financial kpis-business terms

8/4/2019 Financial KPIs-Business Terms

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Financial KPIs(Business Term of the Day)

Operating surplus

An approximate measure of a company's operating cash flow based on data from thecompany's income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. also called Earnings BeforeInterest, Taxes, Depreciation and Amortization (EBITDA) or operational cash flow.

current capital

Current assets minus current liabilities. Current capital is the part of a company's capitalthat is used for day-to-day operations, and so it is desirable that companies maintain

substantially more current assets than current liabilities. A company's level of currentcapital is also a measure of how well the company is able to fulfill its short-term debtors and obligations. also called net current assets or working capital.

family of funds

A mutual fund company offering many mutual funds, for various objectives. Usually,investors can move assets between different funds of a family of funds at little or no cost,and can receive a single statement describing their holdings in all the funds in the familyof funds. also called mutual fund family or fund family.

flipping

The practice of buying initial public offerings at the offering price and then resellingthem once trading has begun, usually for a substantial profit. This is more commonlydone by institutional investors than retail investors, because institutional investors getmost of the IPO shares at the offering price. Flipping is most profitable in a hot IPOmarket, when the price of an IPO often rises dramatically above the offering price on thefirst day. also called stagging.

continuous inventoryKeeping book inventory continuously in agreement with stock on hand within specifiedtime periods. In some cases, book inventory and stock on hand may be reconciled asoften as after each transaction, while in some systems these two numbers may bereconciled less often. This process is useful in keeping track of actual availability of goods and determining what the correct time to reorder from suppliers might be.Sometimes also called perpetual inventory.



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conglomerate merger

A merger of two companies which are involved in different types of business. There aremany ways for this to benefit the companies, such as sharing of assets and reducing

business risk , but can also become a risk to the company if the new company gets toolarge or if it isn't able to successfully blend the two businesses.

domestic rate

The interest rate of a domestic currency expressed in real terms. The domestic rate is usedin foreign exchange markets in interest rate parity calculations, and is compared to theinflation-adjusted interest rate of the foreign currency.

Roth 401(k)

A contribution-based retirement account, which combines features of the traditional RothIRA and 401(k) plan accounts. The Roth 401(k ) contains many benefits for employees,such as being able to contribute post-tax money, but many companies do not yet offer thisas a retirement plan option, due to the increased amount of work it takes to maintain thisplan. Companies were given the option to begin offering this plan in 2006.

clawbackA financial or other benefit that is given, but is later taken back due to uniquecircumstances. A common example of this is when particular investments arepurchased, they provide taxable benefits to the purchaser, but if the investmentsare sold before they mature, these benefits are required to be returned. 2. Adecrease in the stock market that follows just after an increase in the stock market.

put-call parity

The relationship between the price of a call and the price of a put for an option with thesame characteristics (strike price, expiration date, underlying). It is used in arbitrage

theory. If different portfolios comprised of cals and puts have the same value atexpiration, it is implied that they will have the same value leading up to the expirationpoint. Thus, the values of the portfolios move in lock step. Portfolio price equality iscalculated as c + PV(x) = p + s, where c is the market value of the call, PV(x) is thepresent value of the strike price, p is the market value of the put, and s is the market valueof the underlying security. If the two sides of the equation are not equal, arbitrage profit could be gained by investing in the less expensive portfolio. Analysis of the parity relationship assumes that other factors, such as a dividend, are not taken into account.



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conversion privilege

An insurance policy in which the insurer is required to renew the policy for a specifiedamount of time regardless of changes to the health of the insured. The agreement requires

that premiums are paid on time and that the insurer makes no changes except if apremium change is made for an entire class of policyholders. also called guaranteedrenewable or convertible term insurance or guaranteed insurability.

education credit

A tax credit available for education expenses, such as a Hope Credit or a LifetimeLearning Credit. Education credits can be applied to many situations including educationexpenses, deposits in Education Savings Accounts, and withdrawals from IRAs in order to finance education and student interest loan payments.

gold bar

A gold ingot fashioned in the shape of a bar that is 99.5%-99.9% pure in gold. In the US,their value is measured in troy ounces, whereas other nations may use grams. 1 troyounce is equal to 31.1034768 grams. Ingots range in size from 1 troy ounce to 400 troyounces. Gold bars can be used for trading or investing purposes. However, because theyare easier to fabricate, they have to be tested for purity when sold, and thus are often held as long-term investments to hedge against inflation. Central banks often hold these items in large vaults or reserves. In the past, gold bars directly backed the US currency. In moremodern times however, they serve as a symbolic backing of the dollar.

owner of record

The name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer's securities. Dividends andother distributions are paid only to owners of record. also called stockholder of record orholder of record or shareholder of record.

wedge

A technical analysis term used to describe a chart on which lines that connect tops andbottoms converge towards each other but are both moving in the same direction. Similarto a triangle, except that in a triangle, the trends move in opposite directions, with thetops decreasing and the bottoms increasing. In a wedge, both lines have the same trend (upward or downward) but have different slopes, leading to the convergence. A falling wedge is generally thought to be a rest during a period of upward movements.



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exchange rate

Rate at which one currency may be converted into another. The exchange rate is usedwhen simply converting one currency to another (such as for the purposes of travel to

another country), or for engaging in speculation or trading in the foreign exchangemarket. There are a wide variety of factors which influence the exchange rate, such asinterest rates, inflation, and the state of politics and the economy in each country.also

called rate of exchange or foreign exchange rate or currency exchange rate.

ceiling

1. The maximum interest rate permitted by state law for a given loan. A ceiling is acommon feature of floating rate notes. 2. An upper limit on the exchange rate of acountry's currency imposed by some regulatory authorities (the government orregulators will step in and ensure that the exchange rate does not exceed theceiling). 3. More generally, any limit or maximum.

right of first offer

A contractual right that the seller must first give the rights holder the opportunity topurchase an asset, but does not set requirements for the transaction. The seller agrees tonegotiate with the rights holder, and attempt to reach an agreement. If the seller andrights holder cannot reach an agreement, the seller may then negotiate with or sell to anyother party. also called right of first negotiation.

conversion parity price

The price that an investor effectively pays for common stock by purchasing a convertiblesecurity and then exercising the conversion option. This is equal to the price on theconvertible divided by the conversion ratio (the number of shares that the convertible canbe converted into). also called market conversion price.

guaranteed insurability

An insurance policy in which the insurer is required to renew the policy for a specifiedamount of time regardless of changes to the health of the insured. The agreement requires that premiums are paid on time and that the insurer makes no changes except if a



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premium change is made for an entire class of policyholders. also called guaranteedrenewable or conversion privilege or convertible term insurance.

bargain element

The difference between the strike price of a stock option and the market price of theunderlying stock when the option is exercised, times the number of shares purchased. Thebargain element is not treated as capital gains, but rather as income received from theemployer who granted the stock option, and is taxed differently depending on whether thestock option is a non-qualified stock option or an incentive stock option.

public bond

A bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the U.S. government, but not guaranteed by the government since theagencies are private entities. Such agencies have been set up in order to allow certaingroups of people to access low cost financing, especially students and first-time homebuyers. Some prominent issuers of agency bonds are Student Loan MarketingAssociation (Sallie Mae), Federal National Mortgage Association (Fannie Mae) andFederal Home Loan Mortgage Corporation (Freddie Mac). Agency bonds are usuallyexempt from state and local taxes, but not federal tax. also called agency bond.

reversal arbitrage

A riskless transaction consisting of the short sale of a security, the purchase of a call, andthe writing of a put. If the value of the security increases, the call is exercised to negatethe short sale. If the value of the security decreases, the put will be exercised by theholder and the received security will negate the short sale.

earnings estimate

The expected quarterly or annual earnings of a given company, as estimated by an analyst or other market individual or company. Earnings estimates are watched closely byinvestors because they are an important indication of the company's outlook , but even theprofessionals have difficulty predicting earnings accurately.

divestment

Refers to the sale of an asset for financial, legal or personal reasons. For corporations,divestment can refer to a company selling off a portion of its assets, such as a subsidiary,to raise capital or to focus the business on a smaller core of goods and services. Forinvestors, divestment can be used as a social tool to protest particular corporate policies,



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such as a company trading with a country known for child labor abuses. Divestment canalso be required of companies by the Federal Trade Commission in order to have amerger approved. A famous example of this is the breakup of Bell System (Ma Bell) intoAT&T and the Baby Bells in 1984. opposite of investment.

phantom stock planA benefit plan for company employees that gives the employees benefits that wouldcome from holding company stock , without actually giving any stock to these employees.The employees would receive benefits if the stock performed well over a certain amount of time. This is a way for companies to provide a bonus and incentive for employees,without granting them any of the specific benefits that would come from actually being ashareholder. The rules and payout arrangements are similar to that of a deferredcompensation plan.

dot-comA company whose operations are entirely or primarily internet-based, or morespecifically a company whose business model would not be possible if the internet didnot exist. Dotcoms often deliver all their services over an internet interface, but products might be delivered through traditional channels as well. Dotcoms are often divided intotwo categories: those that provide products and services for consumers (B2C) and thosethat provide products and services to other businesses (B2B).

perfect title

A title that is free of liens and legal questions as to ownership of the property. Arequirement for the sale of real estate. In general, a company that specialize in checkingtitle claims for clients (a title company) will be hired to ensure that a title is clear when asale of real estate is taking place. also called just title or good title or clear title or freeand clear.

risk margin

A value that takes into account the potential movement of a stock in relation to its option

position . A more volatile investment would have a higher risk margin , since thepotential for large swings in price is greater than that of a more stable investment.Premium margin and risk margin are the two components comprising the marginrequirement



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house call

A call from a broker to a customer (called a maintenance margin call ) or from aclearinghouse to a clearing member (called a variation margin call) demanding the

deposit of cash or marginable securities to satisfy the Regulation T requirements and thehouse maintenance requirement for the purchase or short sale of securities or to cover anadverse price movement . federal margin call or Reg. T Call (for NASD requirements) ormargin call.

convenience yield

The amount of benefit that is associated with physically owning a particular good, ratherthan owning a futures contract for that good. When a good is easy to come by, an investor doesn't have need to own the actual good at that time, and can buy or sell as he pleases.When there is a shortage of a particular good, however, it is better to already own thegood than to have to purchase it during the shortage because it is likely to be at a higherprice due to the demand. The convenience yield is the benefit derived in the second scenario.

holding period return

The return earned from the act of holding an asset over a given period. The return is equalto the income and other gains (such as appreciation) earned from the asset, divided by theoriginal cost of the asset. The holding period return can be calculated for any asset,including a bond, an individual stock , or a complete portfolio.

COLA

Cost of Living Adjustment. An annual adjustment in wages to offset a change (usually aloss) in purchasing power, as measured by the Consumer Price Index. The Consumer Price Index is used rather than the Producer Price Index because the purpose is to offsetinflation as experienced by the consumer, not the producer.

UIT

Unit Investment Trust. An SEC-registered investment company which purchases a fixed,unmanaged portfolio of income-producing securities and then sells shares in the trust toinvestors. The major difference between a Unit investment Trust and a mutual fund isthat a mutual fund is actively managed, while a unit investment trust is not managed atall. Capital gains, interest and dividend payments from the trust are passed on toshareholders at regular periods. If the trust is one that invests only in tax-free securities,then the income from the trust is also tax-free. A unit investment trust is generally



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considered a low-risk, low-return investment. Some investors prefer UITs to mutualfunds because UITs typically incur lower annual operating expenses (since they are notbuying and selling shares); however, UITs often have sales charges and entrance/exitfees. also called fixed investment trust or participating trust or unit trust.

business process outsourcingBPO. The contracting out of a particular business function to an outside company inorder to reduce costs. An example of BPO would be a manufacturing companyoutsourcing its accounting work to an outside accounting firm, or a telecommunicationsfirm using an outside company to handle customer service.

maintenance margin requirement

The required amount of collateral or equity needed to maintain a margin account with anexchange . The minimum must be met at all times, but the particular amount required canvary. In the case of two major U.S. indices , the New York Stock Exchange and Nasdaq ,the maintenance margin is 25% of the value of the stocks in the margin account . Aninvestor will face a margin call if unable to maintain this minimum level .

NASDAQ-100

An index which tracks the performance of a select 100 stocks listed on the Nasdaq . Mostof these 100 stocks were picked because they are the largest companies on the exchange ,based on market capitalization . Because market capitalization changes over time, the list of companies in the NASDAQ-100 change over time as well. This index was introducedin 1985.

dollar drain

A situation in which a country's imports from the U.S. exceed their exports to the U.S.,which results in a reduction in their dollar reserves. The idea can also be applied tocurrencies of other countries.

cliquet optionA type of option in which the strike price periodically resets before the final expirationdate is reached. When the resetting date is reached, the option will expire worthless if thecurrent price of the security is below the strike price, and the strike price will reset to thislower security price. If the resetting date is reached and the security is trading higher thanthe strike price, the investor will earn the difference and the strike price will reset to thehigher security price. For example, a two-year cliquet stock option that resets annually



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could have a strike price of $500. If the annual resetting date is reached and the stock istrading at $600, the investor receives a $100 payout and the strike price resets to $600.The name "cliquet" refers to the imaginary clicking sound made when the strike price isreset to a higher level. also called ratchet option.

stock purchase planA trust established by a corporate which acts as a tax-qualified, defined contribution plan by making the corporation's employees partial owners. contributions are made by thesponsoring employer, and can grow tax-deferred, just as with an IRA or 401(k) plan. Butunlike other retirement plans, the contributions must be invested in the company's stock .The benefits for the company include increased cash flow, tax savings, and increasedproductivity from highly motivated workers. The main benefit for the employees is theability to share in the company's success. Due to the tax benefits, the administration of stock purchase plans is regulated, and numerous restrictions apply. also called EmployeeStock Ownership Plan (ESOP).

short covering

The purchase of securities to close out a short stock position. To close a position, anoption investor purchases the same number of shares that were sold short. If the price of the shares being purchased is below the price of the shares that were shorted, a profit could be realized (depending on trading fees).

biased expectations theory

Belief that forward foreign exchange rates for deliver at some date in the future will beequal to the spot rates for that particular date, as long as there is no risk premium.unbiased predictor. Also called unbiased expectations hypothesis, unbiased predictor.

stockholder of record

The name of an individual or entity that an issuer carries in its records as the registered holder (not necessarily the beneficial owner) of the issuer's securities. Dividends andother distributions are paid only to shareholders of record. also called shareholder of

record or holder of record or owner of record.

net currency exposure

The potential for foreign exchange risk after netting, a process in which the NationalSecurities Clearing Corporation views each security's purchase and sales orders to match



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each purchase and sale with its appropriate client and brokerage, the company's particularcash flow.

idle

Situation in which production has shut down or is simply not working, or one in whichcash is inactive (not invested). More generally, this term can apply to any asset that is notbeing put to productive use. Being idle is usually an undesirable situation, since there isan opportunity cost of not earning returns on the idle asset.

demerger

The act of splitting off a part of an existing company to become a new company, whichoperates completely separate from the original company. Shareholders of the originalcompany are usually given an equivalent stake of ownership in the new company. Ademerger is often done to help each of the segments operate more smoothly, as they cannow focus on a more specific task . opposite of merger.

franchised monopoly

A government-granted monopoly. The most important reason for the government granting a monopoly is in the case of the product or service being a natural monopoly, i.e.unable to sustain more than one producer. This is usually the case when very largeeconomy of scale is needed to make production efficient (so the marginal cost of producing each additional unit is very low). Thus, given the huge scale of productionneeded for efficiency, it could be that the entire market demand would be fulfilled by asingle efficient producer, making it unfeasible to have a second producer in the market.Thus, the government may decide to simply give a producer a monopoly, so that theproducer is convinced of the fact that there is adequate market to achieve efficient scale.A government may also choose to grant monopolies in special conditions such as whenthey want to encourage a specific kinds of innovation (patents are effectively agovernment-granted monopoly), give preference to a producer who might also beinvolved in community development activities etc.

M3

One measure of the money supply that includes M2, plus large time deposits, repos of maturity greater than one day at commercial banks, and institutional money marketaccounts.



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EBITDA Multiple

EBITDA Multiple gives an estimate valuation of a business operation, where value frominvestment activities (bills, bonds or stocks of other companies) is excluded. In other

words, it estimates how many times of the EBITDA the business operation is worth. It iscalculated as: M = Business Operation Value/EBITDA

Where: M= EBITDA multiple; Business Operation Value = market value of the businesstaken at the end of year; EBITDA = (Operating Revenue - Operating Expenses + OtherRevenue) calculated for year n

recapture

A contract stipulation that permits the seller of an asset to at least partially retrieve assetownership. For example, the seller of a block of shares could arrange to buy back someshares if he/she wants, or the seller of real estate could gain some of the income generated by the property. The recapture agreement is usually valid only within a specifictime period.

down-and-out barrier option

A type of barrier option in which the spot price of the underlying is set above the barrier level, and the price of the underlying must close lower in order for the option to beknocked out or cancelled. It is named "down-and-out" because the right to exercise theoption disappears if the price of the underlying is below the barrier.

participatory note

A tool used by foreign investors to invest in Indian securities. Investors purchase theparticipatory notes from brokerages in India, and these notes give the investors thedesignated share in the designated security. Investors remain anonymous to market regulators, which is one of the major differences when comparing participatory notes tothe American Depositary Receipt.

constant ratio planAn investment strategy in which the portfolio's composition by asset class is maintainedat a certain level through periodic adjustments. When the balance is upset, it isperiodically restored by moving money from overperforming assets to underperformingones. This system prevents one asset class from dominating the portfolio. This is one wayto maintain a desirable asset allocation.



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real-time gross settlement system

RTGS. A system that streamlines that settlement of large-value transactions betweenbanks and other financial institutions. Instead of moving physical amounts of cash, the

banks transfer funds electronically. When one bank transfers money to another, the fundsare immediately credited to the second bank and debited to the first.

unsterilized foreign exchange intervention

A passive approach to the manipulation of foreign exchange rates that can be used toinfluence the relative value of domestic currency. In contrast to sterilized interventions,where the overall supply of currency is altered, an unsterilized intervention does notaffect the money supply in order to influence exchange rates.

J-curve1. The theory that the Internal Rate of Return of a fund will be low in its early stages,particularly due to costs incurred in starting the fund, but then as the firm becomes morestable and profitable, that its internal rate of return will increase. The shape of this, if graphed over time, would look like a J.

2. The shape of a country's trade balance after it devaluates its currency. The immediateeffect of a devaluation is an increase in the trade deficit, though this will shift into anincreased international demand for the country's exports due to a lowered exchange rate,as well as a decrease in the demand for more expensive imports. An appreciation in the

value of a country's currency can result in an inverted J-curve.

loss given default

LGD. The actual total loss that is experienced by a bank when a debtor defaults on a loan from that bank. The loss given default is not always equal to the total amount of the loan;for example, if the debtor pledged collateral against the loan, the bank could receive theseassets, and their total loss would not be greater than the amount of the loan minus thevalue of the assets.

European Economic and Monetary Union

EMU. A monetary union in Europe which succeeded the European Monetary System.This union began to take effect in 1990, over a series of three steps. The first step abolished individual member exchange rate control, the second step established theEuropean Central Bank , and the third step created the Euro as the common currency.



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Dow dividend theoryInvestment strategy that advocates buying the ten DJIA stocks with the highest yields.Some investors believe that these stocks are currently undervalued and are worth buying.Typically, investors following this strategy re-adjust portfolios at the beginning of eachcalendar year, as the fluctuating stock prices change the yields. also called dogs of thedow.

crossing

A situation in which a broker acts as agent on both sides of a given transaction. If thebroker has a buy order and an equivalent sell order, he/she can "cross" the orders. This iscommon in the case of large orders, but is legal only if the broker first offers thesecurities to the public at a price higher than the bid price.

average strike option

A type of stock option used on Asian exchanges. The strike price in this type of option isbased on the average asset price during a certain period of time, defined by a range of dates called the "fixings." This type of option is less volatile than traditional options,which have a predetermined strike price.

European Depositary Receipt

EDR. A negotiable certificate held in the bank of one country representing a specificnumber of shares of a stock traded on an exchange of another country. AmericanDepositary Receipts make it easier for individuals to invest in foreign companies, due tothe widespread availability of price information, lower transaction costs, and timelydividend distributions. also called European Depositary Receipt. also called GlobalDepositary Receipt (GDR).

fixed investment trust

Same as unit investment trust. An SEC-registered investment company which purchases afixed, unmanaged portfolio of income-producing securities and then sells shares in thetrust to investors. The major difference between a Unit investment Trust and a mutualfund is that a mutual fund is actively managed, while a unit investment trust is notmanaged at all. Capital gains, interest and dividend payments from the trust are passed on



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to shareholders at regular periods. If the trust is one that invests only in tax-free securities, then the income from the trust is also tax-free. A unit investment trust isgenerally considered a low-risk, low-return investment. One downside of a unitinvestment trust is that given the fixed nature of its portfolio, the trust is susceptible toinflation. also called unit investment trust or participating trust or fixed investment trust.

stretch IRA

An Individual Retirement Account strategy designed to prolong or "stretch" the period of time over which earnings can be tax deferred. This strategy is used when an investor doesnot need all of the funds from the retirement account, and wishes to create an estate thatcan extend for generations. Beneficiaries will still need to take the required minimumdistributions.

currency basket

A group of securities whose weighted average is used to determine the value of anobligation or the value of another currency. For instance, a country that does not peg thevalue of its currency to a single other currency, such as the U.S. dollar, could value itscurrency to the value of a currency basket comprised of Euros, U.S. dollars, and JapaneseYen.

guaranteed stock

Preferred or common stock of one corporation whose dividends are guaranteed byanother corporation. Since the dividends are guaranteed, investors are generally willing topay a higher amount for the stock than if the stock was not backed up by a guarantee.How valuable the actual guarantee is will depend on the guarantor's financial and credithistory. The guaranteed stock arrangement has frequently been used by railroads.

retrocession

1. The purchase of reinsurance by a reinsurance company. This limits the risk that a

reinsurance company must face, since it has purchased insurance against an event thatmight affect a company that it had underwritten. If a reinsurance company continues topurchase insurance it might unknowingly buy back its own risk, known as "spiraling".

2. The voluntary act of returning property which had been previously "ceded" to itsoriginal holders. Examples include Washington, D.C. returning land to the state of Virginia in 1847, or the United Kingdom returning Hong Kong to China in 1997.



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micro-hedge

Hedge designed to reduce or eliminate risk resulting from a particular asset or liability, asopposed to the risk arising from an entire portfolio. If the asset or liability is part of alarge portfolio with a number of correlated risks, then micro-hedging is less likely to bean effective technique. opposite of macro-hedge.

National Association of Purchasing Managers index

NAPM index. A measure of the health of the manufacturing sector, and more generallythe overall economy, calculated by surveying purchasing managers for data about neworders, production, employment, deliveries, and inventory, in descending order of importance. It is based on a survey of over 250 companies within twenty-one industries

covering all 50 states, and it is released on the first business day of the month at 10 amEST and reflects the previous month's data. A reading over 50% indicates thatmanufacturing is growing, while a reading below 50% means it is shrinking. The NAPM index is also thought to be an early indicator of inflationary pressures.

medical savings account

MSA. An account into which tax-deferred funds are contributed. The money from thisaccount can be used to pay for a variety of the individual's medical expenses, such as aninsurance copay or deductible. This account is often used by people who are self-

employed, so the funds are contributed by the individuals, either for their own use or theiremployees, if they have any.

reciprocal currency arrangement

Short term agreements between the central banks of two or more countries whereby asupply of one country's currency is maintained at a steady exchange rate. This improvesthe conditions of liquidity in the global financial market and helps it to run smoothly.Also called swap lines.

combined loan to value ratioCLTV Ratio. A ratio that indicates the risk of a homeowner going into default if a homepurchase is funded by multiple mortgages. It is calculated by dividing the total value of the combined mortgages by the value of the property. High values (75-85%) are usuallyrequired by creditors before they extend a second mortgage or refinancing option to a



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homeowner, although lower values indicate that there is less risk of default (the loanvalue is a smaller percentage of the overall home value).

sales charge

A fee charged by a broker or agent for his/her service in facilitating a transaction, such asthe buying or selling of securities or real estate. In the case of securities trading, brokerscan be split into two broad categories depending on the sales charges they charge.Discount brokers charge relatively low sales charges, but provide no services beyondexecuting trades. Full service brokers charge higher sales charges, but provide research and investment advisory services. also called commission.

interest-sensitive life insurance

Cash value life insurance in which the rate credited by the insurer is adjusted periodicallyto reflect the current performance of its investment portfolio which is influenced by theprevailing interest rate environment. As the yield on the insurer's investment portfolio increases, the credited cash value rate can also increase

Spider

SPDR. Shares of a security designed to track the value of the S&P 500. Spiders trade onthe American Stock Exchange under the symbol SPY. One SPDR unit is valued atapproximately one-tenth of the value of the S&P 500. Dividends are distributed quarterly,and are based on the accumulated stock dividends held in trust, less any expenses of thetrust. also called Standard & Poor's Depositary Receipt.

Direct Stock Purchase Plan :DSP

DSP. A SEC-regulated program which enables a company to sell shares of stock directly to investors, rather than through a broker, enabling the investors to avoid paying acommission. DSPs are a good way to invest small amounts since you don't even have tobe a current shareholder in order to purchase the shares. The company will not charge you a commission, but they may charge you a small fee in order to set up a stock purchase account. Direct Stock Purchase Plans are not related to Directed Share

Programs (which have the same acronym, DSP).

Fibonacci retracement

A tool used in technical analysis which plots the Fibonacci ratios on a graph whichdisplays a stock's price over time. The key Fibonacci ratios are 23.6%, 38.2%, 61.8%,



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and 78.6%. The different Fibonacci ratios are used to predict how likely it is for the stock to return to that price by retracing its previous actions.

consumer discretionaryA category of industries, made up of companies which deal with products or services thatare not necessities. The degree of spending and amount of consumption of these productsand services varies depending upon the individual. These industries include automobiles,high-end clothing, restaurants, hotels, and luxury goods.

bull trap

A sign which supposedly indicates that a security is reversing its path, and is starting torise instead of decline, but in actuality the security continues to decline after this signal isseen. It is seen as a trap because some people will see this signal and purchase the stock because they believe they will benefit from this increase in value, but they are trappedwith a poor performing stock when they find out that the stock is still falling.

Lorenz curve

A model developed by economist Max Lorenz in 1905. It represents a probabilitydistribution of statistical values, and is often associated with income distribution calculations. For example, a Lorenz curve can show that the bottom 40% of households bring in 25% of a country's income. If income distribution were perfectly equal, 40% of households would bring in 40% of income.

pivot point

A technical indicator which is used to predict a change in resistance or support levels for

a stock . The pivot point is calculated by taking the average of a stock's daily high, low,and closing price. If the market price increases above the pivot point, it is said to indicate a new support level, but if it decreases below the pivot point, it is said to indicate a newresistance level. Pivot points are often used in analysis of the forex market. Formula: thesum of the high, low, and closing prices divided by 3.

broker recommendation



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An opinion given by an analyst to his/her clients about whether a given stock is worth buying or not. Wall Street investment firms employ thousands of analysts whose job is toissue reports and broker recommendations on specific stocks. These analysts typicallylook at the company's fundamentals and then build financial models in order to project future trends, most notably future earnings. They then use these projections as a basis for

issuing broker recommendations on whether or not they think the stock should be bought or sold. Each brokerage has its own terminology, which makes it difficult to comparebroker recommendations between brokerages, but the most common ratings are (indescending order of quality) strong buy, buy, hold, and sell. also called recommendation.

annuity

1. A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferreduntil withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawnwithout penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns.Both are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer haspaid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes inaddition to estate taxes.

2. More generally, a series of payments of set size and frequency, often to a retired person.

forex arbitrage

A forex trading strategy which consists of locating an incorrectly priced currency pair and buying or selling it against another currency pair for a profitable trade. Theseopportunities are small windows caused by an inefficient trading environment lackingliquidity and do not last long.

currency in circulation

The total amount of paper currency, coins, and demand deposits that is held byconsumers and businesses rather than by financial institutions, central banks, and the U.S.Treasury. Currency in circulation is thus the sum of currency held by the public, and is acomponent of a bank's reserves. It is an important factor that the Federal Open MarketCommittee takes into account when setting the money supply, since a decline in thecurrency in circulation means that banks don't have as many demand deposits in their



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reserve. This can mean that fewer loans could be extended to borrowers because the bank will have to make up for a decline in reserves.

Directional Movement IndexDMI. An indicator used in technical analysis to determine if a financial instrument, suchas a stock , is trending in particular direction. It is broken into the positive directionalindicator (+DI), negative directional indicator (-DI) and Average Directional Index (ADX). The value of the index can be zero. The higher the value of the DMI, the betterthe chance that the stock will move.

down-and-in barrier option

A type of barrier option in which the spot price of the underlying is set above the barrier level, and the price of the underlying must close lower in order for the option to beexercised. It is named "down-and-in" because the right to exercise the option appears if the price of the underlying is below the barrier.

indexed loan

A loan in which payments change in response to changes in an index such as theConsumer Price Index. Indexed loans are usually long-term, since such loans mightpotentially be affected by many different market factors. One of the most common factors that a loan might be indexed for is inflation, since prices typically rise over time and theprincipal amount of the loan thus loses value with every time period, benefitting theborrower and hurting the lender. The maturity, interest or principal of an indexed loanmay all be adjusted, depending on the structure of the loan.

spousal remainder trust

A trust in which income-producing property is placed in the trust by the grantor andincome is distributed to the beneficiary over a specified time period. If the beneficiary isless than 14 years old, the income is taxed at the grantor's rate, otherwise it is taxed at the

beneficiary's rate. At the end of the term, the property reverts to the grantor or thegrantor's spouse.

Warren Buffett

The Chairman of Berkshire Hathaway, and arguably the greatest stock market investor of all time. An investor who chose to invest $10,000 in Berkshire Hathaway when Buffett



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took over in 1965 would have more than $20 million today. His forte is in identifyingundervalued companies, and he is well-known for taking a very long-term positions incompanies he identifies as being good investment prospects. Buffett provides strong evidence that it is possible to consistently outperform the market.

balloon maturityA repayment schedule for an issue of bonds in which a large number of the bonds comedue at the same time, typically the final maturity date. This term applies only to bondswhich do not have a sinking fund provision. A balloon maturity can put company cashflow under stress if adequate preparations are not made.

coattail investing

A trading strategy in which an investor tries to duplicate the performance of a successful(and usually well-known) investor by copying their trades as soon as they are madepublic. This is a risky strategy, since there is a time delay between when the successfulinvestor's trades occur and when they are made public, and because the strategydisregards overall portfolio considerations, risk tolerance, and other uniquecircumstances.

Rule 12b-1 fee

An extra fee charged by some mutual funds to cover promotion, distributions, marketing expenses, and sometimes commissions to brokers. A genuine no-load fund does not haveRule 12b-1 fees, although some funds calling themselves "no-load" do have Rule 12b-1fees (as do some load funds). Rule 12b-1 fee information is disclosed in a fund'sprospectus, is included in the stated expense ratio, and is usually less than 1%. also called 12b-1 fee.

OCC

Options Clearing Corporation. The organization that handles clearing of the optionstrades for the various options exchanges and regulates the listing of new options. It isregulated by the Securities and Exchange Commission, and is owned jointly by the U.S.

stock exchanges that trade options (American Stock Exchange, Chicago Board OptionsExchange, Pacific Exchange, and Philadelphia Stock Exchange). The fact that all listedoptions are cleared through OCC means that all options are free of default risk , since theOCC guarantees all option contracts. Therefore, the buyer or a seller of an option onlyfaces the credit risk of the OCC (which is minimal), not the credit risk of thecounterparty. In order to manage risk, the OCC imposes margin requirements on alloptions brokers. The margin requirement depends on the particulars of each specificcontract.



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publicly-traded fund

A fund with a fixed number of shares outstanding, and one which does not redeem sharesthe way a typical mutual fund does. Publicly-traded funds behave more like stock than

open-end funds: closed-end funds issue a fixed number of shares to the public in an initialpublic offering, after which time shares in the fund are bought and sold on a stock exchange, and they are not obligated to issue new shares or redeem outstanding shares asopen-end funds are. The price of a share in a publicly-traded fund is determined entirelyby market demand, so shares can either trade below their net asset value ("at a discount")or above it ("at a premium"). also called closed-end investment company or closed-endfund.

constant dollar plan

An investment strategy designed to reduce volatility in which securities, typically mutualfunds, are purchased in fixed dollar amounts at regular intervals, regardless of whatdirection the market is moving. Thus, as prices of securities rise, fewer units are bought,and as prices fall, more units are bought. also called constant dollar plan. also called dollar cost averaging.

regional exchange

An SEC-registered stock exchange which focuses on listing stocks of corporations in itsgeographic region. The major U.S. regional exchanges are the Boston, Chicago,Cincinnati, Pacific, and Philadelphia stock exchanges. Regional exchanges are usually

significantly smaller than exchanges that focus on listing stocks at the national level.Many stocks listed on regional exchanges are not listed on national exchanges. However,regional exchanges also feature stocks which list both on the regional and the nationalexchange.

offshoring

Shifting a business function from one country to another. For a business, this can entail moving product manufacturing, service centers or operations to a different country.Offshoring is often used to reduce the cost of business, with the company seeking to

move parts of operations to countries with more favorable economic conditions.

APT

Arbitrage Pricing Theory. An alternative asset pricing model to the Capital Asset PricingModel. Unlike the Capital Asset Pricing Model, which specifies returns as a linearfunction of only systematic risk , Arbitrage Pricing Theory may specify returns as a linear



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function of more than a single factor. Thus, there is no clear risk-return trade-off in thismodel.

currency overlay

Currency risk management that is outsourced to specialist firm otherwise called theoverlay manager. Most often used for international investment portfolios the overlaymanager acts as risk manager to limit risk from adverse movements and to assist in profit building. Hedging is conducted by overlay manager on behalf of firm in order to achieve firm's objectives. Most currency overlay is specialized for example profiting fromcurrency movements.

RTO

Reverse Take-Over. When a company buys out a larger company, but could alsooccasionally refer to a private company taking over a publicly listed company. Typically,a public company that is taken over by a private company will remain listed, and theprivate company will use the acquisition as means of gaining a listing. A reverse take-over is a relatively rare event.

adjusted debit balance

Value used to determine a margin account's position, as required by Regulation T. This isthe amount a customer owes a broker, minus profits on short sales and balances in aspecial miscellaneous account. If the adjusted debit balance is very small, the customercan withdraw cash or securities from a margin account.

rate differential swap

A swap in which the two payments are tied to two currencies in two different interest rate indexes, but in which the payments are exchanged in one base currency. For example, arate differential swap might have payments denominated in U.S. dollars, but could haveone set tied to the Japanese LIBOR and another to the U.S. LIBOR. The Japanese LIBORpayments will still be made in dollars. The rate differential swap allows investors toprofit from changes in the interest rates of the two indexes. also called cross-index basis

swap, cross-rate swap, differential swap, interest rate index swap, LIBOR differentialswap.

covered warrant

A right (but not an obligation) to buy or sell a set amount of stock , bonds or othersecurities from a financial institution at a specific price and date. Unlike a regular



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warrant, which is issued by a company and allows a holder to buy or sell that company'ssecurities, a covered warrant is issued by a financial institution and can apply to outside securities. For example, a bank might issue a covered warrant on shares of Microsoft.The warrant is "covered" because the issuing organization owns at least some of theunderlying securities.

standard accounting practice

A set of rules that a company must follow when reporting information on its financialstatement. The standard accounting practice guidelines allow companies to be comparedto each other because they have followed the same rules. The standard methods in theU.S. are referred to as Generally Accepted Accounting Principles.

consolidated tape

A ticker tape which includes quotes for both NYSE and AMEX stocks. The consolidated tape is split into two different reporting systems. One reports the trading prices andvolumes on the New York Stock Exchange, and also trading prices and volume fromother exchanges of stocks that are listed on the New York Stock Exchange. The otherreports the trading prices and volumes on the American Stock Exchange, and on thetrading volume and prices of AMEX-listed stock in other exchanges and the over-the-counter market.

W formation

A technical analysis term used to describe a chart on which the price of a security hasmade two approximately equal bottoms over a period of time. Technical analysts try tobuy at one of the bottoms in anticipation of a rise (which would make the shape of a "W"on the chart). also called double bottom. opposite of double top.

forex hedge

Tactic used by a forex trader to protect a current position from undesirable changes inexchange rates. For example, if a trader predicted that the dollar may take a turn for theworst, he/she may implement a forex hedge to protect the investment.

gamble

To engage in any activity in which money is put at risk for the purpose of making aprofit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds areunfavorable; the behavior is risk-seeking; an unsystematic approach is being taken;



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emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivatedby entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results.

SIMPLESavings Incentive Match Plan for Employees. A retirement plan sponsored by companies with fewer than 100 employees which is attractive for employers because it avoids someof the administrative fees and paperwork of plans such as a 401(k) plan. A SIMPLE plan may be structured as either a 401(k ) or an IRA.

mean reversion

1. The theory that a given value will continue to return to an average value over time,despite fluctuations above and below the average value. This theory can be applied to anymeasurable value, including interest rates and the return on a certain investment.

2. A purchasing strategy based on the above theory, which assumes that prices will returnto an average value. This strategy encourages purchasing underperforming securities,under the premise that the market will eventually rebound, and the value of the security will increase.

muni fundA mutual fund which invests in municipal bonds. These bond funds are popular amonginvestors in high income tax brackets because they are exempt from federal taxes and, insome cases, from state taxes as well. As with U.S. government bond funds, theunderlying securities in muni funds are backed by the government and thus areconsidered to have a high credit rating. However, municipalities have been known todeclare bankruptcy on occasion, making these funds more risky than U.S. governmentbonds. also called municipal bond fund.

split coupon bondA bond which pays no coupons, is sold at a deep discount to its face value, and matures atits face value. A zero-coupon bond has the important advantage of being free of reinvestment risk , though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates. Also, such bonds tend to be very sensitive to changes ininterest rates, since there are no coupon payments to reduce the impact of interest rate changes. In addition, markets for zero coupon bonds are relatively illiquid. The imputed



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interest on a split coupon bond is taxable as it accrues, even though there is no cash flow.also called accrual bond or zero-coupon bond.

whitewash resolution

A term used in Europe to refer to a specific portion of the corporation act (called theCompanies Act in Europe). This portion of the act indicates that a specific resolution must be passed before a company being bought out can provide financial assistance to thecompany which is buying it out. This is to prevent companies from taking advantage of the companies they are buying out.

prepayment privilege

A clause in some loans allowing the borrower to pay off the debt prior to its due date without incurring a penalty. This is an advantage for a borrower when interest rates arefalling, since he/she can pay off the existing loan and then refinance at a more favorable rate. also called prior redemption privilege.

accounting information system (AIS)

A system, typically computer-based, used for storing, collecting, and analyzing acompany's financial and accounting data. Accounting information systems are generallyused by executives to make decisions, develop company strategies, and generate reports for shareholders, internal personnel, and regulatory agencies. Accounting informationsystems also streamline accounting cycles and reduce the incidence of accounting errors.

bullet dodging

Waiting to grant an employee stock option until after bad news involving the company ismade public. Because the strike price on an option is linked to the date on which theoption was issued, waiting until after bad news sends a stock price lower and allows theemployee to obtain shares at a lower strike price.

fraption

Also known as an interest rate guarantee, this type of option allows an investor to set up aforward rate agreement during an agreed amount of time that triggers in response to apre-set strike price. Fraptions are used to protect investors from dramatic declines ininterest rates.



super sinker bond

Bond with long-term coupons but short maturity, usually a home financing bond. Supersinker bonds are sometimes used when some of the mortgages backing the bond get

prepaid, and so the bond is likely to be paid off quite soon. The bond holder is uncertainas to when exactly the pay-off may occur, but the annual return on these bonds works outquite high over the short-to-medium-term holding period.

currency pair

The two currencies used in a foreign exchange transaction. The currency pair consists of a base currency and a counter currency. The value of the currency pair is determined bythe rate at which one unit of the base currency is converted into units of the counter currency. For example, a currency pair could be U.S. dollars/Japanese Yen or SwissFrancs/British pounds.

financial kpis-business terms

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