Accrued interest
Accrued interest is the interest that accumulates on a fixed-income security between one interest payment and the next. The amount is calculated by multiplying the coupon rate, also called the nominal interest rate, times the number of days since the previous interest payment.
Actively managed fund
Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade more frequently than managers of passively managed funds whose goal is to mirror the performance of the index the fund tracks. Since actively managed funds aim to provide stronger returns than index funds, they often have higher management fees.
Alpha
"A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return."
American depositary receipt (ADR)
Shares of hundreds of major overseas-based companies are traded as ADRs on US stock markets in US dollars. ADRs are actually receipts issued by US banks that hold actual shares of the companies' stocks. They let you diversify into international markets without having to purchase shares on overseas exchanges or through mutual funds.
Amortization
Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage loan. To amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to reduce the principal you owe. The word amortize itself tells the story, since it means "to bring to death."
Annual percentage rate (APR)
The APR is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees and certain other credit charges that the borrower is required to pay. It is calculated in a standardized way that takes fees into account, making it easier to compare loans. It is considered the true rate of interest because it includes all of those charges.
Annuity
Annuity is nothing but a stream of periodic cashflows. As a financial product it is generally designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities can be structured to suit the investment / withdrawal needs.
Asset
"Assets are everything you own that has any monetary value, plus any money you are owed. They include money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own. When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets. Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation."
Asset allocation
"Asset allocation is a strategy, advocated by modern portfolio theory, for reducing risk in your investment portfolio in order to maximize return. Specifically, asset allocation means dividing your assets among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate.
Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors. The asset allocation model - specifically the percentages of your investment principal allocated to each investment category you’re using - that’s appropriate for you at any given time depends on many factors, such as the goals you’re investing to achieve, how much time you have to invest, your tolerance for risk and the market outlook. Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model you’ve selected. Or, you might realign your model as your financial goals, your time frame, or the market situation changes. "
Asset class
Different categories of investments are described as asset classes. Stock, bonds, and cash - including cash equivalents - are major asset classes. So are real estate, derivative investments, such as options and futures contracts, and precious metals.When you allocate the assets in your investment portfolio, you decide what proportion of its total value will be invested in each of the different asset classes you’re including.
B
Back-end load
"Some mutual funds impose a back-end load, or a contingent deferred sales charge (CDSC), if you sell shares in the fund during the first, say 12 or 36 months after you purchase them. The charge is a percentage of the value of the assets you’re selling.
The percentage typically declines each year the charge applies and then is dropped. However, the annual asset-based management fee is generally higher on back-end load funds than on front-end load funds, where you pay the sales charge at the time you purchase."
Balanced fund
Balanced funds are mutual funds that invest in a portfolio of equity stocks and bonds to meet their investment goal of seeking a strong return while moderating risk. Balanced funds are sometimes described as a type of asset allocation fund, which provides the oportunity to spread your money among asset classes with one investment.
Basis point
Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points.
Bear market
A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.
Behavioral finance
Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market. Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.
Benchmark
An investment benchmark is a standard against which the performance of an individual security or group of securities is measured. When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is the standard against which the performance of individual investments within the segment are measured. Individual investors and financial professionals often gauge their market expectations and judge the performance of individual investments or market sectors against the appropriate benchmarks.
Beta
Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. For example, BSE 500 has a beta coefficient (or base) of 1. That means if the BSE 500 moves 2% in either direction, a stock with a beta of 1 would also move 2%. Under the same market conditions, however, a stock with a beta of 1.5 would move 3% (2% increase x 1.5 beta = 0.03, or 3%). But a stock with a beta lower than 1 would be expected to be more stable in price and move less.
Bid and ask
Bid and ask is better known as a quotation or quote. Bid is the price a market maker or broker offers to pay for a security, and ask is the price at which a market maker or dealer offers to sell. The difference between the two prices is called the spread.
Blue chip stock
Blue chip stock is the common stock of a large, well-regarded company. The companies in that informal category are collectively known as blue chips companies. Blue chips have a long-established record of earning profits and paying dividends regardless of the economic climate.
Bond
Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe all debt securities, bonds are generally medium to long-term investments with maturities running in years.
Bond rating
Independent rating agencies, assess the likelihood that bond issuers are likely to default on their loans or interest payments. Ratings systems differ from one agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds.
Bottom fishing
Investors using a bottom-fishing strategy look for stocks that they consider undervalued because the prices are low. The logic of bottom fishing is that stock prices sometimes fall further than a company's actual financial situation warrants, especially in the aftermath of bad news. Bottom-fishing investors hope the stock will rebound dramatically and provide a healthy profit.
Bottom-up investing
When you use a bottom-up investing strategy, you focus on the potential of individual stocks, bonds, and other investments. Using this approach, for example, means you pay less attention to the economy as a whole, or to the prospects of the industry a company is in, than you do to the company itself. If your investing method is bottom up, you read research reports, examine the company's financial stability, and evaluate what you know about its products and services in great detail.
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