

Consumer debt is debt that is accrued as a result of purchasing items that do not appreciate in value; otherwise known as consumables. Having high levels of consumer debt can put a financial strain on an individual and their source of income.

Consumer debt is incurred most frequently on purchases for personal, family, or household use. The most common types of consumer debt are consumer finance, payday loans, and credit card debt. These debts often carry higher interest rates than secured loans ans mortgages do. High consumer debt ratios can lead to predatory lending and bankruptcy.

Carrying high balances of consumer debt can reflect negatively on credit reports, and when being considered for other loans. There are very few scenarios in which it is financially advisable to buy something immediately on credit instead of saving up for a cash purchase.

Is there ever a time when making a large consumable purchase on credit is ok?

There are situations where consumer debt can be leveraged in real-estate or business. It can also be acceptable to make a financed purchase that can help increase your earning potential.

This could be new suits bought on credit for a new high paying job, or financing a new car to get to a new job.

How can I work on paying off my credit card bills?

Make sure you are always making at least the minimum monthly payment on all of your credit cards. Then, figure out which of your cards has the highest interest rate, and make an extra payment each month to that account. Once that card is paid off, do the same with the next highest interest rate.

How can I avoid high balances of consumer debt?

When considering a purchase using credit, consider:

• Do I need this item right now?
• If I buy it right now, what is the total cost (sticker price plus credit card interest)?
• Can I wait until I have saved up cash  to make this purchase?

Cash flow is the net amount of cash  moving in and out of a business. A company with positive cash flow has an increase in liquid assets, and is able to pay off debts, return money to shareholders, reinvest in the business, provide a cushion against future financial liabilities, and pay current expenses.

Companies with negative cash flow have a decrease in liquid assets. The quality of a company’s income can be gauged by cash flow.

Since the accrual method of accounting lists both completed transactions, and accounts receivable (or more simply, money you are expecting to receive), it is important to have a total of completed transactions to compare the the IOUs. If a very successful company has an impressive net income, but not enough liquid assets, they can get into trouble very quickly in the event of an unforeseen downturn or emergency.

A cash flow statement is used to flesh out if a company’s income is translating into cash flow, or is hung up as accounts receivable. A cash flow statement is broken down into 3 parts: operating cash flow, investing cash flow, and financing cash flow.

Operating cash flow is to be used for the day to day expenses of running the business. Investing cash flow is the money used to invest in the future of the company through acquisitions. Financing cash flow relates to the company’s investors and dividends paid to stockholders would be reflected here.

Free cash flow is the total operating cash flow, minus capital expenditures. This is the money that can be used to pay off debts to creditors, expand the business, and buy back stock.

What is the difference between net cash flow and net income?

Unlike net cash flow, net income includes accounts receivable and items that have not yet been paid for.  Net cash flow only reflects completed transactions.

What are capital expenditures?

Capital expenditures refer to the funds spent on tangible assets for the operations of a business over the period of one year.

What is a non-cash expense?

A non-cash expense is an expense that was reported on an income statement, but did not have a related cash payment during that accounting period. A common example of a non-cash expense is depreciation.

A convertible bond is a bond issues by a company that can be converted by the holder, at a predetermined time, into equity in the company. It is very similar to a regular corporate bond, but does carry a slightly lower interest rate.

Often, when a public company issues stock, the market can see this action as an indicator that the stock price is over-valued. Investors see convertible bonds as a way to make a profit after conversion if the company does well.

A convertible bond can allow you to make a little money over time, with the option of making a lot more. If you choose to ‘cash in’ your convertible bond for stock, it is possible to estimate the effective price per share. If a convertible bond is sold for $500 and has an annual coupon of 6%, ($500 x 6%) you will receive $30 for every year that you do not convert the bond to shares.

This bond can be converted to 50 shares at any time. Once the bond has been  converted, you are no longer receiving the interest (or coupon payment), and the value of your investment would change with the value of the stock. The effective price per share would be the price paid, divided by the shares received: $500/50= $10/share.

Can I lose money when converting my convertible bond to shares?

Yes, you need to watch the market to make sure that make sure that the current share price is higher than the effective share price when looking at a conversion.

When should I keep my convertible bond?

If the share price is low, or has fallen, it can be smarter for an investor to keep a convertible bond and receive the interest payments. If a share price rises substantially, a conversion could be financially beneficial.

Can I be forced to convert my convertible bond?

An issuing company holds the right to call in the bonds, or forcibly convert them. This can happen either at the bond’s call date, or if a the price of the stock is much higher than the price of the bond.

Credit bureaus are agencies that research and collect information on individuals and their credit history. This information is then sold for a few to creditors. Creditors use this information when making decisions on potential loans.

Creditors primarily use credit bureaus as a source of information to make informed decisions. The most frequent customers of credit bureaus are credit card companies, banks and mortgage lenders.

Credit bureaus collect information on bill paying habits and lending history to calculate the risk involved in granting a loan. This information can also be used to determine the interest rate on a new loan.

A person with a high credit score is more likely to get a low interest rate, while someone with a higher debt to income ration and less than fantastic bill pay history will be more likely to be given a higher interest rate.

Where do credit bureaus get their information?

Credit bureaus collect consumer information from offices of public record, debt collectors, creditors and debtors. This information is compiled into a report that provides a credit history snap shot.

Are credit scores always accurate?

Consumers are encouraged to look at their credit reports regularly to look for any inaccuracies. These inaccuracies can be fixed.

In the United States, the Fair Credit Reporting Act regulates consumer credit bureaus and how they use they information they have gathered. This legislation protects consumers from false or negative information in their credit score reports.

Can individuals access credit bureau information?

There are credit bureaus in existence that provide information for individuals. An individual can contract with a credit bureau to obtain a report of their own credit and finance history.

Credit Default Swap, or CDS, is a swap where the total amount of credit issued to one party are transferred between two or more parties.

In a CDS, the buyer of the swap makes the monthly payments to the swap seller until the loan reaches maturity. In the agreement, the seller agrees that in the event of a debt issuer default, the seller will pay the buyer the security’s premium, along with any interest payments that would have occurred between the date of default and the date of maturity.

Credit Default Swaps happen most frequently in corporate bonds, mortgage backed securities, emerging market bonds, and municipal bonds.

There is a fair amount of risk associated with the sale of securities and bonds. Because debt securities often have long terms of maturity (and it can be hard to predict the future of these securities), a default on the end of the issuer can be likely.

Credit default swaps can be used as a form of insurance against non-payment. The buyer can push the risk off of themselves, and on to the shoulders of an insurance company for a fee.

How does a CDS work?

An example of a CDS would be if a bank thinks if an investor thinks a company is likely to default on their debts, the investor may purchase credit default swaps from an investment bank.

The bank would charge a fee for this insurance. If the investor bought swaps on $25,000 worth of corporate bonds and the bank charges 200 basis points for  4 years, the investor would only have a maximum risk of (2% x 25,000 x 4) $2,000 for a maximum gain of $25,000.

Are there any down-sides to Consumer Debt Swaps?

Effectively being able to purchase insurance on bonds and securities can sometimes make bond purchasers less careful about due diligence when making purchase decisions.

What is the credit exposure risk in a CDS?

The credit exposure of a CDS is the amount of money that would be lost if a default too place immediately.

Credit exposure is equal to the current market value of the bond if the value is positive, and is equal to zero if the bond has a negative current market value.

A dividend is a sum of money  paid, usually quarterly, to shareholders by a company. This money is paid out of profits or reserves. Dividends are issued as cash payments, shares of stock, or property.

A company can distribute earning (net profit) to shareholders as dividends, or keep the funds within the company as retained earnings. Companies can also use net profits to repurchase their own shares in the open market.

Dividends are most commonly issued by older, well established companies. Younger companies and start-ups tend to reinvest their profits to aid in growth and expansion. Sectors that issue the most dividends include: materials, oil and gas, utilities, healthcare and pharmaceuticals, and banks.

There are multiple methods used to determine dividend payout amounts:

• Residual dividend model- The dividends paid out are the profits, minus the amounts kept as residual income to reinvest into the business.
• Constant payout ratio-  A specific percentage of yearly earnings is paid out on an annual basis.
• Target payout ratio- A stated percentage of earnings is paid out, but the dollar mount adjusts as the baseline changes.
• Stable dividend policy- Steady dividend payouts are made, even if profits fluctuate.

What is a dividend rate?

The dividend rate is the total expected dividend rate is the total expected dividend payment per year, plus any additional non-recurring dividends that could be received during that time.

dividend rate = (recent dividend) x (# of dividend periods per year) + extra dividends.

What is dividend yield?

The dividend yield expresses how much a company pays out in dividends in relation to its share price.

dividend yield = annual dividends per share/ price per share.

What are retained earnings?

Retained earnings are a percentage of net profits that are retained by a company, instead of being payed out as dividends, to be reinvested into the company for the purpose of growth, or to pay off debts.

Day trading is the practice of buying and selling a security within a single trading day. This practice occurs most frequently in the stock market and foreign exchange market, but can be done in any market.

Day traders are usually individuals that have in depth knowledge of the markets, and solid financial footing.

Day traders are focused on short-term trading strategies for highly liquid currencies or stocks. They aim to capitalize on small price movements. Day traders use various strategies, including arbitrage, trading news, and swing trading, to make their moves.

There is a high risk involved in day trading, so traders must only use risk capital, or money they can afford to lose.

There are two types of day traders: traders who work for large investment companies, and traders who work alone.

Those that work for large companies have the benefits of large amounts of capital, expensive technology, and resources. Individual traders usually work for a client or trade their own money, but often have strong ties to a brokerage.

What is arbitrage?

Arbitrage is the purchase and immediate sale of an asset to benefit from the price fluctuation. Arbitrage works as a mechanism in the market to prevent mispricing since inefficient pricing is acted upon very quickly.

What is swing trading?

Swing trading is when an investor tries to capture gains in a stock over a span of one to four days. These investors are more focused on trends and patterns, than on the fundamental values of stocks.

Why does my financial advisor advise against day trading?

Many financial advisors tell their clients to shy away from day trading because the financial risks can greatly outweigh the potential gains. Day trading is not a fast or easy way to make money.

The debt-equity ratio is a leverage ratio that measures the riskiness of a company’s financial makeup. It compares a company’s total equity to total debt. The debt-equity ratio will show shareholder equity versus the amount of debt the company has accrued to finance its assets. The ratio is represented as: debt-equity ratio = total liabilities/shareholder equity.

Looking at a company’s debt-equity ratio can give a good indication of financial risk. A company that has a high d-e ratio is often acting aggressively to finance quick growth with credit. This practice is not only risky, but can accrue high levels of interest.

The personal debt-equity ratio can be used by individuals and corporations when applying for a new loan. Lenders are less likely to consider a loan if the applicant has a high amount of debt in relation to equity.

Applicants with low debt and high equity are much more likely to get a loan offered at a good rate.

What is a good d-e ratio?

There is no standard when it comes to the perfect debt-equity ratio since different industries require different amounts of capital for operation.

What is a long term debt-equity ratio?

In the long term debt-equity ration, a company’s future obligations are measured on a balance sheet in comparison to equity. Total debt includes long term debt and short term debt.

What are financial leverage ratios used for?

Financial leverage ratios are used to determine a company’s or individual’s ability to handle all long and short term obligations.

Deflation is a decline in prices that is often caused by a reduced supply of money and credit. Decreases in personal, investment, or government spending can also lead to deflation. Deflation can cause lowered product and service demand, which leads to higher unemployment numbers.  Prolonged or severe deflation can lead to an economic depression.

Persistent declining pricing can cause a spiral effect in the market. Unemployment rates and decreased incomes can lead to loan defaults. Lower product demand can lead to profit losses and cause businesses to lay off workers, which feeds into the cycle of increasing unemployment rates.

The Federal Reserve can lower interest rates and increase the supply of money in the market, in an effort to force inflation by inducing the rise of prices. This works as a mechanism for sustained recovery because companies will see an increase in profits, employment will increase, and fewer loans will be in default.

How will deflation affect me?

If a deflation cycle is short-lived, there will not be many negative effects on you. When prices fall, your household budget will go further. If the cycle persists, consumers will start to hold off on making purchases, waiting to see if prices drop even more.

The market will become even more stagnant as demand for goods and services keep falling. This will lead to layoffs and loan defaults.

What are central banks?

A central bank is responsible for overseeing the monetary system of an entire nation. They are responsible for the oversight of monetary policy, implementing plans for currency stability, low inflation and full employment.

What is full employment?

The term ‘full employment’ refers to a situation in which all available labor resources are being used in the most efficient way to benefit the economy. The goal is to have as much skilled and unskilled labor employed in the workforce as possible.

A demand loan is a loan without a fixed term or duration of repayment. This kind of loan, or note, can be recalled at any time by the lender, as long as appropriate notice is given.

As long as the lender does not call back the loan, a demand loan can provide flexibility to the borrower. This type of note can be paid back in full at any time without incurring any early payment penalties.

There is some risk involved, as a borrower, when looking at demand loans. When a loan is recalled by the lender, the entire amount must be paid back in full on the date of recall.

How much notice is given by a lender when a demand loan is being recalled?

The required notice time will be set between the lender and borrower in the initial terms of the loan. The most common notice is 24-hrs.

What is a fixed term?

A fixed term is the set amount of time regarding an investment. Example: An investor deposits a sum of money into a financial institution for a set amount of time. The investor cannot withdraw the funds until the term, or time period, is over without incurring an early withdrawal penalty.

How does a demand loan differ from other loans?

Unlike traditional loans, like mortgages, demand loans do not require a show-cause order to be delivered to a delinquent borrower. This means that action can be taken without taking into account the side of the borrower in delinquency proceedings.

Earnings per share, or EPS, is the portion of a company’s profit earmarked to each outstanding share of common stock.

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares.

Earnings Per Share is considered to be the most important variable in determining the price of a share. It is also used to calculate the price-to-earnings valuation ration.

For example, Company X has a net profit of $20M.  They pay out $1M in preferred dividends, had  10 million shares for half the year, and 12 million shares for the other half. The EPS would be calculated as (0.5 x 10M + 0.5 x 12M) = $11M

Remember, it is important to take into consideration the capital it takes to generate the net income, or earnings. Two companies could generate the same Earnings Per Share, but if one of the companies is not as good at managing it’s capital, the other company would be more favorable.

What is a share?

A share is a unit of ownership interest in a company or asset. As a shareholder, you are entitled to equal distribution of profits, if said profits are declared as dividends.

What is common stock?

Common stock is a security that gives the holder ownership in a company. The shareholder has the opportunity to exercise control by being involved in the election of electing board members and voting  on corporate policies.

What is net profit?

Net profit is the amount gained, or left over,  after taxes, expenses, and costs have been taken care of. Any profit goes to the business owners, and they decided how to distribute or reinvest.

Economies of scale is the cost advantage that comes with the increased output of product. Economies of scale arise when the larger the quantity of a item or good produced, the lower the price per unit because the cost is spread out over a larger number of items.

Economies of scale can be classified as internal or external. Internal economies of scale arise from within a company; while external economies of scale arise from outside factors, such as industry size.

Example: A toy maker gives a buyer a quote of $5,000 for 500 toy cars and $10,000 for 2,500 toy cars. If the buyer purchases 500 cars, the price per car would be $10, but is the buyer chooses to purchase 2,500 toy cars, the price per care would be $4. In a situation like this, the manufacturer is passing on part of the savings to the customer in the larger order, since his price of production only increases nominally after a certain number of pieces produced.

Do economies of scale only affect production industries?

No, economies of scale can also have an impact on finance. Larger companies tend to have a lower cost of capital than smaller companies because they have access to lower interest rates. This can be a leading factor in company mergers or take overs.

What is a merger?

A merger is the combining of two companies. When this happens, the shareholders of company x are offered shares of stock in company y in exchange for the surrender of their company x shares.

What is a takeover?

A takeover is when a larger acquisition company makes a bid for a targeted company, When the takeover goes through, the acquiring company becomes responsible for the company’s operations, holdings, and debts.

What are holdings?

Holdings are the investments contained in an investment portfolio that are held by an entity (like a mutual fund), or an individual. These portfolio holdings may range from bonds, stocks, options, mutual funds, futures, private equity, or hedge funds.

Equity placements are a method of financing the growth of a business without the necessity of taking it public.

Placements are the sales of securities to a small number of investors instead of opening up to the investments of the general public. Placements do not need to be registered with the Securities and Exchange Commission. Due to this exemption, placements can be a much simpler, less expensive option than a public offering.

Though the same information found in a prospectus must be made available, a formal prospectus is not required in a private placement. The buyers involved in private placements are usually high end investors, like investment banks, insurance companies, or investment funds. The public is not usually aware that a placement has taken place until after the fact.

Making private placements can sometimes be the initial step in taking a company public. Even if a public company has stock registered in a national market, they may still be involved in private equity placement as long as they have the consent of a majority of their share holders.

What is a prospectus?

A prospectus is a formal legal document that is filed with, and required by, the Securities and Exchange Commission. This document provides details about an invest offering for sale to the public.

What is private placement?

Private placement is the offering and selling of shares in a company to a group of buyers. These are small groups of buyers, and can include pension funds, banks, mutual funds, wealthy investors, and insurance companies.

What is a public offering?

A public offering is the sale of shares (equity) in a company to the public, by an organization, to raise money for business expansion and investment. To be considered a public offering, more than 35 people must be involved in the purchase of securities.

An individual’s estate is everything making up their net worth, including all assets, property, and real estate. Net worth is total worth (including assets, property and real estate) minus any liabilities.

In common speech, an estate is a piece of land and the improvements made to it, including a main house and outbuildings. In financial and legal terms, an estate is everything of value owned by a person, and is used to determine the net worth of the person. Items in consideration can include investments, insurance, assets, antiques, art collections, and real estate.

A person’s estate value is important in two scenarios: in the event a person files for bankruptcy, and in the event a person passes away. When an person files for bankruptcy, their estate is assessed to determine how many of their debts can be paid. In the event of an individual’s passing, their estate is usually divided between family members.

What is estate planning?

Estate planning is the process of planning of future management and division of personal assets in the event of death or incapacitation. Some items included in this process are:

• Drafting of a will
• Naming a guardian for minor dependents
• Naming or updating beneficiaries
• Naming an executor of the estate

What is a beneficiary?

A beneficiary is a person who receives a distribution from a will, trust, or insurance policy. This person is either specifically named as a beneficiary, or meets a set of eligibility requirements.

What is an inheritance tax?

In some places, a tax is imposed on the beneficiary or beneficiaries of a will, trust or insurance policy. The tax amount is based on the value of the item or items received.

An Exchange-Traded Fund (EFT) is a security that tracks either a commodity, a bond, an index, or assets like an index fund. EFTs are traded like stock, and because of this, they do not have Net Asset Value (NAV) calculated at the close of each day.

EFTs own underlying assets, such as oil futures, bonds, shares of stock, foreign currency, or gold. The ownership of these assets is divided into shares. Shareholders don’t actually have any ownership of the underlying assets, only indirect ownership through the funds.

Shareholders are entitled to dividends, earned interest, and residual value if the fund is liquidated. EFTs are traded on the public stock exchange, and funds are bought and sold easily.

Large financial institutions, know as Authorized Participants (APs), are the only entities allowed to create or redeem units of an Exchange-Traded Fund.

For a creation, an AP will put together a portfolio of underlying assets to turn over to the fund exchange for the new EFT shares. Fore redemption, APs return the shares to the fund and receive the underlying assets.

What is a marketable security?

A marketable security is a very liquid security that can be quickly and easily converted into cash.

What is a commodity?

A commodity is a good that is easily traded with other goods of the same type, when quality does not differ much between producers. A common example of a commodity is oil.

What is Net Asset Value?

Net Asset Value (NAV) is the price per share of a mutual fund, or EFTs per share value. This amount is calculated by dividing the total value of all securities in the portfolio (minus any liabilities) by the number of outstanding fund shares.

The Federal Reserve Bank is the central bank of the United States. Created by US Congress in 1913, the Federal Reserve Bank was established to provide the United State with a stable and safe financial system.

The Federal Reserve Bank is governed by a central government agency based in Washington D.C. and has 12 regional Federal Reserve Banks that cover the entirety of the country. The Federal Reserve Bank is subject to Congressional oversight and must follow government financial policy, but is considered independent, and does not need any decisions to be ratified by the president or other politicians.

The Federal Reserve Bank (commonly known as the Fed) works in four main areas:

• Provides financial services- operates the country’s national payment system to depositories, foreign nations and the US government.
• Maintains the stability of our financial system, and mitigates risk.
• Supervises and regulates US banking institutions to protect consumer rights and ensure system safety.
• Conducts national monetary policy by influencing credit and monetary conditions in the US economy to ensure moderate interest rates, maximum employment and stable prices.

Where are the regional branches of the Federal Reserve Bank located?

The 12 regional offices of the Federal Reserve Bank are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.

What is the Fed’s main income source?

The main source of income for the Federal Reserve Bank is interest earned on securities acquired by the US government that have been acquired in the open market.

Where do earnings from the Federal Reserve go?

After the Federal Reserve has paid any expenses, the leftover earnings from interest earned on securities, interest on foreign security investments, fees collected for services, and interest on loans to depository institutions, is transferred to the US Treasury.

A financial instrument is a document, either hard copy or digital, that provides representation of a legal agreement involving some sort of monetary value.

Financial instrument can be categorized as equity based- ownership of an asset,  debt based- the loan of an asset, or foreign exchange based.

Financial instruments are packages of easily trade-able capital in the marketplace. They are trade-able assets of any makeup, including cash, ownership interest in an business, bond, share, futures or bill of exchange.

Since financial instruments are legal agreements between two parties ensuring payment, they are legally binding and enforceable.

What is foreign exchange?

Foreign exchange is the exchange of one currency for another. This can also be considered conversion, when turning in one currency for another. There is an exchange rate associated, based on the value of each currency. Foreign currencies can also be virtually traded.

What is a draft?

In trading, a draft is a bill of exchange, considered a form of written payment, between a buyer and seller, and in the case of a trade, is given to the third party involved in the trade.

What are futures?

Futures are legal contracts that obligate the buyer purchase a specific asset on a specified date. The asset could be physical, such as oil or copper, or could be a financial instrument.

A fixed interest rate is an interest rate on a loan that is set for the entire term, or a set portion of the term of the loan. This can be especially attractive to consumers who are worried about rising rates over the life of their loans, increasing total costs.

Fixed interest Rates vary by country. In Canada, a home buyer can obtain a fixed rate for only 5 to 7 years of a 25 year mortgage. In the United States, home buyers can lock in a fixed rate for the entirety of a 30 year mortgage.

Though a fixed rate mortgage can shield a buyer from rising interest rates, and in turn, rising overall costs, rates can sometimes drop after a fixed rate loan has been locked in.

Even though the consumer in this scenario might be paying a bit higher of a rate for a portion of time than the current market average, they are saving significantly over the periods of higher interest rates.

What is opportunity cost?

Opportunity cost is the cost of the alternative of a decision. If you lock in a fixed interest rate mortgage, and then rates drop, you are missing the opportunity for the lower rate.

If you invest in XYZ stock, you have tied your funds up in that investment and may be missing an opportunity to invest in ABC stock, which could be yielding higher returns.

What is a variable interest rate?

A variable interest rate is an interest rate on a loan that fluctuates over time. The fluctuation occurs because the rate is based on an underlying benchmark that can fluctuate based on the rise and fall of indexes.

What is a benchmark?

A benchmark is a standard that the performance of securities and investments can be measured against. Broad market segments are usually the standard for benchmarks.

A floating interest rate is an interest rate that goes up and down with the market instead of being fixed, or locked in, at one rate for the life of the loan. Floating interest rates are sometimes also referred to as variable interest rates.

Floating interest rates are based off of prime lending rates, with the agreement being that the borrower may pay more or less depending on market fluctuations.

When a borrower takes out a floating rate mortgage, they need to account for the possibility of the interest rate increasing over certain periods of time.

The other option is a fixed interest rate. When a borrower takes out a mortgage with a fixed interest rate, they know exactly what they owe each month, for the entire life of the loan, but may be paying higher than prime interest rates if rates lower over certain periods.

A fixed rate will provide protection in the case of rising rates.

What is a rate lock?

A rate lock is an agreement between the borrower and lender guaranteeing a certain interest rate as long as the loan is closed within a certain time frame. In a rate lock, the lender assumes the risk of rates going up during the closing period of the loan.

If I have a loan with a floating interest rate, can I lock in when rates drop?

Yes, if you are in a situation where you have a floating interest rate, you can work with your lender to lock in a fixed rate when market fluctuations cause interest rates to drop. This can end up saving you money in the long run.

What is a floating rate bond?

A floating rate bond is a bond whose interest rate changes with the market. Pricing of floating rate bonds tend to stay pretty stable in the market because there is no capital gain or loss associated with the change in interest rates.

Front end fees, or front end loads, are sales charges or commissions applied at the time of purchase of an investment. This fee is deducted from the total investment amount, which lowers the amount or value of the investment. Most commonly, these fees are associated with mutual funds and insurance policies.

Front end fees are paid to intermediaries, who are usually brokers, financial advisors or investment planners. These fees are received as commission. These fees are not factored into the operating expenses of a mutual fund, and are seen as a cost of doing business to get expert advice on an investment.

Front end fees are sometimes waived. The most common waiver scenario is linked to retirement account. A mutual fund may not have any front end fees associated with it if the fund is part of an investment option in a 401(k).

What is a load fund?

A load fund is a fund that charges a commission or sales fee, which goes to the broker or advisor handling the transaction, to compensate the individual for their time and expertise on the investment.

What is a commission?

A commission is a service fee that is assessed by an advisor or broker for advise on and/or the handling of a securities purchase or sale.

What is a no-load fund?

A no-load fund is a mutual fund that does not assess a sales charge on the purchase. This is possible because these funds are bought and sold directly by the investment company, instead of through an intermediary.

A grace period is an amount of time dictated in an insurance or loan contract that allows a payment received within a certain number of days of the due date without showing past due. This means that as long as the payment is received within the grace period, there won’t be any late fees charged.

Not all loans have grace periods. Credit cards calculate interest on a daily basis, and because of this, do usually have grace periods. A grace period is most often the only component of a loan that calculates interest on a monthly basis. With some contracts, outstanding payments in the grace period are interest free, but many have interest compounding during this period.

Make sure to read grace period details in all loan contracts. Not every loan has a grace period, and with some loans, late payments may result in default or cancellation of your loan.

What does it mean to default on a loan?

Failure to pay due interest or principle payments on a loan result in default. Default is when a borrower fails to meet their financial and legal obligation to repay a loan.

What is compound interest?

Compound interest is the interest calculated on the original principle amount, as well as on the accumulated interest of previous periods of a loan.

What is the average length of a grace period?

Though each lender sets their own policies, the average length for most grace periods is 15 days. That means that your payment must be received with 15 days of the due date for your account to maintain a current status.

Gross Domestic Product (GDP) is the monetary value of services and finished products/goods that are produced in a country over a certain time period. GDP is most frequently calculated on an annual and quarterly basis.

Gross Domestic Product takes into account all public and private consumption, investments, exports, and government outlays, minus all imports. The GDP is a broad picture of the a nation’s economic health.

Gross Domestic Product, or GDP, is calculated as:

GDP=P + G + I + NE

• P= Private Consumption
• G= Government Spending
• I= Country’s Investments and Capital Expenditures
• NE= Net Exports

GDP is a common indicator of economic health in a country, and can also paint a picture of the standard of living. GDP is calculated the same way across the globe, and because of this, countries can easily be compared economically to one another.

There are some significant activities that don’t factor in to the GDP. These are usually items that are not reported to the government, including black market sales and under the table employment.

What is the black market?

The black market economic activity that occurs outside of government-sanctioned channels. These transactions take place without government reporting or taxation. These activities and transactions are considered under the table.

What are the three approaches to calculating GDP?

• The expenditure approach measures the sum of all products needed to in developing a finished product ready for sale.
• The production approach measures the input costs that feed into economic activity.
• The income approach totals domestic incomes earned by using gross income as an indicator.

What is standard of living?

Standard of living is the level of comfort, wealth, and materials goods available to a certain level of socioeconomic class or standing in a specified geographic area. Standard of living can be used to compare geographic locations and same locations over different points in time.

The Gross National Product, or GNP, is a statistic used in economics that includes the Gross Domestic Product (GDP) plus income earned on overseas investments by residents, minus income earned domestically by residents of other countries.

The Gross National Product is used as a measure of the health of a nation’s economy by measuring the goods and services produced by its citizens over the span of one year. The GNP also gauges whether or not these goods were produced domestically, or overseas.

Some of the goods and services assessed in the GNP calculations include:

• Physical/tangible goods, such as cars, furniture, agricultural materials, machinery, etc.
• Provision of services, including education, business services, healthcare, etc.

The Gross National Product does not take into consideration the services used to produce manufactured goods. The cost of these services is factored into the price of the finished product.

How is the GNP calculated?

GNP = (Government Expenditures + Consumption + Investments + Exports + Foreign Production by Domestic Companies) – Domestic Production by Foreign Companies.

Are any taxes factored into the GNP?

Yes, the GNP calculations include indirect taxes, like sales tax, and depreciation.

What is the difference between the GNP and GDP?

The Gross Domestic Product only provides representation of product made within the borders of the country, while the Gross National Product accounts for products made domestically, as well as products made in other countries for domestic companies.

A financial guarantee is an indemnity bond that is not cancellable and is back by an insurer. This guarantees to the investors that all interest and principal payments will be made.

This gifts potential and current investors piece of mind that should the should the securities issuer not be able to fulfill the contractual obligation to make payments on time, the investment will be repayed.

Not only does a financial guarantee provide a sense of security to investors, but it can also lower the cost of finance for issuers. This is because the guaranteed security will usually have a higher credit rating. Higher credit ratings lead to lower interest rates.

Financial guarantee firms are specialized insurers who provide insurance against default. Though financial guarantees lower the risk for investors, they do not provide 100% protection.

The guarantor is providing protection against a default on the liability, but there is not a guarantee that the guarantor goes in to default.

What is a guarantor?

A guarantor is the entity, usually a specialized insurer, who is taking on the the responsibility of a guarantee of shouldering responsibility for another company’s financial obligation.

What is a monoline insurer?

A monoline insurer is an insurance company that specializes in one specific area. There are insurance companies that specialize specifically in financial guarantees.

The benefit of a monoline insurer is the depth of knowledge and expertise in their specific area, compared to a company that does a little bit of everything.

What is indemnity?

Indemnity is the compensation received for loss or damages, or the exemption of liability for loss or damages. Indemnity clauses appear in contracts between two or more entities and spell out the agreed compensation for loss or damage by the specified party.

Growth may refer to the change in earnings, GDP, or revenue of a company or country or the increased value of an investment over time. The common time frame for these measures is one year.

The measure of growth shows the increase or decrease of earnings expressed either as a percentage or a dollar amount. Growth measures may take inflation into account.

Investments that are designed for growth increase in value over time but may not generate a source of cash like an income generating investment might.

Some examples of growth investments include real estate, stocks, and stock mutual funds. Increase in value is dependent on the market. Stock mutual funds and stocks may show more growth than real estate.

What is a stock mutual fund?

Mutual Funds are collections or pools of stocks and/or bonds. A stock mutual fund is a mutual fund comprised of a grouping of stocks that is focused on long-term growth, unlike bond mutual funds, which are mutual funds that are comprised of bonds and are focused on income generation.

How can I determine which stocks show growth potential?

Growth stocks are usually pinpointed by targeting which businesses are expecting earnings at a rate an above average compared to similar companies in the market.

What is organic growth?

Organic growth is growth that is attained by increased output and sales of a company. Organic growth does not include any profits generated by take-overs, acquisitions, or mergers.

A hedge fund is an alternative investment type where a limited partnership of investors uses pooled funds and high-risk methods in the pursuit of large returns.

Hedge fund strategies are chosen to take advantage of market opportunities. Investors have a diverse array of choices among investment opportunities.

Hedge funds are most frequently private investment limited partnerships that are open to a fixed number of accredited investors. These investors are usually required to give a large initial minimum investment.

Hedge fund investments are not liquid, and usually require the investors to keep their money in the fund for a specified amount of time, which is usually at a minimum, one year.

What is a limited partnership?

A limited partnership is a partnership of two or more partners who come together to conduct business jointly.

LPs do not receive dividends but have direct access to income and expenses. The partners are only liable for the amount of money invested.

What are alternative investments?

Alternative investments are investments that do not fit into the three traditional asset types (stocks, cash, bonds). Alternative investments include managed futures, hedge funds, real estate, commodities and derivative contracts.

What are derivatives?

Derivatives are securities that have prices that are dependent upon one or more underlying assets.

Derivatives are contracts between two or more parties based upon underlying assets (stocks, bonds, commodities, interest rates, currencies, and market indexes).

Hazard Insurance is insurance that provides a property owner with protection against damages caused by fires, earthquakes, tornadoes, and other natural events. Only natural disasters specifically named in the policy documentation will be covered.

Hazard Insurance is important because most homeowners insurance policies do not provide coverage for all natural disasters that may cause damage to your property. If you live in a high-risk area, you may need a separate policy, such as flood insurance if you live in a hurricane-prone area.

Covered events will be detailed in your policy. If a covered event occurs and results in damage, the property owner will receive compensation. The annual premiums for hazard insurance policies are generally due in full at closing.

What does hazard insurance cover?

Though each policy is unique, hazard policies usually cover damage from natural disasters and sometimes cover damage from major appliance failure (water damage) and vandalism, riots, explosions, burst pipes, and damage caused by vehicles.

Does my Hazard policy only cover my house?

Each policy is different, but most hazard policies cover the house, outbuildings, and personal belongings housed in any of the structures.

When choosing a policy, make sure the coverage amount you choose is enough to cover your home and possessions.

Is flood damage covered by my Hazard policy?

This will depend on where you live and how your policy is written. If you live in an area that is prone to flooding or prone to storms that may cause flooding, you may need to obtain additional flood insurance.

If you don’t live in an area where the potential for flooding is common, flood damage may be covered by your hazard policy.

A hedge-like mutual fund is a mutual fund that uses alternative investment strategies similar to a hedge fund. Hedge-like mutual funds give investors the convenience and accessibility of investing in a mutual fund, with the aim of increased returns and investment methods of a hedge fund.

The use of many strategies by a mutual fund can make it hedge-like. Long-short strategies and market neutral strategies may achieve better results than traditional benchmark returns.

Hedge-like mutual funds do not have the same ability to use excess leverage in their strategies as hedge funds do because of SEC regulations. Hedge funds do not have the same regulatory status.

Hedge-like mutual funds were born of the success of hedge funds and the realization that hedge funds are exclusively available to accredited investors. Hedge-like mutual funds provide traditional investors with the opportunity to access some of the same tools and strategies used by hedge funds.

What is the SEC?

The SEC is the Securities and Exchange Commission. The SEC was created by US Congress to regulate the securities market and provide protection for investors. The SEC also oversees corporate take-overs.

What are accredited investors?

Accredited investors are investors deemed by the SEC, under Regulation D, as financially advanced and savvy enough to have a greatly reduced need for protection provided by certain government filings.

Accredited investors can be individuals, trusts, insurance companies, banks, or employment benefit plans.

What is a long-short strategy?

A long-short strategy is an investment strategy that takes the long positions on stocks that are expected to gain value over time, and short positions on stocks that are expected to lose value over time.

A high-interest savings account, also known as a high yield savings account, is similar to a traditional savings account but pays a significantly higher rate of interest.

High-interest savings accounts are deposit accounts that are available through banks and credit unions. They offer a higher interest rate than a traditional savings account, helping the account holder achieve savings goals faster.

High-interest savings accounts do tend to come with more restrictions than a traditional savings account.

Some of the things to take into consideration include a required initial deposit, annual percentage yield (APY), compounding method, required minimum balance, ability to link to account holder’s existing bank accounts, set-up fees, maintenance fees, number of allowed transactions per year, how deposits are handled, and ease of accessing funds.

What is FDIC insurance?

If your banking institution is FDIC insured, the funds in your account are insured by the federal government for up to $250,000. FDIC stands for Federal Deposit Insurance Corporation.

What is the minimum balance?

A minimum balance is he minimum amount of money required to be in your account to obtain account features like advertised rate of interest.

What is APY?

APY is the annual percentage yield. It is a representation of an interest rate that is based on compounding over the span of one year.

A home equity line of credit is a line of credit that uses the borrowers’ home as collateral. The lender establishes a maximum loan amount available based on home equity. The homeowner can then draw on the line of credit at their discretion.

The interest on a home equity line of credit is based on a predetermined variable rate and loan terms are usually between five and twenty years. Balances must be paid off in full by the end of the term.

There are several factors involved in the growth of home equity loans. These factors include more local banking institutions providing this type of loan, increased home values increase the amount of equity that is available, this type of credit can be more affordable because mortgage interest, unlike other loan types, can be tax-deductible.

Since home equity lines of credit have variable interest rates, borrowers must be aware of prevailing rates. When the interest rates go up loan repayment can quickly become much more costly.

What is collateral?

Collateral is an asset or property that a borrower uses to secure a loan with a lender. If the borrower defaults on the loan, the collateral can be seized by the lender to recoup losses.

What is the difference between a home equity line of credit and a home equity loan?

A home equity loan delivers the homeowner a lump sum of money that they have to pay back with interest.

A home equity line of credit allows the borrower to draw funds over a period of time as needed and only pay interest on what is actually drawn.

Are HELOCs a good way to finance home renovations?

Most home improvement projects do not add enough overall value to your home to cover the cost of borrowing against your house. Take total cost and potential return (home sale) into account when considering the use of a home equity line of credit to finance upgrades.

An income statement is a financial statement that depicts the financial performance of a company over a specific accounting period. The income statement gives a summary of how the company brings in revenues and incurs expenses.

This statement also shows net profit or loss over the accounting period. Income statements are also known as profit and loss statements or statements of revenue and expense.

Businesses use three major financial statements:

• Balance Sheet
• Cash Flow
• Income Statement

Investors and analysts focus on operating items in the income statement because this section discloses information about expenses and revenues that directly result from business operations.

The non-operating items section of the statement discloses revenues and expenses that are not directly tied to regular operations.

What are expenses?

Expenses are the economic cost associated with doing business. For a business to maximize its profits, it must reduce expenses.

How do investors use income statements?

Potential investors read income statements to analyze the potential profitability and future growth of a company. They use this information to gauge whether or not an investment in the company would be worth the risk.

What is revenue?

Revenue is the amount of money received by a company in a specific accounting period. This amount includes discounts and deductions for returned goods. Revenue is a figure of gross income.

An index fund is a type of mutual fund with a portfolio that is designed to track or match components of a market index. An index fund can provide low operating expenses and low portfolio turnover with high exposure.

The passive form of fund management, known as indexing, has shown to be successful in the outperformance of many actively managed funds.

Passive investing is the investment in an index fund. Passive investing can be advantageous due tot the lower management expense ratio on an index fund.

Index funds require patient investors but are easy for investors to understand as they follow the market. Annual fees on index funds are lower because you don’t have a financial advisor actively searching for investments.

What is passive investing?

Passive investing is an investment strategy that is comprised of limited buying and selling. Passive investors make investment purchases based on long-term gains and limited maintenance.

What is an expense ratio?

An expense ratio is the cost associated with the operation of a mutual fund by an investment company.

ER = Fund Operating Expenses/Avg. $ Value of Assets Managed.

What is a market index?

A market index is the total value provided by combining several investment vehicles, including stocks, together and showing total values against a base value on a specific date.

Inflation is the rate of increase of prices for goods and services, and in turn, the reduction of purchasing power of currency. Central banks play a role in attempting to limit deflation and avoid deflation to ensure the economy runs more smoothly.

The purchasing power of a unit of currency fails as a result of inflation. Inflation is a common reason for investing. At a rate of 2% inflation, a savings account that was worth %1,000 would only be worth $817.07 after 10 years.

Equity and bond investments are a good way to protect your money in these situations.

While inflation and hyperinflation can have a negative impact on the economy, deflation can be just as dangerous. Countries experiencing high rates of growth are able to absorb higher rates of inflation.

What is monetarism?

Monetarism is the belief that inflation is dependent upon the amount of money the government prints, and the government should slightly expand monetary supply each year to allow for the natural growth of the economy.

What is fiat money?

Fiat money is a currency that is declared legal tender by a government. This currency is not backed by a physical commodity such as silver or gold. The value of the currency is derived from the relationship of economic supply and demand.

What is hyperinflation?

Hyperinflation is an inflation that occurs at an extremely rapid or out of control rate. There is no precise measure of hyperinflation.

Intellectual property is a broad grouping that covers a set of intangibles that are owned by a company and legally protected from outside use without express consent from the owner. Intellectual property includes patents, copyrights, trade secrets, and trademarks.

The idea of intellectual property comes from the concept that human intellect should be afforded some of the same protections as physical property.

Companies must be diligent when it comes to intellectual property protection because intellectual property holds so much value in our innovative knowledge-based current economy. Preventing others from using ideas and concepts can be very valuable.

Intellectual property is often not able to be listed on a balance sheet as assets, but the value of the intellectual property is reflected in current stock prices.

What is a patent?

A patent is a government issued license that gives the patent holder the exclusive rights to a design, process, or new invention for a specified period of time.

What is a trade secret?

A trade secret is a process or practice of a company that is unknown outside of the company. Trade secrets give a company an economic advantage over competitors. These trade secrets are often associated with research and development.

What is a copyright?

A copyright is the exclusive right to further develop original ideas, art, etc. over a certain amount of time by the items’ creator. After the specified time-frame is over, the copyrighted item becomes public domain.

An interest rate is the amount charged by a lender (shown as a percent) to a borrower for the use of the assets borrowed. Interest rates are typically shown as an annual percentage or APR. Interest rates can be assessed on cash, property, vehicles, and other consumer goods.

The purpose of an interest rate is to compensate the lender for the loss of the assets’ use during the term of the loan. In the case of a cash loan, the investor is missing out on the potential earnings they might have had if they had invested the money instead of lending it.

Simple Interest = Principal x Annual Interest Rate x Years

Borrowing $1,000 at 8% annual interest for 6 months means the borrower would owe $40 in interest.

Compound Interest = P (principal) x [ ( 1 + I(interest rate) ^N (months) ) – 1 ]

Borrowing $1,000 at 8% annual interest for 6 months means the borrower would owe $40.70 in compounded interest.

What is risk?

Risk is the chance that the return on an investment will be different or lower than expected.

What is simple interest?

Simple interest the calculation of the interest rate charged on a loan by multiplying the interest rate by the principal and number of periods.

What is accrued interest?

Accrued interest is the term used to describe the accrual accounting method when interest (either payable or receivable) has been recognized but not yet received or paid.

A junior mortgage is a mortgage that is subordinate to, or comes after, a senior (prior) mortgage. Most junior mortgages are second mortgages, but could be a third or fourth. In a foreclosure situation, the primary or senior mortgage is paid down first.

Junior mortgages are most commonly used for home equity loans and piggyback mortgages. Piggyback mortgages allow borrowers with down payments less than 20% to avoid paying for pricey private mortgage insurance. Home equity loans are used to extract equity from a home to make a purchase or pay down other existing debts.

A piggyback mortgage is a mortgage situation where a second mortgage is taken out by a borrower at the same time that a first mortgage is taken out or refinanced. Piggyback mortgages lower the loan-to-value ratio of a first mortgage under 80% and eliminates the need for private mortgage insurance.

What is the loan-to-value ratio?

The loan-to-value ratio, or LTV, is a risk assessment ratio used by lenders to determine lending risk before approving a mortgage.

If the risk is high, and the mortgage is approved, the loan will generally cost the borrower more and the borrower will be required to purchase mortgage insurance.

What is private mortgage insurance?

Private mortgage insurance, or PMI, is an insurance product that protects the lender in the case that a borrower defaults on their mortgage.

This product is usually required if the LTV percentages are in excess of 80% (ie if the borrower puts down less than 20%).

Can PMI be advantageous to a buyer?

PMI can enable a buyer to put down a smaller down payment (between 3% and 19%), which would allow the buyer to save for a shorter amount of time.

If the mortgage and PMI payments are made on time and the home accumulates enough equity, the lender will consider the buyer a lower risk and may no longer require PMI.

Joint owned property is any property that is held in the name of two or more entities. These entities could be any combination of people, including business partners or spouses. Jointly owned property may be held in a trust, as community property, joint tenancy, or tenancy by the entirety.

If considering joint owned property, it is important for all entities involved to choose the best form of legal ownership. This care and planning can greatly simplify things in the event that one of the owners passes away.

In the event of the death of one of the partners, the decedent’s share of the property stays with the co-owner, and not as part of the decedent’s estate.

One very important point to consider is that the deceased partner’s liabilities might remain attached to the property. This means that the property may be used to pay off creditors, even if the creditors had no involvement with the property.

Owners must also consider the potential event of one party selling their interest in the property at some point. To simplify this situation, buyers should sign a buyout agreement when they first take ownership of the property.

What is a creditor?

A creditor is a business or person that extends credit by giving permission to borrow money with a payback date. Individuals can be classified as personal creditors if they loan money to family or friends.

Real creditors are financial institutions that have legal contracts with borrowers and have access to assets owned by the borrower if the borrower defaults on the loan.

What is a buyout agreement?

A buyout agreement is a contract between co-owners that determines the handling of the departure of a member. This agreement regulates who is allowed or able to buy the member’s interest/share and also sets a predetermined price for ownership interest.

What is joint tenancy?

Joint tenancy is the holding of a property by two or more parties with the share of each passed to the others in the event of a death.

A junk bond is a term for high-yield non-investment grade bonds. Junk bonds receive their name because of their much higher default risk in relation to investment grade bonds. These bonds carry a rating of ‘BB’ or lower by Standard & Poor’s or ‘Ba’ or lower by Moody’s.

Junk bonds are appealing because of their potential for much higher yields than safer bonds but carry a much higher risk.

Companies that offer junk bonds tend to have below average credit ratings. Because of their poor credit, investors demand higher yields as a compensation for the risk associated with the investment.

If a company that issues junk bonds and then  manages to turn their performance around and improve their credit ratings, the value of the bonds may appreciate substantially.

What is an investment grade bond?

An investment grade bond is a bond that is issued to low to medium risk lenders. These bonds may not offer large returns, but they come with a lower risk of the borrower defaulting.

What is a bond rating?

A bond rating is a grade given to a bond reflecting its credit quality. These grades are assigned by independent rating services such as Moody’s, Standard & poor’s, and Fitch.

What is credit quality?

Credit quality is the credit worthiness or risk of default of a bond or company distributing bonds.

Jurisdiction risk is the risk that arises from operating in a foreign jurisdiction. The focus of this risk has of late been on banks and other financial institutions that are exposed to the risk that some of the countries of operation are at high risk for financing terrorism and money laundering.

Jurisdiction risk may also refer to the unexpected change of laws in a jurisdiction that an investor has involvement in.

Jurisdiction risk is most frequently higher in countries identified by the US Treasury as requiring certain special measures due to suspicion of corruption or money laundering, or designation of non-cooperative by the Financial Action Task Force.

Financial institutions that are involved (knowingly or inadvertently) in financing terrorism or money laundering are subject to penalties and punitive fines. Because of this, most financial institutions have a specific plan in place to mitigate jurisdiction risk.

What is money laundering?

Money laundering is the practice of making large amounts of money from drug trafficking, terrorist activity, and other serious crimes appear to be from legitimate sources.

What is corruption?

Corruption is wrongdoing by a figure of authority or powerful party through immoral or illegitimate means.

What is the Financial Action Task Force?

The Financial Action Task Force is an inter-governmental task force that was developed to combat the financing of terrorism and money laundering through policy.

Just compensation is compensation that is provided to a property owner when the property is seized by the government through eminent domain. Property owners could have their property seized for public use.

Property owners could lose their property in situations such as highway construction. The Fifth Amendment has a taking clause that gives the property owner compensation, which usually equals fair market value for the property.

Though a property owner may be receiving fair market value for  their property, this may not seem like fair compensation.A property

A property owner who loses their home to eminent domain may not see fair market value as fair compensation because this price does not take into account the time, stress, or expense associated with purchasing and moving into a new home. Just compensation also doesn’t account for emotional attachment to a property.

Most states do not have provisions to cover business losses incurred by loss of property business is conducted on.

What is eminent domain?

Eminent domain is the right of the government, or an agent acting on the government’s behalf, to seize private property for public use.

What is fair market value?

Fair market value is the estimated market value of a property based on what an unpressured and knowledgeable buyer would be willing to pay.

Can I stop the government from taking my property?

You can only halt the process if the proposed use of the land doesn’t meet requirements for public necessity. If the purpose does meet public necessity the government cannot be stopped from proceeding.

Key currency is a currency that is used as a reference when setting an exchange rate or in an international transaction. The key currency used is a currency issued by stable developed countries, Central banks hold key currencies as reserve currencies.

It is a common monetary practice for smaller countries with less developed economies to align their exchange rates with more dominant trading partners.

Central banks in countries with less dominant economies may fix their exchange rate to a key currency. This can increase confidence in the less developed country’s economy, but can also limit monetary policy flexibility.

Key currencies can help companies do business with a lessened risk of their transactions being marred by extreme or sudden changes in currency value.

What currencies are most frequently used as key currencies?

The most common currencies used as key currencies are the British pound, the US dollar, the Euro, the Canadian dollar, and the Yen.

What is reserve currency?

A reserve currency is a currency held by a central bank in significant quantities as part of their foreign exchange reserves. Reserve currencies are mostly used on international transactions and are considered safe-haven currencies.

What are safe-haven currencies?

Safe-haven or hard currencies are strong globally traded currencies that are safe and reliable value stores. These currencies have long-term stability and purchasing power.

A kangaroo bond is a bond that is issued in the Australian market by non-Australian companies. These bonds are in Australian denominations and are subject to Australian laws and regulations.

Foreign bonds, like kangaroo bonds, are typically used to provide access for issuers to a market outside of their own to raise capital. Large investment firms and large companies may use kangaroo bonds to raise Australian funds to diversify their holdings. The majority of kangaroo bonds are issued by American and German entities.

Samurai bonds are similar to kangaroo bonds but are issued in Yen denominations in Tokyo by non-Japanese companies. Another similar foreign bond type is bulldog bonds. Bulldog bonds are traded in the United Kingdom and are in British pound denomination.

Why are kangaroo bonds becoming more popular?

Kangaroo bonds, also known as matilda bonds, have risen over recent years because of the strength of the Australian dollar. Cash-rich investors prefer to invest in assets backed by strong currencies.

What are the benefits of investing in a kangaroo bond?

Not only does a kangaroo bond give the issuing company access to capital in a foreign market, but it also gives the issuer the opportunity to avoid unstable markets in their own currency.

What are Yankee bonds?

Yankee bonds are bonds issued in the American market by foreign companies. These bonds are US dollar denominated.

A keepwell agreement is a contract between a subsidiary and parent company that provides a guarantee that the parent company will provide all of the financing that is needed by the subsidiary for a specified period of time.

Keepwell agreements benefit bondholder because they provide a guarantee that if the subsidiary gets into financial trouble, the parent company will bail them out.

This type of agreement helps a subsidiary appear more credit worthy to potential investors and makes it easier for subsidiaries to borrow money.

What is a parent company?

A parent company is a company that has control over other companies. This control is through ownership of influential amounts of voting stock or control.

What is a subsidiary?

A subsidiary is a company whose stock is 50% or more controlled by another company. The controlling company may be a parent company or a holding company.

What is a holding company?

A holding company is an LLC, Limited Partnership, or parent company that owns or controls enough interest in another company to control its management and policies.

Key Performance Indicators, or KPI, are a set of measures that companies and industries use as a gauge to compare performance in meeting operational and strategic goals.

Companies must have operational and strategic goals established and then choose KPIs that best reflect these goals.

Business metrics are quantifiable measures that track the status of specific business processes over a specific timeframe.

KPIs vary by business, but some include:

• Project management KPIs (cost of work done, percentage of milestones missed, etc.)
•  Financial performance (debt-equity ratio, return on investment, etc.)
• Human resources performance (revenue per employee, salary competitiveness ratio, ROI, etc.)
• Supply chain and operational performance (order fulfillment, yield, earn value, etc.)

Who in a company uses KPIs?

While they are most commonly used by managers, any employee can use them to track goal and target achievements.

What is a performance measurement?

A performance measurement is a process of collecting, analyzing, and reporting information on the performance of an organization or individual to see if target outputs are met.

What is a strategic goal?

A strategic goal is a planned objective that an organization works to achieve. These objectives are prioritized by SWOT analysis (strengths, weaknesses, opportunities and threats).

Key rate duration measures the price sensitivity of a security or the value at key points on a yield curve. This information is very useful for securities with embedded options like prepayment options and call options.

Key rate duration measures the value change of a security when its yield changes by 1% in either direction for a certain maturity.

Key rate duration = (Pminus-Pplus/2 )x (1% x Poriginal)

• Pminus= price of security after a 1% decrease in yield
• Pplus= price of a security after a 1% increase in yield
• Poriginal= original price of security

A key rate duration is calculated for each of the 11 maturities along the US Treasury spot rate curve. The effective duration of a portfolio is equal to the sum of key rate durations along a portfolio yield curve.

What is an effective duration?

The effective duration is a calculation used to calculate the modified duration of a callable bond, taking future interest rate changes and expected cash flows into account.

What is a callable bond?

A callable bond is a bond with an embedded call option. This means that the borrower has the right to pay back the loan in full to the lender before the maturity date listed in the contract.

What is a key rate?

A key rate is a specific interest rate that determines the cost of credit for borrowers and determine bank lending rates.

A ladder option is an option contract that lets the holder lock in gains as long as the underlying asset’s market price reaches a predetermined level or rung. This guarantees a profit even if the underlying asset’s value falls before the expiration of the option.

Traditional option contracts give holders call options and put options (the rights to buy and sell) on underlying assets at the strike price by the end of the contract.

Ladder options, as suggested by the name, feature additional price options above or below the strike price.

The premiums for ladder options tend to be more expensive than premiums for traditional options because of the increased profit opportunities and lower risk associated with ladder options.

What is a strike price?

A strike price is the specified price at which a call or put option can be exercised.

What is an option?

An option is a contract between the buyer and seller that gives the investor the right to either buy or sell an asset when the asset hits the strike price.

The investor is not required to buy or sell, but if they choose to exercise the option, it must be done before the specified expiration date.

What is an underlying security?

Underlying securities are securities from which derivatives obtain their value.

Labor market flexibility is the ability of a firm to make changes to their workforce: number of employees hired and number of hours worked by hired employees. Labor market flexibility also includes unions and wages.

Flexible labor markets are those that have firms under less regulation regarding the labor force and can set wages without a set minimum wage, make changes to work hours, and let employees go at will. Labor markets with low flexibility are bound by regulations and requirements including minimum wage and trade unions.

Labor market flexibility is a contentious subject. Supporters of labor market flexibility claim that a flexible market leads to higher GDP and lower unemployment. Opponents of labor market flexibility claim that the workforce is more insecure due to the breadth of power in the hands of employers.

What is minimum wage?

Minimum wage is the amount of pay, or compensation, that an employee must be given for performing a job. Minimum wages are established through legislation or contracts.

Because minimum wages are most commonly established by Congress, it is illegal to pay an employee less than minimum wage.

What is the current minimum wage rate?

The current federal minimum wage is $7.25 (as of 2016). Many states have their own wage laws, which puts many state’s minimum wages above the $7.25 threshold.

Is the minimum wage different for workers who receive tips?

According to federal law, employers are permitted to pay workers who earn tips only $2.13 per hour as long as the tips earned make up the difference between $2.13 and $7.25 per hour.

A lagging indicator is an economic factor that shifts after the market has already started to follow a certain trend or pattern. Lagging indicators can also be technical indicators that trail price action of underlying assets and are used by traders and investors to confirm the strength of or determine signals of certain trends.

Long-term trends can be confirmed by lagging indicators, but can not be used to predict trends. Interest rates can be good lagging indicators because interest rates fluctuate after severe market changes.

Unemployment rates, corporate profits, and labor costs per unit of output are also examples of lagging indicators.

Moving average crossovers are an example of a lagging indicator because this happens after price moves occur. Short-term average crossings are used over long-term averages by technical traders as confirmation when making buy orders. This strategy is used because of the suggested increase in momentum.

What is price action?

Price action is the movement in pricing of a security.

What is a moving average?

A moving average is an indicator used to smooth price action by filtering out random price fluctuations.

What is technical trading?

Technical training is a broader approach to investing, by using history and recognizable patterns of past trading to make predictions of stock outcomes.

A liquid asset is an asset that can be quickly converted to cash while having a minimal impact on the received price. Liquid assets are generally considered to be the same as cash since their pricing is relatively stable when sold in the open market.

For an asset to be considered a liquid asset it needs an established market with enough active participants to absorb the sale without the price of the asset being impacted.

The transfer of ownership of the asset must also be relatively simple. Liquid assets include government bonds, money market instruments, and many bonds.

The most liquid market in the world is considered to be the foreign exchange market. This is due to the impossibility of an individual entity influencing the exchange rate since trillions of dollars exchange hands on a daily basis.

What is the foreign exchange market?

Foreign exchange markets are comprised of commercial companies, banks, central banks, hedge funds, and investment firms that are able to buy, sell, speculate on, and exchange currencies.

What are government bonds?

Government bonds are a debt security issued by a government in support of government spending. These bonds are usually issued in the country’s domestic currency.

What is an open market?

An open market is a system that doesn’t have any barriers to free market activity. This includes the absence of taxes, tariffs, and subsidies that may interfere with the functioning of the free market.

A long position, or long, is the purchasing of a security expecting that the security will increase in value. These securities include currencies, commodities, and stocks. A long position can also be the purchase of an options contract.

An investor who owns shares in a large corporation is said to have a long position in the company.

If an investor buys a call options contract from an options writer the buyer has the right to buy or sell the specified asset or commodity for a pre-specified date. The buyer is not obligated to buy or sell the asset or commodity with the options contract.

What is the difference between a long position and a short position?

Essentially, short positions are owed and long positions are owned. Short investors frequently borrow shares from brokerage firms instead of purchasing them like long investors.

What is a short position?

A short position is when a borrowed commodity , security or currency is sold with the expectation that the value of the asset will fall.

What is an options contract?

An options contract is a contract that allows the buying or selling of an underlying security by the contract holder.

Market capitalization is the market value of a company’s outstanding shares, calculated by multiplying the stock price by the total number of outstanding shares.

If a company is trading at $30 per share and there are 1 million shares outstanding, the market capitalization is $30 million ($30 x 1 million shares).

Many people believe that stock price is directly tied to company size (ie higher stock price equals larger company), but stock prices can misrepresent company size. Companies can be classified in caps (small, mid, or large). These caps classify company size.

Investors use the classification of companies to gauge growth vs potential risk.

What is small cap?

Small cap refers to stocks with small capitalization, usually between $300 million and $2 billion.

What is mid cap?

Mid cap refers to a company with middle capitalization, usually between $2 billion and $10 billion.

What is large cap?

Large cap, also called big cap, refers to large market capitalization, with values of more than $10 billion.

‘Mergers and Acquisitions’ refers to the consolidation of assets or companies. A merger is the combining of two companies to form a new company. An acquisition is the purchase of one company by another without the formation of a new company.

Mergers and Acquisitions can also refer to a department in a financial institution that deals specifically with mergers and acquisitions.

The term ‘Mergers and Acquisitions’, or M&A, refers not only to mergers and acquisitions but also the purchase of assets, management acquisitions, tender offers, and consolidations. Each of these cases involves transactions between two companies.

• When a merger occurs, the combining of two companies has to be approved by both company’s board of directors, and approval from shareholders. The acquired company then ceases to exist.
• In an acquisition, the company making the acquisition takes a majority stake in the acquired company but does not change its name or legal structure.
• During consolidation, a new company is created. The consolidation must be approved by the shareholders of each company. Shareholders will receive equity shares in the new company after the consolidation is approved.
• A tender offer is the offer of a company to purchase the outstanding stock of another company at a certain price.
• Acquisition of assets is when one company acquires the assets of another company, after the approval of shareholders.
• Management acquisition is when management of a company purchases a controlling stake in the company making int private.

When do acquisition of assets occur?

Acquisition of assets most frequently occurs during bankruptcy proceedings.

What is a target company?

A target company is a company that is the subject of a merger or acquisition.

What is a conglomerate?

A conglomerate is a corporation that is made up of multiple companies or businesses that do not seem to have any common business overlap.

A mortgage is a loan type that is secured by real estate as collateral. The borrower must pay back the loan amount in predetermined installment payments. Businesses and individuals use mortgages to purchase real estate without having to pay in full up front.

When an individual secures a mortgage, the agreement is that if the borrower defaults on their loan, the bank or lender will take possession of the property. In a foreclosure, the lender might evict the occupants of the property and sell it to clear the mortgage debt.

Mortgages are not one size fits all. There are fixed rate, or traditional mortgages, where the borrower pays the same interest rate for the life of the loan, and principal payments stay the same every month.

There are also adjustable rate mortgages (ARM) where the interest is fixed only for an initial prespecified amount of time, and then fluctuates with the market.

Less common types of mortgages include interest-only mortgages and payment-option adjustable rate mortgages. These options are best left to savvy borrowers.

What is a debt instrument?

A debt instrument is an obligation, be it paper or electronic, that gives the issuing party the ability to raise money by committing to pay back the lender according to terms set in the contract.

What is a foreclosure?

A foreclosure occurs when a property owner fails to make full principal and interest payments in accordance with the mortgage contract.

When the property owner defaults, the lender can rightfully seize the property, evict tenants, and sell the property to recoup losses.

What is an interest-only mortgage?

An interest-only mortgage is a type of mortgage where the borrower is only required to pay off the interest on the borrowed principal.

Payment amounts tend to stay fairly constant through the term. Interest-only mortgages are not a long term solution. At some point the principal will need to be paid off.

Mortgage insurance is a type of insurance policy that protects a lender or title holder in a situation where the borrower dies, doesn’t make scheduled payments, or otherwise defaults. There are different kinds of mortgage insurance, including private mortgage insurance (PMI), mortgage life insurance, and mortgage title insurance.

Private mortgage insurance may be required by a lender if the borrower puts less than 20% down on a property.

Mortgage life insurance can have a level payout or a declining term (meaning the payout falls as the balance of the loan is paid down).

When paying premiums on mortgage insurance, there a couple payment options. You may have to pay in a lump sum at the contract signing, or you may have the option to pay monthly installments.

What is mortgage life insurance?

Mortgage life insurance is an insurance product that pays off mortgage debt in the event of the death of the borrower.

This type of policy only pays out if the borrower passes away while the mortgage is still active.

What is a fee structure?

A fee structure is a list or chart that lists what a business charges for various services. Fee structures let potential customers know what to expect when doing business with a company.

What is a payout?

A payout is the expected financial return from an investment over a certain period of time. Payouts can be for a certain dollar amount or for a percentage of the investment’s cost.

A mutual fund is an investment vehicle that consists of a group or pool of funds gathered from several investors for the sole purpose of investing in bonds, stocks, money market instruments, and other assets.

Mutual funds are run by money managers who invest the capital in the fund to try to produce capital gains and investment income for the investors. Portfolios for mutual funds are maintained in a manner that matches the investment objectives listed in its prospectus.

Mutual funds provide an advantage for small investors by giving them access to diverse, professionally managed portfolios of securities, bonds, and other equities that would be challenging to access with small amounts of capital.

What is a money market?

A money market is a portion of a financial market where highly liquid financial instruments with short maturities are traded.

What are capital gains?

Capital gains are an increase in the value of a capital asset that gives the asset (investment or real estate) a higher value than the purchase price.

What is a capital loss?

A capital loss is when the value of a capital asset (investment or real estate) falls below the purchase price.

Net worth is a key measure of an entity’s worth, calculated as the amount by which assets exceed liabilities. Net worth that consistently increases is an indicator of good financial health.

Net worth is also known as shareholders’ equity or book value. Net worth may decrease due to annual operating losses or decreases in asset values relative to liabilities.

Companies that are profitable year after year will have an increasing net worth, as long as the profits are retained by the business and distributed to shareholders. Public companies with rising net worth may see an increase in stock market value.

What is a public company?

A public company is a company that has issued securities through an IPO and is traded on at least one stock market.

What is book value?

Book value is the value of an asset on a balance sheet. This figure is the cost of the asset minus depreciation.

What are operating losses?

Operating losses are net losses that occur due to the unprofitable operation of a company.

Negative amortization is the increase in the principal balance of a loan due to a failure to make payments that cover interest due. The remaining interest due is tacked on to the principal balance, causing the borrower to owe more money.

If a borrower has a loan with a periodic interest payment of $1,000 and only pays $800, $200 will be added onto the principal of the loan.

ARM, or adjustable rate mortgages, that have a negative amortization feature are known as payment option ARMs. Fixed-rate mortgages with a negative amortization feature are known as graduated payment mortgages.

These mortgages may allow borrowers to make low monthly payments over a short time, but at some point, the monthly payments will increase substantially.

Fixed-rate graduated mortgages have fixed dates when these increases will occur. Payment option ARMs carry triggers that may cause increases before the scheduled dates.

What is payment shock?

Payment shock is the risk that future scheduled payments on a loan may increase substantially.

What is a graduated payment mortgage?

A graduated payment mortgage is a fixed-rate mortgage where the payment increases from a low initial base level to a final level.

The payments usually grow 7-12% annually until the full payment is reached.

What is interest due?

Interest due is the portion of a current mortgage payment comprised of the interest on the remaining principal amount.

Net asset value or NAV is the price per share or exchange traded fund’s per share value for a mutual fund. The fund’s per-share dollar amount is calculated by:

NAV = (Total value of securities – liabilities)/(# of outstanding shares)

Net Asset Value per share is calculated once per day for mutual funds based on the closing market prices of the securities involved in the mutual fund.

All buy and sell orders for mutual funds are processed at the NAV on the trade date. Investors do however have to wait until the next business day to get the trade price.

Since mutual funds pay out just about all of their capital gains and income, NAV is not a great gauge of the performance of a mutual fund. Performance is best measured by the fund’s annual return.

EFTs and close-end funds may trade at a dollar above or a dollar below NAV because they trade like stocks and their shares are traded at market value.

What is a trade date?

A trade date is when an order to buy or sell a security is performed. The trade date is listed in month, day and year format.

What is total return?

Total return is the rate of return on a specific investment or group of investments over a certain period of time.

What is a close-ended fund?

A close-ended fund is a publicly traded investment company that raises a set amount of money through an IPO. This fund is structured and traded like stock on a stock exchange.

Net income is the total profit or earnings of a company by taking a company’s total earnings and then factoring in the cost of doing business, interest, taxes, depreciation, and other expenses.

Net income can be found on a company’s income statement. This information is an important measure of the company’s profitability over time. Net income is also used in the calculation of earnings per share.

When calculating net income, expenses incurred by the company and cost of sales are removed from the total earnings figure to get the earnings before tax figure. Taxes are deducted from the before tax figure. Taxes are deducted from the before tax figure, and you are left with net income.

When using net income as the basis of an investment decision, carefully review the quality of the calculations because it can be fairly easy to manipulate this information by hiding expenses.

What is depreciation?

Depreciation is a way of accounting for the cost of a tangible asset over its useful life, or the decrease in value of an asset due to unfavorable market conditions.

What is a tangible asset?

A tangible asset is an asset that is tangible, or has physical form. Tangible assets include buildings, inventory, machinery, etc.

What is gross income?

Gross income is the revenue of a company minus the cost of goods sold, or total income before taxes and other deductions are taken.

A Notice of Default is a public notice that is filed with a court, that states that a mortgage borrower is not up to date on scheduled payments. A notice of default is the first step in foreclosure proceedings.

If the borrower makes up the missing payments and gets back on track, the foreclosure process will be halted. If the borrower doesn’t catch up on missed payments, the lender will file a notice for the sale of the property.

There are multiple timeframes and procedures a lender can use to file a notice of default. Some lenders will file as soon as legally allowed to do so, while others are more willing to work with borrowers and are more forgiving. These more forgiving lenders may take longer to file a notice of default.

A notice of default could negatively affect your credit score if filed against you. This could adversely impact your ability to refinance your existing mortgage or open new lines of credit.

What is the difference between a notice of default and a notice of sale?

These notices are both part of the foreclosure process. The notice of default is filed when a borrower falls behind on scheduled payments. If the borrower doesn’t get caught up on missed payments, a notice of sale is filed.

What is a foreclosure?

A foreclosure is the process of repossessing a mortgaged property when the borrower has failed to keep up with scheduled payments according to the terms of the loan contract.

What is a public notice?

A public notice is a notice given to the public through any level or branch of government regarding certain types of legal proceedings.

An online credit report is a report obtained online that outlines and details an individuals’ credit history. These reports are prepared by credit bureaus and are used by lenders to determine credit-worthiness when processing new loan applications.

Credit reports contain a variety of information, including:

• Personal information: addresses (current and previous), SSN, employment information and history
• Credit history summary: types of accounts, total number of accounts, status of accounts (in good standing and past due status)
• Account details
• Number and type of inquiries into applicants’ credit history
• Details on any wage garnishments, liens, collections, etc.
• Information on how to dispute any incorrect listings on your credit report.

It is important to check your credit report frequently to make sure information is accurate. If negative information shows up on your credit report but is accurate, there is little you can do about it.

Most negative marks on your credit report will stay on for 7 years, while bankruptcy proceedings will stay on for about 10 years.

What is a credit bureau?

A credit bureau is an agency that collects and compiles individuals’ credit information. Credit bureaus sell this information to creditors.

What is a credit agency?

A credit agency is a for-profit company that assigns a credit score to an individual based on information collected on an individual’s or company’s debts.

What are liens?

A lien is the right of a creditor to to sell property posted as collateral in the event that a borrower defaults on the terms of a loan.

Online trading is the placing of buy or sell orders for securities or currencies on a brokerage’s internet based proprietary trading platform. Stocks, bonds, currencies, futures, and options can all be traded online.

Online trading has increased since the mid-1990s when affordable high-speed computers and internet connections became more widely available.

The number of discount brokerages has increased due to online trading because the internet allows brokers to cut costs, including overhead. These savings can be directly passed on to the customers through lower fees and commissions.

What is proprietary trading?

Proprietary trading is term used when a firm chooses to trade for direct gain instead of commission.

What are commissions?

Commissions are service charges assessed by sales people, brokers, and investments advisors paid in return for the handling of a purchase or sale.

What is a broker?

A broker is a firm or individual that executes buy and sell orders submitted by investors for a commission.

Opportunity cost is the cost of or benefit received from an alternative action that must not be taken in order to pursue another action or the difference in return between a chosen investment and an investment that was turned down.

When considering opportunity cost, a choice must be made between two options. Without knowing the outcome of your decision, you, through your choice, are taking a risk in hopes of achieving greater benefit. The option you didn’t choose is the opportunity cost.

For example: If you are contemplating leaving the workforce to pursue a degree in hopes of earning a higher salary after graduation, the four years you spend in school would be four years of lost salary. That is your opportunity cost.

What is scarcity?

Scarcity is the concept that humans have a seemingly endless amount of wants in a world of limited resources.

What is real cost?

Real cost is cost with inflation taken into account. Real cost allows for direct cost comparisons over time.

What is the difference between opportunity cost and risk?

Opportunity cost involves the idea that a chosen investment may not perform as well as an investment that you turned down.

Risk is the possibility that actual and projected returns on an investment are different, and that principal, or a portion of the principal may be lost as a result.

Over-the-counter, or OTC, is a security that is traded in a manner other than on a formal exchange. Over-the-counter stock trades can be made via dealer networks. Debt securities and derivatives can also be traded through dealer networks instead of on a centralized exchange.

Over-the-counter trades are usually done when a company is too small to meet the listing requirements for a centralized exchange.

Stock that is traded over-the-counter is referred to as unlisted stock. Broker-dealers involved in these trades negotiate directly with each other via phone and computer networks.

OTC stocks are generally unlisted and trade on the pink sheets or on the Over the Counter Bulletin Board (OTCBB). Be careful when looking at OTC stocks since OTCBB stocks are either offered by companies with poor credit or are penny stocks.

What are listing requirements?

Stock exchanges establish standards as a means to control membership in an exchange. If a company wants to issue their stocks on a certain exchange, they must meet the listing requirements.

What are pink sheets?

Pink sheets are the bid and ask prices of OTC stocks that are compiled daily by the National Quotation Bureau.

What are penny stocks?

Penny stocks are stocks that are traded at a low price and market cap. Penny stocks are usually traded outside of major exchanges and are high risk due to a lack of liquidity.

An overdraft is a set amount of money that a bank allows an account holder to borrow in the event that the individual withdraws more than the available account balance.

If your bank provides overdraft protection for your accounts in the event that you write a check or use your debit card for an amount that exceeds your account balance, the bank will loan you the amount you went over (as long as the amount falls within the parameters that the bank allows).

Just as with any other type of loan, you will have to pay the bank the interest on the amount borrowed. The interest on an overdraft is generally lower than credit card interest rates.

What is the difference between cash credit and overdraft?

Though both are forms of credit from a lending institution, cash credit requires some sort of tangible security to be offered as collateral. Cash credit loans are also offered in higher amounts than overdraft.

What are the most common types of overdraft?

Secured overdraft accounts loan cash against financial instruments and individual demand deposit accounts, which provide protection from overdrawing an account.

What is an overdraft protection fee?

An overdraft protection fee is a fee charged to an individual for the use of the overdraft protection feature of a bank account.

Penny stocks are highly speculative stocks that are valued at less than five dollars. Penny stocks may also be referred to as micro-cap stocks. Penny stocks are traded on pink sheets or on the Over the Counter Bulletin Board.

Penny stocks are much riskier than blue chip stocks because of four major factors:

1. Lack of information: information on these stocks is not readily available to the public because companies listed on pink sheets are not required to register with the SEC. There is also not a lot of information available from credible sources.
2. Lack of minimum standards: stocks traded on pink sheets or on the OTCBB do not have minimum standard requirements to adhere to like the major exchanges do. Minimum standards provide protection for investors and benchmarks for companies.
3. Lack of history: penny or micro-cap stock companies are primarily very young or are approaching bankruptcy. They may have poor credit and poor records. It can be hard to determine a stock’s potential without an adequate history to look at.
4. Liquidity: Penny stocks are not very liquid. This means that it may be hard to find buyers for a certain stock and the price may have to be lowered just to make the sale.

What is the OTCBB?

The OTCBB, or Over the Counter Bulletin Board, is an electronic trading service that is regulated and offered by the National Association of Securities Dealers. This service is used for over-the-counter trades.

What is volume information?

Volume information is information on how much of a certain financial asset has been traded over a certain period of time.

What is a stock split?

A stock split is when a company divides its existing shares into multiple shares. Though the total number of shares increases, the dollar value of the total shares doesn’t change.

Preferred stock is an ownership class in a company. Preferred stock has a claim on the company’s earnings and assets over common stock.

Dividends must be paid out to for preferred stocks before dividends can be paid out to common shareholders. Preferred stocks pay fixed dividends and equity, with a potential for an appreciation in value.

When it comes to dividends, preferred shareholders have priority over common shareholders. Preferred dividends are generally higher and pay out monthly or quarterly.

If an issuing company is in trouble and has to suspend dividends, preferred shareholders may be eligible for arrears payments before dividends can be resumed. Preferred shareholders also have the ability to claim liquidated assets behind bondholders. Preferred shares generally do not come with voting rights. Preferred shares also have less potential for price appreciation than common stock.

Institutions are the most common buyers of preferred stock, as they have certain tax advantages over individuals. Institutions tend to buy in bulk, so preferred stocks can be a relatively easy way to raise capital in large amounts.

What are maturity dates?

A maturity date is the date when the principal amount of a loan becomes due, is repaid in full to the investor, and interest payments stop.

What is par value?

Par value is the face value of a bond. Par value determines the maturity value and the dollar value of coupon payments for a bond or fixed-income instrument.

What are voting rights?

Voting rights are the rights of a stockholder to vote on corporate policy matters and the makeup of the board of directors.

Prepayment is the satisfaction of a financial obligation (debt or installment payment) before the due date. Prepayment can refer to an upcoming installment payment or an entire loan balance.

Prepayments can be made on many types of debt obligations, including rent, car loans, taxes, and credit card charges. Read the fine print on all loan documents, before you make a prepayment, to make sure your lender doesn’t issue penalties for prepayment.

Some mortgages allow for prepayment without penalty when a property is sold, but will assess a penalty if the loan is paid off early in any other case. These are called soft prepayment terms. Hard prepayment terms do not include any exceptions without penalty.

What is prepayment risk?

Prepayment, or reinvestment risk, is the risk that an investment may be stopped or cancelled due to an investor finding a new investment to place their money in.

What is refinancing?

Refinancing is the replacement of an existing debt with another debt obligation for various reasons, including better interest rates, debt consolidation, reduction of monthly payment amounts, reduction of risk, and the freeing up of capital.

Are prepaid expenses recorded on income statements?

Prepaid expenses do not appear on income statements. When the expense comes due (original due date, not prepayment date) the expense is shown on a company’s income statement as an expense in the period it is due.

The prime rate is an interest rate used by commercial banks to charge customers with high creditworthiness. These customers are usually large companies.

The federal funds rate, the overnight rate used by banks to lend to one another, is the basis for prime rate determination. Prime rates have wide-reaching effects. Retail customers are affected since prime rates have a direct impact on mortgage rates, business loans, and personal loans.

Banks use default risk to determine the interest rate charged to a borrower. Favored customers have little chance of defaulting due to high creditworthiness. Banks will charge these customers a lower interest rate than customers who have a higher probability of defaulting on a loan.

What is the overnight rate?

The overnight rate is the interest rate used by depository institutions when making a short term loan to another financial institution.

What is the federal funds rate?

The federal funds rate is the interest rate used by depository institutions when lending funds held at the Federal Reserve to another depository institution.

What are commercial banks?

Commercial banks are financial institutions that provide deposit, loan, investment, and savings services. Unlike traditional banks, commercial banks do not have branches. All transactions must be made via web or phone.

Private banking is a personalized banking service and financial service that is offered to customers at a bank who are considered to be HNWIs, or high net worth individuals. Private banks work with HNWIs to find the best banking and financial options to manage the customer’s wealth.

Private banks provide high net worth individuals with exclusive investment related advice, management of personal investments, provide service to protect and grow current assets, provide financing solutions, plan for retirement, and make estate plans.

Private banks may have different thresholds for acceptance. Some will allow individuals to conduct some private banking with $50,000 or less in assets while some more exclusive private banks require $500,000 in investable assets.

These banks require such a high amount with the idea that the wealth of these individuals would allow them to participate in alternative investments such as real estate and hedge funds.

What are high net worth individuals?

High net worth individuals or HNWIs are people classified in the financial services industry as having a high net worth in terms of liquid assets.

What is wealth management?

Wealth management is a professional, high-level service that provides investment and financial advice, accounting services, retirement and estate planning all for a single fee.

What is an accredited investor?

An accredited investor is an investor who is deemed financially sophisticated enough to have a reduced need for protection from certain government filings.

Quick assets are highly liquid assets, including cash, marketable securities, and accounts receivable held by a company. Quick assets are anything having exchange or commercial value that is either already in cash form or can be easily converted to cash.

The quick asset ratio, also known as the acid test, is calculated as:

(cash + marketable securities + accounts receivable)/(current liabilities)

Companies use this information to determine whether or not they can meet financial obligations if sales were to cease.

When are current assets converted to liquid assets?

The conversion may occur at any time, but the expectation is that the conversion will occur within one year.

What is the current ratio?

The current ratio is a liquidity ratio that measures the ability  of a company to pay obligations, both long and short term.

Current ratio = current assets/current liabilities

What are current liabilities?

Current liabilities are the debts and obligations of a company that are due in one year.

The quick ratio is used as an indicator to determine the short-term liquidity of a company. This ratio measures the ability of a company to meet short-term obligations using liquid assets.

Quick ratio = (current assets-inventories)/(current liabilities)

This ratio measures the dollar value of liquid assets available for each dollar of current liabilities. For example, a quick ratio of two means that a company has $2.00 of liquid assets available for every $1.00 of current liabilities.

The quick ratio excludes inventories from current assets, and thus, is more conservative than the current ratio.

Accounts receivable being included as a source of ready cash is debatable because it depends heavily on the credit terms extended from the company to its customers.

What is inventory?

Inventory is finished goods, goods in process, and raw materials that are considered a portion of a company’s assets that are either ready or will be ready for sale.

What are marketable securities?

Marketable securities are very liquid securities that may be converted to cash quickly and at a reasonable price.

What is maturity?

Maturity is the length of time that a financial instrument is outstanding. It is a finite period of time, after which the principal must be repaid in full.

In a currency pair, a quote currency is the second currency quoted in forex. In an indirect quote, the quote currency is the domestic currency and in a direct quote, the quote currency is the foreign currency.

Quote currency is also known as counter currency or secondary currency. Anyone interested in trading currencies in the forex market needs to understand the pricing and quotation structure of currencies.

Looking at the CAD/USD currency pair, the Canadian dollar is the base currency and the U.S. dollar is the quote currency.

Major currencies that are frequently shown as quote currencies include the British pound, the euro, the Japanese yen, the U.S. dollar, and the Canadian dollar.

What is a currency pair?

A currency pair is the quote and pricing structure of currencies traded in the foreign exchange market. Value is determined by comparing one currency with another.

How are currency pairs written?

The first currency in a pair is the base currency and the second is the quote currency.

0.60 EUR/USD would mean that it would take 0.60 euros to purchase $1USD.

What is a base currency?

Base currency is the domestic currency in a currency pair. This is also the first currency listed in a pair.

Quote stuffing is the act of quickly entering and withdrawing large orders to attempt to flood the market with quotes that must be processed by competitors, causing them to lose their advantage in high-frequency trading.

High-frequency trading programs that can execute market actions extremely quickly make this tactic possible. Market makers and other large players are really the only ones capable of executing this sort of tactic because they need a direct link to an exchange for this to be effective.

The SEC is investigating exactly to what extent is appropriate for high frequency trading in US markets.

What are anomalies?

Anomalies are incidents where actual results differ from expected results.

What is a market maker?

A market maker is a broker-dealer firm that holds (and accepts the risk for) a certain number of shares of a security to facilitate the trade of that security.

What is high frequency trading?

High-frequency trading is a method of trading using powerful computers to process large numbers of transactions at high speeds.

A quoted price is the most recent price at which an investment has been traded. Events that affect financial markets and perceived values cause the quoted prices of investments to change constantly throughout the day.

The quoted price is a representation of the most recent bid and ask price that buyers and sellers could agree on.

Quoted prices of stocks are shown on an electronic ticker tape, showing up to the minute trade price and trade volume information.

Stocks are indicated with their three or four letter stock symbol, and show number of shares traded, trade price, and whether the most recent quoted price is higher or lower than the previous one.

What is a ticker tape?

A ticker tape is an electronic device that shows current stock information. Ticker tape gets its name from the mechanical sounds made by the original machines that printed quote information on long narrow strips of paper.

What is perceived value?

Perceived value is the worth of a service or product in the mind of a consumer.

What is a derivative?

Derivatives are securities whose prices are dependent upon one or more underlying assets.

A rate lock is an agreement between a lender and borrower to lock in the interest rate on a loan over a specific amount of time.

Lenders may charge a lock fee for a borrower to lock in an interest rate. If the fee is not paid, the rate is not locked in. Lenders may charge a higher  interest rate initially in case the borrower decides not to lock in the rate.

When an interest rate is locked in by a borrower, the agreement should be binding for both lender and borrower.

Some borrowers may walk away from an agreement if interest rates fall. There have also been scenarios where untrustworthy lenders let lock periods expire when interest rates rise by telling the borrower that the paperwork couldn’t be processed in time.

What are lock periods?

A lock period is a set number of days (usually 30 or 60) where a promised interest rate on a pending loan cannot be changed.

When does a mortgage rate lock occur?

A mortgage rate lock usually can’t occur until the seller has accepted the offer made on a specific property.

How long can a rate be floated?

A loan rate must be locked in a few days to a week prior to closing. This allows the lender enough time to prepare disclosures and loan documents.

A REIT, or real estate investment trust is a security that uses property and mortgages as tools to invest in real estate. Those securities are traded like stock on major exchanges.

Real estate investment trusts provide investors with a highly liquid stake in real estate. REITs offer high dividend yields and receive special tax considerations.

REITs are comparable to mutual funds, allowing large and small investors to obtain ownership in real estate ventures. REITs must have at least 100 shareholders.

75% of all REIT assets have to be invested in real estate, or cash, 75% of gross income has to be from real estate, and 50% of ownership shares cannot be held by five or fewer shareholders.

Income-seeking investors are fond of REITs because, by law, payout ratios must be at least 90%.

What are dividend yields?

A dividend yield is a ratio indicating how much a company pays out in dividends every year relative to share prices.

What are the three major kinds of REITs in the US?

1. Equity REITs, which invest in and own properties.
2. Mortgage REITs, which invest in and own property mortgages.
3. Hybrid REITs, which invest in both properties and mortgages.

How does an individual invest in a REIT?

An individual can invest in a REIT either by purchasing shares directly on an open exchange or by investing in a mutual fund specializing in public real estate.

A repurchase agreement, or repo, is a method of short-term borrowing for government securities dealers. An investor purchases the government securities from a dealer, usually overnight. The following day, the dealer buys the securities back.

For the seller, with the agreement to repurchase the security in the future, this is a repo. For the purchaser, in this case, this is a reverse repurchase agreement.

A repo is classified as a money-market instrument and is usually used as a way to raise short-term capital. In a repurchase agreement, the buyer functions as a short-term lender, the security is collateral, and the seller is the borrower.

Repurchase agreements are pretty safe investments since the security involved is collateral. The most common government securities involved are US Treasury bonds. As a way of regulating bank reserves and monetary supply, the Federal Reserve enters into repurchase agreements.

What are the three types of repurchase agreements?

1. Specialized delivery repo- this transaction requires a bond guarantee at the beginning of the agreement and at maturity.
2. Held-in-custody repo- the seller holds the cash from the sale in a custody account for the buyer.
3. Third-party repurchase- a bank conducts the transactions between buyer and seller.

Are repurchase agreements loans or sales?

Even though a repurchase agreement has many similarities to loans, ownership changes hands, so technically these agreements are sales, but since the change in ownership is only temporary, these agreements are treated as loans for accounting and tax purposes.

What is a reverse repurchase agreement?

A reverse repurchase agreement is the purchase of securities, with an agreement to sell them back to the seller at a higher price on a set future date.

Return on investment, or ROI, is a performance measure for the evaluation of the efficiency of an investment compared to the efficiency of a number of other investments.

Return on investment, or ROI, is calculated as:

ROI = (gain from investment – cost of investments)/(cost of investments)

ROI is a very versatile and simple metric, and can be used as a gauge for the profitability of an investment. Investors look at ROI to determine what investments are preferable.

There are some limitations to using ROI when comparing investments. Duration of investments must be taken into account, and annual ROI should be calculated to determine which investments are a better choice. Failure to do so can lead to incorrect conclusions.

To give a fuller picture of an investment, ROI can be used in conjunction with a Rate of Return and Net Present Value (NPV) to account for specified periods of time and value of money over time due to inflation.

Some businesses and investors have been working to develop a new ROI metric called “Social Return on Investment”, or SROI. SROI accounts for the social impacts of projects and works to include those affected in capital allocation planning.

What is NPV?

NPV, or net present value, is the difference between present value of cash inflow and the present value of cash outflow.

What is rate of return?

Rate of return is the gain or loss of an investment over a period of time. Rate of return is expressed as a percentage increase over the cost of the initial investment.

What is allocation of capital?

Capital allocation is the division of financial resources and sources of capital by a business to different people, projects, and processes.

Revenue is the amount of money received by a company during a specified period. Revenue is a figure of gross income, from which net income is determined by subtracting costs.

Revenue is calculated as the price of goods or services sold times the amount or the number of units sold. The way revenue is calculated can vary based on the accounting method being used.

Accrual accounting includes sales made on credit, as long as the goods have been delivered to the customer. Cash accounting only counts a sale as revenue if the payment for the good or service has been received.

An investor may look at the net income and revenue of a company to determine the health of the business. Both of these figures are important indicators since there could be instances where net income increases while revenue stays the same in the event of cost cutting measures.

What is the price-to-earnings ratio?

The price-to-earnings ratio is the ratio that measures a company’s current share price relative to its per-share earnings.

What is the price-to-sales-ration?

The price-to-sales ratio is a ratio that compares a company’s stock price to the company’s revenues.

What is a cash flow statement?

A cash flow statement is a quarterly financial report that publicly traded companies are required to disclose to the SEC and the public. This statement shows all data regarding cash inflows from business operations and external investments.

Savings bonds are bonds that offer a fixed rate of interest over a fixed period of time. Savings bonds are non-negotiable and non-transferrable. These bonds are attractive to investors because they are not subject to state or local income taxes.

US savings bonds are one of the safest forms of investment and are almost risk-free because they are backed by the federal government. Since all savings bonds are registered with the government, if they are ever lost or stolen they can be replaced.

Savings bonds do not earn much interest compared to stock market investments, but they do provide a less volatile source of income.

In the US, savings bonds come in eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Bonds have varied maturation times, but the usual time is somewhere between 15 and 30 years. US savings bonds can only be purchased or redeemed by American citizens and must be purchased directly from the US Treasury.

Where can I cash a savings bond?

Savings bonds can be cashed at most US banks. There may be restrictions if you are not a customer of the bank you are trying to cash in the bond with.

Where can I get a US savings bond?

Though you used to be able to purchase savings bonds at most banks, you must now purchase them from Treasury Direct at www.treasurydirect.gov.

Do I have to pay taxes on a savings bond?

There are no state or local taxes due on earnings from a savings bond, though you will have to pay federal taxes on certain series of savings bonds.

A shareholder is a person, company, or other institution that owns one or more shares of stock in a company. Shareholders are the owners of a company. Shareholders stand to profit if the company is successful or face a loss on their investments if the company doesn’t perform well. Shareholders are also called stockholders.

Corporate shareholders, unlike the owners in sole proprietorship or partnership situations, are not personally liable for the company’s debts or obligations.

Corporate shareholders are not involved in the day to day operations of a company, but are able to vote on corporate matters such as proposed mergers, and who sits on the board of directors.

Shareholders have rights that are outlined in the company’s bylaws and charter. These rights include being able to see the company’s books anytime, the ability to sue the company for misdeeds of officers and directors, and the right to proceeds in the case of liquidation. Shareholders attend annual meetings and vote on large matters.

What is a board of directors?

A board of directors is a body or committee that holds overall responsibility for the management of an organization. These are elected or appointed positions.

What is liquidation?

Liquidation is the sale of assets when a company cannot pay its obligations when they come due.

What are some things shareholders can vote on?

Shareholders have voting rights to cast votes on things such as elections for board of directors positions, mergers and acquisitions, and corporate compensation packages.

Short selling is the sale of a security not owned by the seller. Sometimes the security is borrowed by the seller. Short sales are motivated by the idea that the price of the security will fall, allowing for it to be bought back at a lower price.

Short sales may be prompted by the desire to hedge the downside risk of a long position in a related security or speculation. Short selling should only be used by experienced investors since the risk of loss is extremely high.

There are two metrics that are used to track how much a stock has been sold short. These metrics are short interest and short interest ratio, or SIR.

Short selling is often looked down upon and short sellers often have a reputation as destroyers of companies, but short selling provides market liquidity, prevents over-optimism, and prevents stocks from being bid up to extremely high levels.

What is a margin account?

A margin account is a brokerage account where a customer is lent cash to purchase securities from the lender.

What is short interest?

Short interest is the quantity of stock shares sold by an investor but not yet covered or closed.

What is the short interest ratio (SIR)?

SIR is a ratio calculated by dividing the short interest by the average daily volume for a stock. It provides a number that indicates how long it will take short sellers to cover their positions if the stock price rises.

Stock is a type of security that gives the holder a piece of ownership in a corporation and represents a claim by the stockholder on a portion of the company’s earnings and assets.

There are two main categories of stock: common stock and preferred stock. Common stock allows the stockholder to vote at shareholder meetings and receive dividends. Preferred stock does not usually come with voting rights, but has a higher claim to earnings and assets.

Shareholders have a claim to assets and earnings of a company. The amount of ownership is determined by the number of shares owned by an individual relative to the number of outstanding shares.

If a company has 2,000 shares of outstanding stock and an individual owns 200 shares, that individual holds claim to 10% of the company’s assets.

What is a common shareholder?

A common shareholder is a business, individual, or institution that holds common shares in a company.

What are adjustable rate shares?

Adjustable rate shares are a type of preferred stock where the dividends issued vary with a benchmark. Equity holders receive dividend payments in the event of the company’s liquidation.

What is benchmark interest?

Benchmark interest is an interest rate of which an interest rate swap or a floating-rate security is based upon.

Investing in the stock market is the act of committing cash or capital to the purchase of securities with the expectation of obtaining a profit or additional income. These securities are bought and sold on exchanges.

The income from an investment can be from appreciation, profits, or interest earnings. Trading and speculating are short-term commitments, but an investment is considered a long-term investment that carries a lower amount of risk.

Investing wisely can be the key to building wealth. Securities and businesses must be researched and analyzed to determine whether or not the risk of an investment is worth it before any money changes hands.

The New York Stock Exchange (NYSE) has been around since 1792 and was formed as a centralized exchange for the growing securities market in the United States. The NYSE is considered to be the largest equities exchange in the world.

What indicates the health of a stock?

The health of a stock can be evaluated by looking at earnings per share, price earnings ratio and price book ratio.

What is an IPO?

An IPO is an initial public offering. It is the first sale made by a private company going public.

What is a dividend?

A dividend is the distribution of a portion of earnings, decided by a company’s board, and distributed to a class of shareholders.

A tax haven is a country that offers little or no tax liability in an economically and politically stable environment for foreign individuals and businesses. Tax haven countries do not provide much, if any, financial information to foreign tax authorities.

Tax havens allow individuals and businesses who reside elsewhere to take advantage of their tax regimes to avoid paying domestic taxes.

Some tax havens include Andorra, Belize, Bermuda, the Bahamas, the British Virgin Islands, the Cayman Islands, Honk Kong, the Channel Islands, the Cook Islands, the Isle of Man, Mauritius, Lichtenstein, Monaco, Switzerland, Panama, St. Kitts and Nevis.

Some tax haven countries have signed tax information exchange agreements (TIEA) and mutual legal assistance treaties (MLAT) with foreign countries due to mounting pressure from foreign governments that are trying to collect taxes they are entitled to.

What is a tax liability?

Tax liability is the total amount that an entity is legally obligated to pay due to a taxable event.

What is a taxable event?

A taxable event is an event or transaction that results in a tax consequence. Taxable events include the selling of securities for gain and receiving interest or dividends.

What is a tax base?

A tax base is the assessed value of a set of investments, assets, or income streams that are subject to taxation.

A tax return is the form or forms used to file income taxes with the Internal Revenue Service (IRS). Tax returns must be filed every year by individuals and businesses that receive income during the year. This income includes wages, interest, dividends, capital gains, and profits.

Tax returns contain worksheets where tax liability is calculated. There are different forms for different entity types. Individuals must use Form 1040, partnerships must use Form 1065, and corporations must use Form 1120.

The majority of large corporations and sole proprietors file quarterly tax returns as opposed to filing once per year. This helps to avoid large tax bills at the end of the year and keeps the amount of taxes due to a minimum.

What are income taxes?

Income taxes are taxes imposed by the government on income generated by any and all entities within a jurisdiction.

What is a tax refund?

A tax refund is the tax liability minus the amount of taxes paid. More simply, it is the return of the overpaid amount of taxes.

What is tax liability?

Tax liability is the total amount of taxes that an individual or business is legally obligated to pay as the result of a taxable event.

A trend is the general direction of the price of an asset or of a specific market. Trends don’t have a set length. They can be short term, long term, or intermediate.

Being able to determine a trend can be highly lucrative if you are able to trade with the trend. Trading with trends is not a rock solid general strategy when trading. For example, if the general trend of a particular market is heading upwards, an investor must use caution against taking a position that would rely on the trend going down.

Trends characterized by long-term movement in volume or price can also be applied to yields, equities, and interest rates.

What is the difference between a pattern and a trend?

A pattern is a series of data points that repeats in a recognizable way while a trend is a general direction of a price or asset.

What characterizes an upward trend?

Upward trends are characterized by asset prices hitting higher highers and lows.

How are patterns used for forecasting?

A trust fund is a fund made up of a variety of assets with the express intention of providing benefits to an organization or individual. A grantor establishes a trust fund to provide financial security, most frequently for children and grandchildren, or for an organization such as a non-profit or charity.

Trust funds can be made up of stocks, cash, bonds, properties, or other financial products. Trust recipients usually have to wait until a certain age or until a specific event occurs before they can receive income from the trust fund.

Prior to the recipient receiving an annual income from the trust, a group of trustees or a single trustee manage the fund according to the trust fund’s specifications. This management may include living expenses, an allowance, or educational expenses for the recipient.

What is a grantor?

A grantor is the creator of a trust. This individual uses personal assets to put into the trust.

What is a trustee?

A trustee is an individual or firm who holds or administers property or assets for a third party.

What is a beneficiary?

A beneficiary is an entity that receives a distribution from a trust, life insurance policy, or will.

A trustee is a firm or individual that administers or holds assets or property for the benefit of a third party. Trustees may be appointed to work with a variety of cases including bankruptcy, trust funds, charities, pensions, or retirement plans.

Trustees are in a position of trust and must make every decision based on the best interest of the beneficiary or beneficiaries.

Trustees must be impartial and maintain a high level of integrity. Trustees may not receive profits or benefits from their position unless payments for services provided by the trustee or trustees is specifically noted in the trust documents.

Trustees often maintain a fiduciary responsibility to the beneficiaries of a trust.

What is a fiduciary?

A fiduciary is an entity that is responsible for managing another’s assets.

What is an executor?

An executor is an individual who is appointed to administrate the estate of a deceased person.

What is a revocable trust?

A revocable trust is a trust is a trust with provisions that can be altered or canceled per the grantor.

An underwater mortgage is a purchase loan for a home with a higher balance than the market value of the home. If the homeowner were to sell the property, they would have to pay the loss out of pocket.

An underwater mortgage may prevent a homeowner for refinancing their loan. If the homeowner can no longer afford to make monthly mortgage payments the home will fall into foreclosure unless the terms of the loan can be renegotiated.

Underwater mortgages were prevalent after the housing bubble burst of the early 2000s. In conjunction with a bad economy, this led to many foreclosures.

What is foreclosure?

Foreclosure is the seizure and resale of a property when the borrower defaults on the terms of their mortgage.

What is a reverse mortgage?

A reverse mortgage is a home equity conversion mortgage for homeowners 62 and older that doesn’t require any monthly payments.

What is a short sale?

A short sale is the sale of property where the net proceeds fall short of the total liens against the property. All lien holders have to agree to accept the lesser amount to settle the debt.

The unemployment rate is the percentage of the total workforce that is unemployed and willing to work.

The International Labor Organization defines an unemployed person as someone who is both unemployed and actively seeking employment. This measure is a lagging indicator, providing confirmation of long-market trends but not forecasting any trends.

To be classified as a job seeker, an individual must be in contact with employers, sending out applications, scheduling interviews, or be in contact with government employment agencies.

In the US, there are many ways to measure the unemployment rate including sample surveys, social insurance statistics, and employment office statistics. When providing official statistics, the Bureau of Labor uses information from all of these sources.

Who isn’t factored into unemployment rate statistics?

Workers who drop out of the labor force and those who work full time from home raising children are not factored into unemployment rates.

What are employment agencies?

Employment agencies are agencies that work to match employers with suitable employees.

What is the Current Population Survey?

The current population survey is a survey performed monthly by the US Census Bureau of Labor Statistics. This survey samples a group of about 60,000 homes, individuals 15 and older.

A unit investment trust, or UIT, is an investment company that offers fixed unmanaged portfolios as redeemable units for a specific period of time to investors. These portfolios generally contain stocks and bonds.

Unit investment trusts are designed to provide dividend income and/or capital appreciation. These trusts are one of three types of investment companies. The other two types are close-end funds and mutual funds.

The typical cost of each unit is $1,000 and is sold by brokers to investors. UITs can be resold in the secondary market. UITs are regulated as either grantor trusts or regulated investment corporations (RIC).

What is a secondary market?

A secondary market is a market where securities and assets are purchased from investors by other investors.

What is an investment company?

An investment company is a business or trust engaged in the investment of pooled capital.

What is an underlying security?

An underlying security is the security that a derivative’s value is based on.

Unrealized gain is a profit resulting from an investment that exists on paper. This profitable position hasn’t yet been cashed in, like in the case of a winning stock position that is still open. Gains don’t become realized until the position is closed for a profit.

The opposite of an unrealized gain is an unrealized loss. An unrealized loss occurs when an investor holds on to a losing investment.

The loss becomes realized when the position closes. Unrealized losses and gains are referred to as paper losses and gains because the gains and losses are not determined until the position closes.

Due to market fluctuation, a person with an unrealized gain could turn into a position with an unrealized loss or vice versa. Unrealized gains occur when the current price of a security rises above the price the investor paid for it.

What is a capital gain?

A capital gain is a decrease in the value of a capital asset.

What is a capital loss?

A capital loss is a decrease in the value of a capital asset, with the value falling below what the investor paid.

What is a capital asset?

A capital asset is an asset that is not easily sold in the normal course of business. Capital assets include buildings, land, machinery, etc.

Unsecured debt is any loan that is not backed by an underlying asset. Credit cards, medical bills, utility bills and any other loan extended without collateral are all types of unsecured debt.

Unsecured loans present a high risk for lenders. If the borrower defaults, the lender may have to sue to recoup the money they are owed. Since unsecured debts are so risky, they tend to come with higher interest rates.

Secured debts are backed by assets or collateral. In the contract terms of a secured loan, the lender may seize the collateral that was put up as a guarantee on the loan if the borrower defaults. Secured debts include auto loans and mortgages.

Secured debts tend to have lower interest rates than unsecured debts because the borrower has more to lose.

What is collateral?

Collateral is a property or other asset that is offered to a lender by a borrower to secure a loan.

What is a lien?

A lien is the legal right of a creditor to sell property posted as collateral if the debtor does not meet the obligations of a loan agreement.

What is a default?

A default is a failure to pay interest and principal payments on a loan when they are due.

Value added tax, or VAT, is a consumption tax placed on a product when the value is added at a certain stage of production and at final sale.

Value added tax is based on the consumptions of goods by a taxpayer rather than his income. VAT is used in the European Union and several other countries. Advocates in the US claim that replacing the current income tax system with a federal VAT could increase government revenue, fund social service programs, and reduce the federal deficit.

A VAT would collect revenue on every good sold in the US, including internet purchases, and would make tax evasion much harder and may simplify tax codes.

Potential drawbacks include increased costs for business owners, and conflicts between state and local governments because of different tax rates.

What is a consumption tax?

A consumption tax is a tax on the purchase of goods or services.

What is a tariff?

A tariff is a tax imposed on an imported good or service.

What is a hidden tax?

A hidden tax is a tax that is indirectly assessed on consumer goods without the consumers knowledge. Hidden taxes are levied upon goods at a point in the process of production and, therefore, raise the cost of the final good sold.

Variance is the measurement of a spread between numbers in a data set. This measurement shows how far each number in the set is from the mean.

Variance is used for probability distribution in statistics. It measures variability from an average mean (volatility). Since volatility is the measure of risk, variance statistics can help investors determine risk when purchasing a certain security.

A variance value of zero is an indicator that all numbers in the data set are identical. Large variances indicate that the numbers in the data set are not only far from the mean, but also far from each other.

Variances may skew data since added weight is given to numbers far from the mean.

What is spread?

In the stock market, spread is the difference between the lowest ask price and highest bid price.

What is volatility?

Volatility is the statistical measure of the dispersion of returns for a specific market index or security.

What is probability distribution?

Probability distribution  is a function that describes the possible values and likelihoods that a random variable may take in a given range.

The velocity of money is how much of a currency is used over a time period and the rate at which the money is exchanged from one transaction to the next. Velocity of money is a ratio of Gross National Product to the total supply of a country’s money.

Velocity of money is a very important measure of the rate at which money currently in circulation is used in the purchase of goods or services.

Investors use the measure of the velocity of money to gauge the health or robustness of the economy. This value is also a key factor in determining the inflation calculation of an economy.

Economies exhibiting a higher velocity than others tend to be further along in the business cycle and will also have a higher rate of inflation.

What is GNP?

GNP, or gross national product, is the estimated total value of all products and services produced in a given time period, produced by domestic residents.

What is total supply?

Total supply, or aggregate supply, is the total supply of goods produced at a given price, over a given period of time within an economy.

What is inflation?

Inflation is the rate at which the level of pricing for goods and services rises and purchasing power falls.

Vendor financing is the lending of money to a customer by a company so that the customer may buy products from the company. When the vendor, or company, extends this credit they increase their sales.

Even though vendor financing is a way for a company to increase sales, it does come with some risk. The companies that are the borrowers in the financing situation may not be very financially stable. This means that they may never pay the money back.

If a company that offers vendor financing is not paid back for loans it has extended to customers, the losses must be written off as bad debt.

What is bad debt?

Bad debt is a debt that is not collectible, which it worthless to a creditor.

What is a debtor?

A debtor is an individual or company that owes money to a lender.

What is an issuer?

An issuer is an entity that develops, registers, and sells securities.

A viatical settlement is an agreement in which an individual with a terminal illness sells his or her life insurance policy at a discount below face value for immediate cash.

The buyer in this type of agreement cashes in the policy for its full face value amount when the seller passes away. This type of agreement is also called a life settlement.

Viatical settlements can be risky because it is impossible to know exactly when the original owner will pass away. As an investor in a viatical settlement, you are speculating on death.

With that in mind, the longer the life expectancy, the cheaper the policy. Because of the time value of money, you return will be lower the longer the person lives.

What is rate of return?

Rate of return is the gain or loss of an investment over time, expressed as a percentage.

What is life expectancy?

Life expectancy is the statistical age when a person can be expected to live to.

What is the time value of money?

The TVM, or time value of money, is the idea that money available right now is worth more than the same amount available in the future due to its potential earning capacity.

A waiver of demand is an agreement by the endorser of a check to accept legal responsibility, without formal notification, should the check issuer default.

The waiver of demand may be express or implied. It could also be oral or written unless you are in an area where oral waivers are prohibited by law.

Waiver of demand also refers to a bank’s waiver of its right to formal notification when presenting short-term negotiable debt instruments like drafts or banker’s acceptances to a Federal Reserve bank for rediscounting.

The Federal Reserve considers this endorsement by the bank a “waiver of demand, notice and protest” if the issuer defaults on its debt obligation.

What is an endorser?

An endorser is an entity who, by signing an instrument, transfers the title of the instrument to another.

What is a payee?

A payee is an entity to whom a check or draft is made payable.

What is a drawee?

A drawee is an entity who is expected to pay a bill of exchange (check or draft) immediately or on a certain date.

A weak currency is a currency whose value has depreciated significantly against other currencies over time. A weak currency is expected to continue to lose value because of fundamental weaknesses in the issuing nation.

Nations issuing weak currencies tend to have poor economic fundamentals, including high rates of inflation, chronic budget and current account deficits, and very slow economic growth.

Nations with weak economies import much more than they export. This results in more supply than demand for these currencies on international stock exchanges.

Temporary weakness in a major currency can give a pricing advantage to exporters, but these benefits do not transfer to countries with weak currency.

What are budget deficits?

Budget deficits are a financial situation where expenditures exceed revenue.

What are exports?

Exports are goods produced in one country that are shipped to another country for sale.

What are foreign exchange markets?

Foreign exchange markets are markets where participants can buy, sell, speculate, and exchange currencies.

Wealth management is a very high-level professional service that, for one fee, provides financial and investment advice, accounting and tax services, estate planning and retirement planning.

A client works with a wealth manager who coordinates expertise from financial experts, legal counsel, insurance agents, and accountants. Some wealth managers also provide personal banking and philanthropic opportunity services.

Wealth management is a “one stop shop” for all of a customers’ financial life. It can take the stress out of dealing with multiple advisors for each variable. Having a single advisor coordinate all of these services is a much more holistic approach for high net worth individuals.

Wealth managers are usually part of a wealth management firm, with access to teams of experts and services at their fingertips.

What are management fees?

A management fee is a fee charged by an investment manager for the management of an investment fund for the use of their time and expertise.

What is investment advice?

Investment advice is guidance given in an attempt to educate or guide an investor in regards to a particular investment.

What is rebalancing?

Rebalancing is the realigning of the weightings in a portfolio of assets. Rebalance is achieved by periodically buying and selling assets in the portfolio to maintain a desired level of asset allocation.

Wealth tax is a tax based on the market value of owned assets. These assets may include cash, shares, bank deposits, fixed assets, vehicles, real estate, pension plans, money funds, and trusts.

Wealth tax is charged to individuals based on personal wealth. The tax is based on an individual’s net worth, which is assets minus liabilities. Though many countries have a wealth tax, in recent years countries such as Austria, Denmark, Germany, Sweden, Spain, Finland, Iceland, and Luxemburg have abolished this type of tax.

In the United Stated, a wealth tax is not imposed. The US does require the payment of income and property taxes.

What are fixed assets?

A fixed asset is a tangible piece of property owned by a firm and used in the production of its income.

What is an ad valorem tax?

An ad valorem tax is a tax based on the assessed value of personal property or real estate, also known as a property tax.

What is an assessed value?

An assessed value is a dollar amount given to a property and used to measure applicable taxes due.

Withholding tax is an income tax that is withheld from an employee’s wages. The withheld taxes are paid directly by the employees to the federal government.

Withholding taxes are also due on any interest or dividends from securities owned by non-residents, and any other income earned by non-residents.

The amount of income tax withheld is a credit against the income taxes that must be paid during the calendar year by an employee. If an employee decides to have an additional amount withheld, they may be eligible for a tax refund.

What is a W-4?

A W-4 is a tax form used by employers to withhold the appropriate amount of income tax per paycheck.

Why do employers withhold income taxes?

Employers are required by the federal governments to withhold income taxes from employees to ensure that the government receives the money it is entitled to before the employee has a chance to spend it.

What happens if I don’t have enough money withheld?

If you don’t have enough withheld you will owe money to the IRS at the end of the year.

X-efficiency is the efficiency of an individual or business under the condition of imperfect competition. Under perfect competition, firms and individuals have to maximize efficiency to be successful and profitable.

If a company fails to maximize efficiency, they will be forced to exit the market.

Economist Harvey Leibenstein proposed the theory of x-efficiency in a paper in 1966. This is a controversial theory because it is in direct conflict with the assumption of utility maximizing behavior.

Some economists believe that x-efficiency is only witnessed in work life balance. Data evidence for the theory of x-efficiency is mixed.

What is imperfect competition?

Imperfect competition is a market that is operating outside of the rules of perfect competition. Imperfect competition includes monopolies, oligopolies, monopolistic competition, and oligopsony.

What is perfect competition?

Perfect competition is a market or industry in which prices cannot be influenced by suppliers, all suppliers offer the same goods, suppliers and buyers are plentiful, pricing information is accessible and entry and exit barriers are small.

What is a monopoly?

A monopoly is a scenario where a single group or company owns the majority of a market for a certain service or good. There is an absence of competition, resulting in high prices and low product quality.

An x-mark signature is an x symbol made in place of a person’s signature. X-mark signatures are used in cases where an individual is unable to append a full signature to a document.

X-mark signatures are most commonly used to approve reviewed documents by illiterate or disabled individuals. For an x-mark signature to be deemed valid, the x-mark must be witnessed.

There is a high potential for fraud with x-mark signatures, which casts doubt on the validity and enforceability of legal documents signed with an x-mark. Some states deem x-marked wills as invalid unless the testator is mentally or physically incapable of signing his or her full legal name.

What is illiteracy?

Illiteracy is the inability of an individual to read or write.

What is a testator?

A testator is an individual who has written and executed their last will and testament.

Why are x-mark signatures risky?

X-mark signatures are easily forgeable because they are less likely to look unique like a full signature.

XBRL, or extensible business reporting language, is a standard that was developed to streamline the way financial data is communicated, making the sharing of this data much easier.

Extensible business reporting language (XBRL) is a form of extensible markup language, or XML, used for the organization and defining of data. XBRL tags each piece of financial data. These tags are used by XBRL compatible programs.

When looking at a company’s online financial statements, statements that list financial information in XBRL make it easy for the viewer to simply convert the data into a spreadsheet program (that is XBRL compatible) instead of having to copy and paste plain text into a spreadsheet manually.

What is XML?

XML, or extensible markup language, is a flexible markup language based on standard generalized markup language, for electronic documents. It is commonly used by data exchange services.

What are accounting standards?

An accounting standard is a principle guiding accounting practices. GAAP, or the generally accepted accounting principles, are a group of accounting standards widely used in the field of accounting.

Do all countries follow the same GAAP?

There is not a set of universally accepted GAAP, but there are international financial reporting standards or IFRS. The IFRS are a list of principles addressing the way transactions, procedures and events should be indicated on financial statements.

Xenocurrency is a currency that trades in foreign markets. The prefix “xeno” means foreign or strange. A currency traded outside of domestic borders is considered xenocurrency.

The term xenocurrency is not frequently used because of the socially negative reaction to the word “xeno”. A more common;y heard term with the prefix “xeno” is xenophobia, which is the irrational fear or hatred of foreigners. The term more commonly used is foreign currency.

Some examples of xenocurrency or foreign currency are the Canadian dollar traded in Japan or the Japanese yen traded in Europe.

What is foreign exchange?

Foreign exchange is the currency of one country converted to the currency of another.

What is globalization?

Globalization is the increase in international trade and cultural exchange due to the tendency of businesses and investment funds to move past domestic markets.

What is an exchange rate?

An exchange rate is the price of one country’s currency. Exchange rates have two components: foreign  currency and domestic currency.

Xetra is a completely electronic trading system that is based in Frankfurt, Germany. Xetra was launched in 1997, originally for use on the Frankfurt Stock Exchange.

Though originally created for use on the Frankfurt Stock Exchange, Xetra’s use has expanded to exchanges throughout Europe. The Xetra platform increases flexibility to see greater depth within markets trading stocks, bonds, warrants and commodities contracts.

Xetra was one of the original global electronic trading systems. It now accounts for more than 90% of all stocks traded on the Frankfurt Exchange. Xetra has opened German markets to foreign investment, and is currently being used in Shanghai, Vienna, and Ireland.

What are commodities?

A commodity is a good used in commerce. A commodity is interchangeable with another commodity of the same type.

What is a basis grade?

A basis grade is the minimum accepted standard that must be met by a commodity in order for the commodity to be used as an actual in a futures contract.

What is a futures contract?

A futures contract is an agreement to buy or sell a specific commodity or financial statement at a set price in the future.

Y shares are a class of mutual fund shares that require a high minimum investment but also come with the benefit of waived or limited load charges and fees.

Because Y shares require such a large minimum investment (ie $500,000), these shares are usually only accessible to large institutional investors.

Annual 12b-1 fees that are usually charged for marketing and distribution purposes are often waived on Y-class shares. The savings incurred from the lack of fees on purchased Y shares are substantial. The 12b-1 fees alone on a fund with $500,000 in securities would be between 0.25-1% of the fund’s total assets.

What are institutional investors?

Institutional investors are non-bank individuals or companies that trade securities in large enough quantities or monetary amounts that qualify them for lower commissions and preferential treatment.

What are commissions?

A commission is a service charge assessed in return for assistance in the purchase or sale of a security or for investment advice.

What are 12b-1 fees?

A 12b-1 fee is the annual distribution or marketing fee on a mutual fund. These fees are categorized as an operational expense.

A yield is the income return on an investment. This amount includes interest or dividends received on a security. The value is expressed as a percentage on an annual basis and is based on the cost of the investment, and its current face or market value.

Bonds have four yields:

1. Coupon, which is the bond interest rate set at issuance.
2. Current, which is the bond interest rate as a percentage of the current price of the bond.
3. Yield to maturity, which is an estimate of what the investor would receive if the bond is held until maturity.
4. Municipal bonds, which are non-taxable, and will have a tax-equivalent yield determined by the investor’s tax bracket.

Mutual fund yields are the annual percentage of dividends and interest (income) earned by a fund’s portfolio, minus the fund’s expenses.

What is a coupon?

A coupon is the annual interest rate that is paid on a bond. This rate is expressed as a percentage of the face value of the bond.

What is capital gain?

Capital gain is the increase in value of a capital asset.

What is rate of return?

Rate of return is the gain or loss on an investment over a period of time.

Yield to maturity rate, or YTM, is the total anticipated return on a bond if that bond is held until the end of its lifetime. Yield to maturity is a long-term bond yield expressed as an annual rate.

The YTM is the internal rate os return of an investment in a bond if the bondholder holds onto the bond until it matures, as long as all payments are made on time as scheduled.

The YTM calculation is based on the assumption that all coupon payments made are reinvested at the same rate as the bond’s current yield, and also take into account the bond’s par value, current market price, coupon interest rate, and term to maturity.

The YTM can be difficult to calculate because of the complex associated factors, but the figure can be estimated using a bond yield table.

What is a long-term bond yield?

A long-term bond yield is the amount of return an investor can expect on a bond. The most common type of bond yield is normal yield, which is calculated by dividing the amount of interest paid by the face value of the bond.

What is nominal yield?

Nominal yield is the interest rate that the issuer promises to pay the purchaser.

What is term to maturity?

Term to maturity is the remaining life of a debt instrument, or the amount of time until the instrument reaches maturity.

Yield to worst is the lowest potential yield that can be received on a bond without the issuer of the bond defaulting. This is calculated by making worst-case scenario assumptions and calculating the returns on these assumptions.

When calculations on worst case scenarios are done, the calculations take into account what the returns would be if scenarios including if prepayment or call or sinking fund provisions are used by the issuer.

Worst case scenario evaluations like YTW help investors manage risks and meet specific income requirements.

Yield to worst is calculated for every possible call date, prepayment is assumed if the bond has call or put provisions, and it is assumed that an issuer may offer a lower coupon rate based on the current market.

What is a call date?

A call date is the date which a bond can be redeemed before maturity.

What is ‘at par’?

At par refers to a bond, preferred stock or other investment that is trading at face value.

What is yield to call?

Yield to call is the yield of a note or bond if an entity were to buy and hold it until the call date.

A yield based option is a type of debt instrument that gets its value from the difference between the exercise price and value of yield of the underlying instrument. These options are settled in cash.

Yield based put buyers’ anticipated interest rates will go down while yield based call buyers anticipated interest rates will go up.

If the interest rate on an underlying security climbs above the strike price of a yield based call option plus the premium that was paid, the holder has profited.

The same can be said if the opposite occurs (if the interest rate falls below the strike price minus the premium paid on a yield based put option.

What is a put option?

A put option is an options contract that would allow the owner, if he or she so chooses, to sell a certain amount of an underlying security at a set price within a certain amount of time.

What is a call option?

A call option is an options contract that would allow the owner, if he or she os chooses, to buy a stock, bond, commodity, or other debt instrument at a set price within a certain period of time.

What is a strike price?

A strike price is the price at which the holder of an option can sell an underlying security.

A Z bond is a bond that accrues interest but the interest is not paid out to the bond holder until the bond reached maturity. The interest is added back into the principal and further interest is calculated on the new principal amount.

Z bonds are the final tranche in a series of mortgage-backed securities and are the last to receive payment. Some collateralized mortgage obligations (CMO) use Z bonds because no coupon payments are made while principal payments are being made on earlier bonds.

Interest payable on a Z bond is added to the principal balance and is only payable when claims on all other bonds have been satisfied. Z bonds are similar to zero coupon bonds.

What is a tranche?

A tranche is a slice or portion of something. In regards to investing, it is used to describe securities that can be divided into smaller pieces.

What is a zero coupon bond?

A zero coupon bond is a debt security that is offered at a heavy discount but doesn’t pay any interest.

What is an asset class?

An asset class is a group of securities that have similar characteristics and behave in a similar manner in the marketplace.

A zero cost collar is a positive carry collar that secures a return by purchasing the cap and sale of a floor. Zero cost collars are also called zero cost options or equity risk reversals.

A zero cost collar is an investment strategy that is sometimes used in relation to commodities, options, interest rates, and equities.

Investors may sell a cap and buy a floor to secure a return while a borrower may sell a floor and buy a cap. The cost of a cap for an investor is offset by the income received from the floor.

The purchase of a put option and the sale of a call option with a lower strike price is an example of a zero cost collar. The return is capped by the sale of the call if the underlying asset falls in value, and also offsets the purchase of the put. Upside risk is unlimited.

What is an investment strategy?

An investment strategy is a plan made by an investor on how to guide their investment decisions based on risk tolerance, individual goals, and future capital needs.

What is risk tolerance?

Risk tolerance is the degree of variability in returns on investments that an individual is willing to take.

What is a floor?

A zero minus tick is a securities trade on an exchange at the same price as the preceding trade, but lower than the last trade of a different price.

The last trade would be considered a zero minus tick trade if a succession of trades occurred in the following order: $15.50, $15.25, $15.25.

The SEC, up until 2007, prohibited the sale of stock short on a zero minus tick or a down tick. Potential short sales had to pass a ‘tick test’ to ensure that the stocks were flat or trading up before the sale could be accepted.

The SEC eliminated this restriction after concluding that the function of US markets was orderly enough to not suffer artificial price dives due to excessive short sales.

Decimalization also helped in the lifting of this ban because the average size of a tick was reduced by moving from fractions to pennies.

What is a short sale?

A short sale is the sale of borrowed securities in anticipation of a drop in price.

What is the SEC?

The SEC, or Securities and Exchange Commission, is a government organization that was created by Congress to protect investors and regulate the securities markets.

What is trading flat?

A bond is trading flat when the price neither rises nor falls.

A zero plus tick is when a security is traded at the same price as the preceding trade but higher than the last trade of a different price.

Until 2007, the SEC ruled that stocks could not be shorted on downticks but could be shorted on an up tick or zero plus tick.

The last trade would be considered a zero plus tick if a succession of trades occurred in the following order: $15.25, $15.50, $15.50.

It was originally believed that short selling on downticks was the cause of the stock market crash of 1929. The SEC concluded in 2007 that US markets are orderly and advanced enough to handle short sales without artificial price drops or spikes.

What is the SEC?

The SEC is the Securities and Exchange Commission, which is a government organization that regulates security markets and protects investors.

What is a short sale?

A short sale is the sale of borrowed securities in anticipation of a drop in price.

What is decimalization?

Decimalization is a system of quoting security prices in decimal format instead of as fractions.

Zoning is the local government or municipal laws that govern how real property can and cannot be used in certain areas. Zoning laws restrict the commercial use of land to limit manufacturing and other business ventures and prevent oil extraction in residential areas.

Zoning laws can be suspended or modified if construction or changed use of a property will economically benefit the community.

Zoning laws restrict homes, businesses, and parks. Types of zoning areas include industrial, light industrial, commercial, light commercial. agricultural, single family residential, multi-family residential, and school.

What is real property?

Real property is any property directly attached to land, as well as the land itself.

What is a zoning ordinance?

A zoning ordinance is a set of written laws and regulations that define how property in certain geographic zones may be used.

What is commercial property?

Commercial property is any real estate property that is used to conduct business.