February 14th to February 20th
Sunday February 14, 2010
Intelligent ETF
What Does Intelligent ETF Mean?
An exchange-traded fund (ETF) that employs an active investment strategy based on a broad index, such as the S&P 500 or a sector-based index. The fund may choose to exclude some stocks within the index while increasing or decreasing the percentage weighting of other stocks. Most intelligent ETFs carry higher expense ratios than standard ETFs, as well as substantially higher turnover ratios.
Also known as a "smart ETF".
Investopedia explains Intelligent ETF
Many of these "intelligent" or "smart" ETFs originated in the aftermath of the 2000-2002 bear market. Most intelligent ETFs look to avoid market capitalization-weighted portfolios, instead using internal metrics (or black box systems), such as company fundamentals or share performance.
Any ETF or index fund that does not replicate a base index is not passive investing, meaning that the fund's returns could deviate markedly from the returns of the benchmark index. Some intelligent ETFs have internal or proprietary indexes that are merely replicated within the ETF, but this is still active investing, and many of the internal indexes cannot be readily examined.
Monday February 15, 2010
Christmas Club
What Does Christmas Club Mean?
A short-term savings account that usually pays out the full account balance to its account holders once each year, right before Christmas. Christmas club accounts pay depositors monthly interest on their account balances and often punish early withdrawals by retracting interest earned if money is taken out before a given date.
Investopedia explains Christmas Club
Because of the tremendous pressure put on people to save money for Christmas spending and the debt loads that consumers incur just before the holidays, many financial institutions offer their customers Christmas club accounts. Usually, Christmas club accounts offer systematic savings through automatic withdrawal upon deposit of paychecks to a checking account.
Tuesday February 16, 2010
No-Load Life Insurance
What Does No-Load Life Insurance Mean?
A type of life insurance that charges much lower fees and expenses than conventional life policies. This is due primarily to the absence of a commission for the selling agent. No-load life insurance mirrors traditional life insurance in all other aspects.
Investopedia explains No-Load Life Insurance
No-load policies allow cash value to accumulate faster inside the policy because of their lower cost. However, although its lower cost allows no-load life insurance to provide an affordable alternative to lower-income policyholders, carriers of no-load policies should be examined for financial stability. No-load policies also typically offer very little in the way of customer service.
Wednesday February 17, 2010
Gift Splitting
What Does Gift Splitting Mean?
A taxation rule that allows a married couple to split a gift's total value as if each contributed half of the amount. Gift splitting allows a couple to increase their total gift tax exemption amount by combining individual allowances.
Investopedia explains Gift Splitting
For gift splitting to be official, both spouses must agree to the gift and specify the situation when filing taxes. In 2006, the gift tax exemption was set at $12,000 per individual gift annually. Gift splitting allows a couple to donate a total of $24,000 before being taxed on the contribution.
For example, let's say you want to give your child $20,000 to purchase a vehicle. If you make the gift alone, $8,000 ($20,000-$12,000) will be subject to gift taxes. However, if you split the gift with your spouse, with each of you contributing $10,000, both contributions will fall under the $12,000 limit, making the entire gift non-taxable.
Thursday February 18, 2010
Natural Gas ETF
What Does Natural Gas ETF Mean?
Exchange-traded funds (ETFs) that invest in natural gas futures and other products in an effort to closely track the price of delivered natural gas at market. Natural gas ETFs are set up as commodity pools, which issue limited partnership interests as opposed to shares. The fund may also invest in heating oil, crude oil and gasoline futures.
Investopedia explains Natural Gas ETF
Natural gas ETFs (and those of other natural resources/commodities) opened well when they first began trading on the American Stock Exchange (AMEX). Having a more liquid way to access natural gas as both a speculative and hedging play is very useful to both retail and institutional investors. Investors should expect small tracking errors over shorter time frames, but see strong correlation to the spot price of natural gas over medium and longer time horizons.
Friday February 19, 2010
Gold Fix
What Does Gold Fix Mean?
The twice-daily act of setting gold prices by the five members of the London gold pool. This rate is used as a benchmark for pricing the majority of global gold products and derivatives.
Investopedia explains Gold Fix
Twice a day, the London gold pool sets the price of gold based on the basic economic principles of supply and demand. The world then uses these prices to determine the price of bullion and gold-related products.
Saturday February 20, 2010
Holographic Will
What Does Holographic Will Mean?
A holographic will is a will that is handwritten and signed by the testator (the person who makes the will). Some states do not recognize holographic wills and those that do require the will to meet certain requirements. The minimal requirements that must be met for a holographic will to be recognized are:
a. Proof that the testator actually wrote the will
b. Proof that the testator had the mental capacity to write the will
c. The will must contain the testator's wish to disburse personal property to beneficiaries.
Investopedia explains Holographic Will
To avoid fraud; some states require that a holographic will contain the maker's signature. A holographic will does not have to be witnessed or notarized. However, if the will is typed instead of handwritten and it is unwitnessed, then the will is invalid because typed wills must be witnessed.
February 7th to February 13th
Sunday February 7, 2010
Retirement Planner
What Does Retirement Planner Mean?
A practicing professional who helps individuals prepare a retirement plan. A retirement planner identifies sources of income, estimates expenses, implements a savings program and helps manage assets. Estimating future cash flows and assets is also a central part of a retirement planner's work. He or she may use a web-based calculator or software program that will predict future cash flows and assets based on the data entered.
Investopedia explains Retirement Planner
Although most retirement planners deal with the financial aspects of planning for retirement, some planners also deal with the non-financial aspects, including how to spend one's time in retirement, where to live and when to quit work, to name just a few.
Today, retirement planners rely heavily on web-based calculators and retirement-planning software, but, like any kind of forecast, the information produced is only as good as the data used. The plan created by a retirement planner is in no way a complete predictor of retirement spending or income needs, but it is a good starting point.
Monday February 8, 2010
Sweep Account
What Does Sweep Account Mean?
A bank account that automatically transfers amounts that exceed (or fall short of) a certain level into a higher interest earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds.
Investopedia explains Sweep Account
In a sweep program; a bank's computers analyze customer use of checkable deposits and "sweeps" funds into money market deposit accounts.
This is done to provide the customer with the greatest amount of interest with the minimum amount of personal intervention. That said, sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts. Now, some brokerage accounts have similar features that enable investors to gain some additional return for unused cash.
Tuesday February 9, 2010
IRA Rollover
What Does IRA Rollover Mean?
A transfer of funds from a retirement account into a Traditional IRA or a Roth IRA. This can occur either through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account.
Investopedia explains IRA Rollover
If the transfer is done by check, there will be a 20% withholding penalty applied before the custodian issues the check. To avoid the 20% penalty, the rollover must take place directly from one custodian to another.
Many IRAs will only allow one rollover per year on an IRA to IRA transfer. The one-year calendar runs from the time the distribution is made. Most rollovers occur when people change jobs and wish to move 401(k) or 403(b) assets into an IRA. Most IRAs offer more investment choices along with a continuation of tax-free gains and income.
IRA rollovers can occur from a retirement account such as a 401(k) into an IRA, or as an IRA to IRA transfer. A rollover can occur into a Roth IRA provided that the individual's adjusted gross income is below a certain level in the tax year in which the rollover occurs.
Wednesday February 10, 2010
Gift of Equity
What Does Gift Of Equity Mean?
The sale of a home made to a family member or someone with whom the seller has had a previous relationship, at a price below the current market value. The difference between the actual sales price and the market value of the home is called the gift of equity. Most lenders allow the gift to count as a down payment on the home.
Investopedia explains Gift of Equity
A gift of equity requires a gift of equity letter that is signed by both the seller and the buyer. A gift of equity can have tax consequences, as it could impact the asset's cost basis for the new homeowner and have capital gains implications for the seller.
Thursday February 11, 2010
Cookie Jar Accounting
What Does Cookie Jar Accounting Mean?
An accounting practice in which a company uses generous reserves from good years against losses that might be incurred in bad years. Cookie jar accounting is a sign of misleading accounting practices.
Investopedia explains Cookie Jar Accounting
This gives the sense of "income smoothing", because earnings are understated in good years and overstated in bad years. You may have heard of companies taking special charges or write-downs - that's just another flavor of cookie jar accounting.
Friday February 12, 2010
Window Dressing
What Does Window Dressing Mean?
A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.
Investopedia explains Window Dressing
Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. Another variation of window dressing is investing in stocks that don't meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund's holdings, so clients really have no idea what they are paying for.
Window dressing may make a fund appear more attractive, but you can't hide poor performance for long.
Saturday February 13, 2010
Bank Holiday
What Does Bank Holiday Mean?
Any business day during which commercial banks and savings & loans institutions are closed for business to the public, specifically at physical locations. These holidays usually coincide with federal holidays in the United States, but each country defines is own bank holidays.
Infrequently, a bank holiday can also refer to a day where there is an emergency bank closure to avert a bank run. This type of bank holiday occurred as a result of the Emergency Banking Act of 1933 during the Great Depression in the United States.
Investopedia explains Bank Holiday
In the United States, scheduled bank holidays do not necessarily coincide with stock market or capital market holidays, although they do tend to be federal holidays. There will never be two consecutive business days that are scheduled bank holidays (during which banks are closed to the public.)
Most online banking systems will still allow access by customers even on bank holidays.
January 31st to February 6th
Sunday January 31, 2010
Christmas Tree
What Does Christmas Tree Mean?
An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at different strike prices. When drawn structurally, the strike price of the long option is located below the two successively higher written calls and loosely resembles a Christmas tree.
Investopedia explains Christmas Tree
This strategy is used when an investor believes a stock is going to make a move higher. It is a variation of the ratio spread, so a significant upward move in the stock price will result in a very large loss due to the extra short call. The staggered strike prices for the written calls in the Christmas tree strategy reduce the amount of loss incurred when the share price rises more than expected, unlike the ratio spread, where the call options have the same strike.
Monday February 1, 2010
Boston Snow Indicator
What Does Boston Snow Indicator Mean?
A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For example, in Christmas of 1995, Boston received snow and the following year, the S&P 500 increased by more than 20%.
Investopedia explains Boston Snow Indicator
As you may have guessed, there is no logical correlation between whether there is snow in Boston on Christmas and the performance of the stock market. Any incidence of a white Christmas in Boston and bullish market performance in the following year are purely coincidental. This may be why this indicator is also referred to as the "BS indicator".
Tuesday February 2, 2010
Santa Claus Rally
What Does Santa Claus Rally Mean?
A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week.
Investopedia explains Santa Claus Rally
Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.
Wednesday February 3, 2010
Year Over Year - YOY
What Does Year Over Year - YOY Mean?
A method of evaluating two or more measured events to compare the results at one time period with those from another time period (or series of time periods), on an annualized basis. Year-over-year comparisons are a popular way to evaluate the performance of investments. Any measurable events that recur annually can be compared on a year-over-year basis - from annual performance, to quarterly performance, to daily performance.
Investopedia explains Year Over Year - YOY
Year-over-year performance is frequently used by investors seeking to gauge whether a company's financial performance is improving or worsening. For example, a business may report that its revenues have increased for the third quarter on a year-over-year basis for the last three years. This means that revenues at that company in the third quarter of year three were higher than revenues in the third quarter in year two, which were higher than revenues in the third quarter of year one.
As another example, a mutual fund that returned 50% last year may have a YOY return of 12%, as the year-over-year return takes into account each annual return since the fund's inception.
Thursday February 4, 2010
Tax Selling
What Does Tax Selling Mean?
A type of sale whereby an investor sells an asset with a capital loss in order to lower or eliminate the capital gain realized by other investments. Tax selling allows the investor to avoid paying capital gains tax on recently sold or appreciated assets.
Investopedia explains Tax Selling
When participating in tax selling; an investor must not execute a wash sale. Wash sales occur when an investor sells an asset through a broker in order to realize a loss, but simultaneously repurchases the same asset from another broker. This strategy allows the investor to maintain his or her position while incurring a capital loss. Wash sales are illegal, whereas tax selling is allowable.
Tax selling often occurs in December, as investors try to realize capital losses for the upcoming income tax season. If investors would like to repurchase the shares sold for a loss, they can do so after the 30-day wash sale rule no longer applies. In addition, shares sold for a loss must have been in the investor's possession for more than 30 days.
Friday February 5, 2010
Fiscal Year-End
What Does Fiscal Year-End Mean?
The completion of a one-year, or 12-month, accounting period. A firm's fiscal year-end does not necessarily need to fall on December 31, and can actually fall on any day throughout the year.
Investopedia explains Fiscal Year-End
The reason that a company's fiscal year often differs from the calendar year and may not close on December 31 is due to the nature of a company's needs. For example, retailers tend to close their books at the end of January due to the large amount of December sales. If the fiscal year-end is too close to a heavy selling season, the company will be hard-pressed to produce its annual financial statements, count inventories, etc. because its manpower will be going toward selling its product.
Saturday February 6, 2010
January Effect
What Does January Effect Mean?
A general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.
Investopedia explains January Effect
The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.
January 24th to January 30th
Sunday January 24, 2010
January Barometer
What Does January Barometer Mean?
A theory stating that the movement of the S&P 500 during the month of January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year.
Investopedia explains January Barometer
If an investor believes in the ability of the January barometer to predict the equity market's performance, he or she will only invest in the market in the years when the barometer predicts the market will rise, and stay out of the market when it forecasts a market pullback.
While the January barometer has been seen to produce better than 50% accuracy rates during 20-year periods, it is difficult to produce excess returns by using it since the improved performance by staying out of the market during bad times can be more than offset by larger losses incurred when the barometer incorrectly predicts a bull market.
Monday January 25, 2010
World Economic Outlook - WEO
What Does World Economic Outlook - WEO Mean?
A report by the International Monetary Fund (IMF) that contains analysis and projections of the integral elements of the IMF's surveillance of economic developments and policies in its member countries, and of the developments in the global financial markets and economic system. The World Economic Outlook (WEO) is usually prepared twice a year and is used in meetings of the International Monetary and Financial Committee.
Investopedia explains World Economic Outlook - WEO
The WEO presents the IMF's analysis and projections of global economic developments and classifies their analysis by region and stage of economic development. This report is the main instrument of disseminating the findings and analysis of their global surveillance activities to the world.
Tuesday January 26, 2010
Forward Rate Agreement - FRA
What Does Forward Rate Agreement - FRA Mean?
An over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used along with the termination date and notional value. On this type of agreement, it is only the differential that is paid on the notional amount of the contract.
Also known as a "future rate agreement".
Investopedia explains Forward Rate Agreement - FRA
Typically, for agreements dealing with interest rates, the parties to the contract will exchange a fixed rate for a variable one. The party paying the fixed rate is usually referred to as the borrower, while the party receiving the fixed rate is referred to as the lender.
For a basic example, assume Company A enters into an FRA with Company B in which Company A will receive a fixed rate of 5% for one year on a principal of $1 million in three years. In return, Company B will receive the one-year LIBOR rate, determined in three years' time, on the principal amount. The agreement will be settled in cash in three years.
If, after three years' time, the LIBOR is at 5.5%, the settlement to the agreement will require that Company A pay Company B. This is because the LIBOR is higher than the fixed rate. Mathematically, $1 million at 5% generates $50,000 of interest for Company A while $1 million at 5.5% generates $55,000 in interest for Company B. Ignoring present values, the net difference between the two amounts is $5,000, which is paid to Company B.
Wednesday January 27, 2010
Headline Inflation
What Does Headline Inflation Mean?
The raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes current year prices based on the base year's values.
The headline figure is not adjusted for seasonality or for the often volatile elements of food and energy prices, which are removed in the Core CPI. Headline inflation will usually be quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis.
Also known as "top-line inflation".
Investopedia explains Headline Inflation
Inflation is a great threat to long-term investors because it erodes the value of future dollars. Inflation can stifle economic growth and cause a rise in prevailing interest rates.
While headline inflation tends to get the most attention in the media, core inflation is often considered the more valuable metric to follow. Core inflation removes the CPI components that can exhibit large amounts of volatility month to month, which can cause unwanted distortion to the headline figure. Both headline and core results are followed closely by investors, and are also used by economists and central banking figures to set economic growth forecasts and monetary policy.
Thursday January 28, 2010
Freeze Out
What Does Freeze Out Mean?
An action taken by a firm's majority shareholders those pressures minority holders to sell their stakes in the company. A variety of maneuvers may be considered freeze-out tactics, such as the termination of minority shareholder employees or the refusal to declare dividends.
Also referred to as a "squeeze out".
Investopedia explains Freeze Out
Freeze outs usually occur closely held companies, where majority shareholders can converse with one another. Majority shareholders attempt to freeze out the minority from the decision making process, rendering minority voting rights useless. Such actions are often illegal and may be overturned by the courts.
Friday January 29, 2010
Commodity Index
What Does Commodity Index Mean?
An index that tracks a basket of commodities to measure their performance. These indexes are often traded on exchanges, allowing investors to gain easier access to commodities without having to enter the futures market. The value of these indexes fluctuates based on their underlying commodities, and this value can be traded on an exchange in much the same way as stock index futures.
Investopedia explains Commodity Index
There is a wide range of indexes on the market, each of them varying by their components. The Reuters/Jefferies CRB Index, which is traded on the NYBOT, comprises 19 different types of commodities ranging from aluminum to wheat. They also vary in the way they are weighted; some indexes, for instance, are equally weighted and others have a predetermined, fixed weighting scheme.
Saturday January 30, 2010
FDIC Problem Bank List
What Does FDIC Problem Bank List Mean?
A list of commercial banks in the U.S. that are considered to be in financial difficulty. The Federal Deposit Insurance Corporation (FDIC) issues this problem list quarterly based on liquidity, capital levels and asset quality. Only institutions that are insured by the FDIC through the Deposit Insurance Fund (DIF) are included on the list. The actual names of the banks are not given, but the total assets are provided.
Investopedia explains FDIC Problem Bank List
Problem institutions are chosen based on financial and operational criteria. The banks are given a ranking from one to five, with one being the most sound and five being the least. In order to be considered a four or five (a problem bank) the institution must have financial, managerial or operational weaknesses that threaten its continuing financial viability. The numbers of banks on the list are used to evaluate the strength of the financial industry as a whole. The banking industry is then used as a lagging indicator for the overall economy.
January 17th to January 23rd
Sunday January 17, 2010
Indemnity Insurance
What Does Indemnity Insurance Mean?
An insurance policy that aims to protect business owners and employees when they are found to be at fault for a specific event such as misjudgment. Typical examples of indemnity insurance include professional insurance policies such as malpractice insurance, and errors and omissions insurance, which indemnify professionals against claims made in the workplace.
Investopedia explains Indemnity Insurance
Errors and omissions insurance is commonly sought (and often required) in financial industries, while deferred compensation indemnity insurance has become popular as a way for company executives to protect future money owed to them, even if the company has filed for bankruptcy.
Health indemnity insurance is sometimes used when a person is in between health plans, and will cover some (but not all) expenses.
Monday January 18, 2010
Exchange Rate Mechanism - ERM
What Does Exchange Rate Mechanism - ERM Mean?
An exchange rate mechanism is based on the concept of fixed currency exchange rate margins. However, there is variability of the currency exchange rates within the confines of the upper and lower end of the margins. This currency exchange rate mechanism is also commonly called a semi-pegged currency system.
Investopedia explains Exchange Rate Mechanism - ERM
The most notable exchange rate mechanism was the one that was in effect in Europe. The goal of the European Exchange Rate Mechanism was to reduce exchange rate variability and achieve monetary stability in Europe prior to the introduction of the single currency - the euro - on January 1, 1999.
Tuesday January 19, 2010
Predatory Lending
What Does Predatory Lending Mean?
Unscrupulous actions carried out by a lender to entice, induce and/or assist a borrower in taking a mortgage that carries high fees, a high interest rate, strips the borrower of equity, or places the borrower in a lower credit rated loan to the benefit of the lender. As with most things of a dishonest nature, new and different predatory lending schemes frequently arise.
Investopedia explains Predatory Lending
Many states have anti predatory lending laws. A dedicated consumer who shops around for a mortgage is unlikely to be taken by predatory lending. Additionally, becoming more financially literate helps borrowers spot red flags and avoid questionable lenders. The U.S. Department of Housing and Urban Development (HUD) has also been taking measures to combat predatory lending.
Wednesday January 20, 2010
Frugalista
What Does Frugalista Mean?
People who keep up with fashion trends without spending a lot of money. Frugalistas stay fashionable by shopping through alternative outlets, such as online auctions, secondhand stores and classified ads. They also reduce the amount of money spent in other areas of their lives, such as by growing their own food and reducing entertainment expenses. This is a popular term during recessions.
Investopedia explains Frugalista
Frugalistas also try to maintain expensive-looking cosmetic appearances. For example, they may still get an expensive haircut, but they might cut back on their TV subscription to afford the recurring expense.
Thursday January 21, 2010
Escrow
What Does Escrow Mean?
A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Securities, funds and other assets can be held in escrow.
Investopedia explains Escrow
An escrow account can be used in the sale of a house, for example. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. This assures the seller - in the process of allowing the house to be inspected - that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and title is transferred to the buyer.
Friday January 22, 2010
Junk Fees
What Does Junk Fees Mean?
Nebulous charges assessed at the closing of a mortgage that go to the originator or lender. These fees are hidden in the mortgage documents and are usually assessed as raw dollars rather than "points" or a percentage of the loan. Junk fees may or may not pay for an actual service to the borrower, but they typically are not known to the borrower prior to signing. Some common fees that may be considered junk fees include settlement fees, sign-up fees, underwriting fees, funding fees, translation fees and messenger fees.
Also known as "padding fees" or "garbage fees".
Investopedia explains Junk Fees
The idea behind junk fees is that at the end of the mortgage signing process, the borrower is already committed to signing the loan and will not walk away from the table. Junk fees, however, may not necessarily be noted in the good faith estimate the borrower receives a few days prior to closing.
Most junk fees are nominal compared to mortgage points and other major closing costs.
Saturday January 23, 2010
McMansion
What Does McMansion Mean?
A slang term that describes a large, opulent house that may be generic in style and represents a good value for a homebuyer in terms of its size. This type of home is built to provide middle and/or upper middle class homeowners with the luxurious housing experience that was previously only available to high-net-worth individuals.
The McMansion term is as a play on McDonald's fast food restaurants, as these homes also represent the pervasiveness and excessive consumption that critics often associate with McDonald’s.
Investopedia explains McMansion
McMansions are often considered a status symbol because their size (often in excess of 3,000 square feet) may exceed the amount of space that shrinking modern families actually need or can afford to maintain.
Many McMansion homeowners live beyond their means as mortgages on these monstrous properties may be 100% mortgages, interest-only mortgages and/or amortized over 40 or more years. The cost of utilities and maintenance in a larger home are also more significant, as is the cost of commuting from the distant suburban settings in which these homes are often located.
January 10th to January 16th
Sunday January 10, 2010
Surrender Period
What Does Surrender Period Mean?
The amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty. Withdrawing money before the agreed-upon holding period can result in a surrender charge.
Investopedia explains Surrender Period
Generally, but not always, the longer the surrender period, the better the terms of the annuity. After the surrender period has passed, the investor is free to withdraw the funds without being subject to a fee.
Monday January 11, 2010
Cramdown
What Does Cramdown Mean?
A bankruptcy concept that is often employed to obtain Chapter 11 bankruptcy reorganization plan while there are still objections from one or more creditors. Cramdown allows the bankruptcy courts to modify loan terms subject to certain conditions in an attempt to have all parties come out better than they would have without such modifications. The conditions are mainly that the new terms are fair and equitable to all parties involved.
Investopedia explains Cramdown
The term "cramdown" comes from the idea that the loan changes are "crammed down" creditors' throats - they can either renegotiate the loan through Chapter 11 reorganization, or lose everything through a Chapter 7.
Secured creditors will often do better in Chapter 11 reorganization than unsecured creditors, and are usually the ones with objections. The unsecured creditor’s best defense against an unwanted reorganization plan is usually to stay away from arguing whether the plan is fair and equitable and to instead challenge whether the debtor can meet the plan's obligations.
During the financial crisis of 2008, cramdown was used to help troubled mortgage borrowers by allowing the bankruptcy courts to alter mortgage terms, subject to certain conditions, in an attempt to keep borrowers from foreclosure when one or more tranches of the mortgage did not agree to loan modification.
Tuesday January 12, 2010
Pre-Encashable Deposit
What Does Pre-Encashable Deposit Mean?
A deposit made in a term deposit or CD that allows the account holder to withdraw funds without penalty to the principal. A pre-encashable deposit is a popular investment vehicle for individuals looking for full flexibility while saving in a guaranteed account.
Investopedia explains Pre-Encashable Deposit
Pre-encashables are available in a wide range of investment vehicles, including term deposits, GICs and CDs, all of which can be held in tax-deferred accounts. Although pre-encashables usually advertise withdrawals without penalty, most deposits require a certain minimum investment period before funds can be withdrawn without penalty to the principal.
Wednesday January 13, 2010
Hardship Withdrawal
What Does Hardship Withdrawal Mean?
An emergency withdrawal from a retirement plan that may be subject to certain tax or account penalties. In the United States, funds withdrawn prior to the age of 59.5 are typically subject to a 10% Internal Revenue Service (IRS) early withdrawal penalty, as well as standard income taxes.
Investopedia explains Hardship Withdrawal
Hardship withdrawals from a retirement plan such as a 401(k) can't be replaced. The money that is withdrawn is permanently removed from the account, and only scheduled future contributions are permitted.
The stiff penalties and criteria for hardship withdrawals are meant to deter investors from using this option except as a last resort. The ability to have money free from future income taxes and capital gains taxes (a trait of most retirement accounts) is an extremely valuable asset, and is necessary for many people to achieve a stable retirement.
Thursday January 14, 2010
Pay Yourself First
What Does Pay Yourself First Mean?
A phrase commonly used in personal finance and retirement planning literature that means to automatically route your specified savings contribution from each paycheck at the time it is received.
Because the savings contributions are automatically routed from each paycheck to your investment account, this process is said to be "paying yourself first"; in other words, paying yourself before you begin paying your monthly living expenses and making discretionary purchases.
Investopedia explains Pay Yourself First
This simple system is touted by many personal finance professionals and retirement planners as a very effective way of ensuring that individuals continue to make their chosen savings contributions month after month. It removes the temptation to skip a given month's contribution and the risk that funds will be spent before the contribution has been made.
Regular, consistent savings contributions go a long way toward building a long-term nest egg, and some financial professionals even go so far as to call "pay yourself first" the golden rule of personal finance.
Friday January 15, 2010
Tax Fairness
What Does Tax Fairness Mean?
A tax platform based on an ideal that aims to create a system of taxation that is fair, clear and equivalent for all taxpayers. Overall, tax fairness looks to limit the amount of tax legislation and rules that benefit one segment of the tax-paying population over another.
Investopedia explains Tax Fairness
Many groups, politicians and individuals that push for tax fairness are looking to remove loopholes, incentives and cheating within the tax system. Tax fairness supporters believe these practices place an undue tax burden on certain segments of the tax-paying population, while making it easy for other segments to significantly lower their tax burdens.
Saturday January 16, 2010
Nonpersonal Time Deposit
What Does Nonpersonal Time Deposit Mean?
Time deposit accounts held by corporate bank customers that pay a fixed amount of interest for a specified time period. Money may not be withdrawn without advance notice at the risk of incurring an early withdrawal penalty.
Investopedia explains Nonpersonal Time Deposit
Examples of nonpersonal time deposits include money market deposit accounts, certificates of deposit and investment accounts. Nonpersonal time deposits are not subject to reserve requirements under the Federal Reserve's Regulation D. Federally insured banks are required to report their nonpersonal time deposit account balances to their regional Federal Reserve Bank on a regular basis.
January 3rd to January 9th
Sunday January 3, 2010
No Documentation Mortgage - No Doc
What Does No Documentation Mortgage - No Doc Mean?
A type of reduced-documentation-required mortgage program in which income and assets aren't disclosed on the loan application and employment isn't verified. However, a credit check is typically required as lenders are counting on the fact that the borrower has a good credit history. No doc mortgages usually fall into the Alt-A classification, and tend to carry a higher interest rate and require a higher down-payment than a prime mortgage.
Investopedia explains No Documentation Mortgage - No Doc
In some circumstances, borrowers may be enticed to use a no doc mortgage in order to obtain a mortgage they wouldn't otherwise be able to afford. A borrower should not be persuaded by a lender or mortgage broker to use a no doc mortgage when a more traditional mortgage is reasonably available at a lower interest rate.
A possible use of a no doc mortgage is by a business person who is moving a business from one community to another and has no income or assets that can be documented or verified.
Monday January 4, 2010
Beacon Score
What Does Beacon Score Mean?
A number generated by the Equifax Credit Bureau to rank an individual's credit-worthiness. Beacon scores are credit scores, which are determined through a complex algorithm. These numbers tell the lender how likely it is that the borrower will repay the loan. When NextGen FICO scores started being used, the Beacon score was replaced with the Pinnacle score.
Mathematical criteria involved in calculating a Beacon score can include late payments, current debts, length of time an account has been open, types of credit and new applications for credit.
Investopedia explains Beacon Score
Beacon and other credit scores affect the interest rate on a loan. If the borrower's score is too low, the lender will charge more interest or may not lend at all.
Each bureau uses a different name for its score, even if it uses the same FICO algorithm to generate the score. For example:
- Experian uses the term "FICO or FICO II",
- TransUnion uses "Empirica"
- Equifax uses "Beacon"
For NextGen FICO scores, (created by Fair Isaac Corp.) the new names became:
- FICO advanced risk score, used by Experian
- Precision, used by TransUnion
- Pinnacle, used by Equifax
Tuesday January 5, 2010
Double No-Touch Option
What Does Double No-Touch Option Mean?
A type of exotic option that gives an investor an agreed upon payout if the price of the underlying asset does not reach or surpass one of two predetermined barrier levels. An investor using this type of option pays a premium to his or her broker and in turn receives the right to choose the position of the barriers, the time to expiration, and the payout to be received if the price fails to breach either barrier. With this type of option, the maximum possible loss is just the cost of setting up the option.
A double no-touch option is the opposite of a double one-touch option.
Investopedia explains Double No-Touch Option
This type of option is useful for a trader who believes that the price of an underlying asset will remain range-bound over a certain period of time. Double no-touch options are growing in popularity among traders in the forex markets.
For example, assume that the current USD/EUR rate is 1.20 and the trader believes that this rate will not change dramatically over the next 14 days. The trader could use a double no-touch option with barriers at 1.19 and 1.21 to capitalize on this outlook. In this case, the trader stands to make a profit if the rate fails to move beyond either of the two barriers.
Wednesday January 6, 2010
Debt-To-Income Ratio - DTI
What Does Debt-To-Income Ratio - DTI Mean?
A personal finance measure that compares an individual's debt payments to the income he or she generates. This measure is important in the lending industry as it gives lenders an idea of how likely it is that the borrower will repay the loan.
Investopedia explains Debt-To-Income Ratio - DTI
The higher this ratio, the more burden there is on the individual to make payments on his or her debts. If the ratio is too high, the individual will have a hard time accessing other forms of financing.
Thursday January 7, 2010
Hobby Loss
What Does Hobby Loss Mean?
A non-deductible loss incurred as a result of doing an activity for personal pleasure instead of for profit. A taxpayer cannot deduct the hobby loss as a business loss. A "hobby loss rule" is used to determine whether an activity is a hobby or a business.
Investopedia explains Hobby Loss
The "hobby loss rule" states that if an activity is profitable in three years out of five then it can be treated as a business in the one or two year(s) that a loss was realized.
For example, if a man builds and sells birdhouses as a hobby, but only makes a profit one year out of the last five, then the losses are considered a hobby loss. The law does not prohibit taxpayers from making deductions on such activities if they are prepared to argue that the losses were created while attempting to make profit.
Friday January 8, 2010
Teaser Rate
What Does Teaser Rate Mean?
An initial rate on an adjustable-rate mortgage (ARM). This rate will typically be below the going market rate, and is used by lenders to entice borrowers to choose ARMs over traditional mortgages. The teaser rate will be in effect for only a few months, at which point the rate will gradually climb until it reaches the full indexed rate, which will be a static margin rate plus the floating rate index to which the mortgage is tied (usually the LIBOR index).
Investopedia explains Teaser Rate
The use of teaser rates tends to grow dramatically during times when long-term interest rates move toward historical lows. Lenders stand to make much more money on ARMs if interest rates rise, while borrowers with ARMs will be faced with high interest payments.
Saturday January 9, 2010
Love Money
What Does Love Money Mean?
Seed money or capital given by family or friends to an entrepreneur to start a business. The decision to lend money and the terms of the agreement are usually based on qualitative factors and the relationship between the two parties, rather than on a formulaic risk analysis.
Investopedia explains Love Money
Love money is usually given to entrepreneurs who have proved their responsibility to close family and friends over the years, but who fail to meet the capital requirements that financial institutions look for in borrowers. An angel investor's love money is sometimes the only way a business can get off the ground; this type of financing can allow for growth that would be impossible through traditional financing channels.
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November 1st to 7th
Sunday November 1, 2009
BRIC ETF
What Does BRIC ETF Mean?
An exchange-traded fund that invests in stocks and listed securities associated with the countries of Brazil, Russia, India and China. BRIC ETFs are designed to give holders diversified exposure to these growing countries. Assets are invested in both locally issued stocks and shares that trade on exchanges in the U.S. and Europe. The portfolio allocation among the four counties may vary from fund to fund, but all ETFs in the space should be passively invested around an underlying index.
Investopedia explains BRIC ETF
Investing in the BRIC economies has been on the rise as increased economic globalization creates higher levels of world trade and commerce. Brazil, Russia, India and China have had strong growth in gross domestic product (GDP) over the past few decades, with recent rates much higher than those found in the United States and the Eurozone. BRIC ETFs may carry slightly higher expense ratios than funds focused on the U.S. and Europe due to the higher costs of investing directly in these foreign stock markets.
Monday November 2, 2009
China ETF
What Does China ETF Mean?
Exchange traded funds that invest in and track the equity stakes of China-based companies, either through investment on Chinese stock exchanges or via foreign-listed shares such as American depositary receipts (ADRs). Because of regulations against certain types of foreign investment and the existence of many large state-run companies operating in China, ETFs that represent the nation are limited in their investment choices to companies that have public shares to offer. As with all ETFs, intraday trading is offered for China ETFs, which makes for increased liquidity and flexibility over China-based mutual funds.
Investopedia explains China ETF
By holding an ETF, investors can increase exposure to China and still achieve the diversification of an index. Many investors are drawn to China because of its world-leading population and strong economic growth, but because many of the nation's companies are still state-run or otherwise private, the China ETFs are skewed in their sector allocation toward those sectors that have seen public offerings of stock. These sectors include telecommunications, financial, and energy. As the Chinese markets open up, ETFs that model the region will become more diversified by sector.
Tuesday November 3, 2009
Cover On A Bounce
What Does Cover On A Bounce Mean?
The covering of a short position after it has reached and bounced off a level of support. This strategy waits for the price to move to a support level, instead of selling before, to see if the level will hold - because the trader will benefit if it doesn't hold. Once the security bounces, it is clear the security will have trouble moving down further, so the trade covers the short position.
Investopedia explains Cover On A Bounce
Levels of support act as a backstop to a further move downward in price, but can sometimes fail to hold. If a security falls below a support level, it will often lead to an even stronger downward move as the level is taken out. The trader waiting for a bounce is betting that the support level will not hold and they will benefit if this materializes.
Wednesday November 4, 2009
Socionomics
What Does Socionomics Mean?
The study of social mood and its effects of social behavior. Socionomic theory suggests that trends in social actions such as the economy, financial markets and political preferences are influenced by trends in social moods.
Investopedia explains Socionomics
The socionomic perspective can be applied to any area of social activity, including economics and finance. Some examples of socionomic views in contrast to traditional views of human behavior are:
• Where the traditional view would be that recessions cause businesses to become cautious, the socionomic view says that businesses become cautious and cause recessions.
• Traditionally, it is thought that a bull market makes investors optimistic. Socionomics says that optimistic investors create a bull market.
• It is thought in the traditional view that scandals make people outraged. Socionomics believes that outraged people will seek out a scandal.
Thursday November 5, 2009
Spoo
What Does Spoo Mean?
A slang term for an S&P 500 contract that trades on the Chicago Mercantile Exchange (CME). The S&P 500 contracts trade on the CME independent of the S&P 500 index itself, and expire quarterly in the months of March, June, September and December.
The word originated in the XMI pit on the America Stock Exchange (AMEX) in New York. It comes from the symbol for the September contract: "SPU". Even though the name is based on the September contract symbol, the term is used to describe contracts of all expiries. When somebody speaks of the spoo, they are referring to the current, most active month trading.
Investopedia explains Spoo
Trading a spoo is a bet on where the S&P 500 index will be at some point in the future, so these securities almost always trade at a premium to the fair value of the index. This is because of the assumption that the value of equities will rise as time progresses.
Friday November 6, 2009
Recession Proof
What Does Recession Proof Mean?
A term used to describe an asset, company, industry or other entity that is believed to be economically resistant to the outcomes of a recession. Oftentimes, recession-proof stocks are added to many investment portfolios during times of economic decline, which may be the onset of a recession. Securities that are believed to be recession proof often have a negative beta values, which would indicate an inverse relationship to the greater market.
Investopedia explains Recession Proof
Although many items have been labeled as recession proof, very few turn out to be so. Quite often, the long-reaching consequences of a recessionary period are too much for even the most recession-proof firms, assets etc. to withstand.
Securities that are believed to be recession proof often have negative beta values, which indicate an inverse relationship to the greater market. It was once believed that gold and gold stocks, for example, were recession proof due to gold's negative beta value. However this belief has been disproved over the long run.
Saturday November 7, 2009
Green Shoots
What Does Green Shoots Mean?
A term used to describe signs of economic recovery or positive data during an economic downturn. The term green shoots is a reference to plant growth and recovery, and has been used during down economies to describe signs of similar growth.
Investopedia explains Green Shoots
One of the first uses of the term green shoots was to describe signals of economic growth during the economic downturn in the United Kingdom in 1991. The term gained greater notoriety when it was used by U.S. Federal Reserve chairman Ben Bernanke to describe positive economic data during the financial crisis of 2008-2009.
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October 25th to 31st
Sunday October 25, 2009
New York Dollar
What Does New York Dollar Mean?
The buying power of a U.S. dollar in the city of New York. The New York dollar is calculated by subtracting the additional cost of living in New York, and then adding back the additional income residents tend to command as a result. Once calculated, the remaining amount is a rough estimate of what your dollar is worth in this very expensive city.
Investopedia explains New York Dollar
Living in New York is much more expensive than most other places in America. A dollar earned and spent in this city does not go as far, and once this is taken into account, you are left with the New York dollar. For example if you take $1 and subtract the additional cost of housing (15 cents), taxes (5.2 cents), basic costs (4.1 cents) and lifestyle (13.3 cents), and then add additional wages paid (16 cents), you are left with the buying power of a dollar in New York: 100 - 15 - 5.2 - 4.1 - 13.3 + 16 = 78.4 cents.
Monday October 26, 2009
Whisper Number
What Does Whisper Number Mean?
1. Traditionally, the unofficial and unpublished earnings per share (EPS) forecasts that circulate among professionals on Wall Street. In this context, whisper numbers were generally reserved for the favored (wealthy) clients of a brokerage.
2. A company's forecasted future earnings or revenues according to the collective expectations of individual investors. In this sense, a whisper number would be compiled by a website polling its visitors. Individuals come up with a whisper number using their own analyses of company financials, market trends, gut feel, etc.
Investopedia explains Whisper Number
Whisper numbers are especially useful when they differ from the consensus forecast. They can be used as a tool to help spot (or avoid) an earnings surprise (or disappointment). Of course, this is only relevant if they are more accurate than the consensus estimate, and this depends on the sources used to calculate them.
Increased regulatory scrutiny on the brokerage industry made it much more difficult (if not impossible) to get a whisper number in the traditional sense. For example, regulations like Sarbanes-Oxley provided for stricter rules in how companies disclose financial data. Employees, financial professionals and brokerages face significant penalties if they provide insider earnings data to a select group of people. While it's impossible to know the extent to which whisper numbers still circulate among the wealthy, it's highly unlikely that a small investor could access this data. For these reasons, the newer definition (expectations of individuals) is of more relevance to regular individual investors.
Tuesday October 27, 2009
Tenbagger
What Does Tenbagger Mean?
A stock whose value increases 10 times its purchase price. This expression was coined by Peter Lynch, one of the greatest investors of all time, in his book "One Up On Wall Street" (1989).
Investopedia explains Tenbagger
These types of returns are considered once-in-a-lifetime investments. Some of the most famous examples of tenbaggers include now blue-chip stocks like Wal-Mart, Hewlett-Packard and General Electric. Many investors are constantly in search of the elusive tenbagger, but there isn't an exact science to discover tenbagger stocks. Generally, these explosive companies are smaller companies (market cap under $1 billion) with large potential markets. Over time, these companies grow into their potential markets, providing patient investors with handsome returns.
Wednesday October 28, 2009
Core Inflation
What Does Core Inflation Mean?
A measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation.
Investopedia explains Core Inflation
Core inflation is most often calculated by taking the Consumer Price Index (CPI) and excluding certain items from the index, usually energy and food products. Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.
Thursday October 29, 2009
Matrix Trading
What Does Matrix Trading Mean?
A fixed-income trading strategy that looks for discrepancies in the yield curve, which an investor can capitalize upon by instituting a bond swap. Discrepancies come about when current yields on a particular class of bond (corporate, municipal, etc.) don't match up with the rest of the yield curve or its historical norms.
Investopedia explains Matrix Trading
An investor performing a matrix trade could be looking to profit purely as an arbitrageur - by waiting for the market to "correct" a yield spread discrepancy - or by trading up for free yield, for example, by swapping debt with similar risks but different risk premiums.
Yield curves can be thrown off historical patterns for any number of reasons, but most of those reasons will have a common source: uncertainty about the future of financial markets. Individual classes of bonds may also be inefficiently priced for a period of time, such as a high-profile corporate default that sends shock waves through corporate debt with similar ratings.
Friday October 30, 2009
Rule Of 70
What Does Rule Of 70 Mean?
A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it would take to double your money
Investopedia explains Rule Of 70
Another useful application of the rule of 70 is in the area of estimating how long it would take a country's real GDP to double. Similar to compound interest rates, one can use the GDP growth rate in the divisor of the rule. For example, if the growth rate of the China is 10%, the rule of 70 predicts it would take 7 years (70/10) for China's real GDP to double.
Saturday October 31, 2009
Equity Risk Premium
What Does Equity Risk Premium Mean?
The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium.
Also referred to as "equity premium".
Investopedia explains Equity Risk Premium
The reason behind this premium stems from the risk-return tradeoff, in which a higher rate of return is required to entice investors to take on riskier investments. The risk-free rate in the market is often quoted as the rate on longer-term government bonds, which are considered risk free because of the low chance that the government will default on its loans. On the other hand, an investment in stocks is far less guaranteed, as companies regularly suffer downturns or go out of business.
If the return on a stock is 15% and the risk-free rate over the same period is 7%, the equity-risk premium would be 8% for this stock over that period of time.
October 18th to 24th
Sunday October 18, 2009
Rio Hedge
What Does Rio Hedge Mean?
When a trader who is facing financial or legal troubles hedges his or her position in an investment with a ticket to a tropical location (such as Rio de Janeiro). The idea behind the Rio hedge is that if the investment goes bad (either legally or through financial loss) the investor will use the ticket to escape.
Investopedia explains Rio Hedge
The Rio hedge is a joke in the investment community regarding the risks involved in trading. A traditional hedge will protect against potential financial risks associated with an investment. The Rio hedge pokes fun at protecting against risks, such as getting caught by the authorities, lenders, or owners of the funds under management.
Monday October 19, 2009
Dollar Drain
What Does Dollar Drain Mean?
When a country imports more goods and services from another country than it exports back to the same country. The net effect of spending more money importing than is received from exporting causes a net reduction in the importing country's reserves of the exporting country's currency.
Investopedia explains Dollar Drain
For example, if Canada has exports $500 million worth of goods and services to the U.S. and has also imported $650 million worth of goods and services from the U.S., the net effect will be a reduction in Canada's U.S. dollar reserves.
A dollar drain position should not be maintained indefinitely. As a result of the laws of supply and demand, importing more than is exported may cause a devaluation of the importing country's currency. However, this effect will be mitigated if foreign investors pour their money into the importing country's stocks and bonds, as these actions will increase the demand for the importing country's currency, causing it to appreciate in value.
Tuesday October 20, 2009
Calendar Effect
What Does Calendar Effect Mean?
A collection of assorted theories that assert that certain days, months or times of year are subject to above-average price changes in market indexes and can therefore represent good or bad times to invest. Some theories that fall under the calendar effect include the Monday effect, the October effect, the Halloween effect and the January effect.
Investopedia explains Calendar Effect
Most of the evidence for these effects is anecdotal, although there is a slight statistical case to be made for some of them, which is more than enough to encourage some investors to place their faith in them.
Proponents of the October effect, one of the most popular theories, argue that October is when some of the greatest crashes in stock market history, including 1929's Black Tuesday and Thursday and the 1987 stock market crash, occurred. While statistical evidence doesn't support the phenomenon that stocks trade lower in October, the psychological expectations of the October effect still exist.
Wednesday October 21, 2009
Gold Fund
What Does Gold Fund Mean?
A mutual fund or exchange-traded fund (ETF) that invests primarily in gold-producing companies or gold bullion. The price of shares within a gold fund should correlate very closely to the spot price of gold itself, assuming the fund holds the majority of its assets in bullion or in the stocks and bonds of gold miners and manufacturers.
Investopedia explains Gold Fund
While many mutual funds focus on manufacturing and production stocks within precious metals, a few new ETF entries have focused primarily on ownership of gold bullion. Gold funds are a valuable tool for investors, including speculators (gold can be a very volatile commodity) and those wishing to hedge against geopolitical instability. Gold is also valuable as a bet against a falling currency. By investing in a gold fund, a retail or institutional investor can gain exposure to this asset without the hassle of taking delivery of physical gold assets, which is often required in the commodities market.
Thursday October 22, 2009
Weekend Effect
What Does Weekend Effect Mean?
A phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday. Some theories that explain the effect attribute the tendency for companies to release bad news on Friday after the markets close to depressed stock prices on Monday. Others state that the weekend effect might be linked to short selling, which would affect stocks with high short interest positions. Alternatively, the effect could simply be a result of traders' fading optimism between Friday and Monday.
Investopedia explains Weekend Effect
The weekend effect has been a regular feature of stock trading patterns for many years. For example, according to a study by the Federal Reserve, prior to 1987 there was a statistically significant negative return over the weekends. However, the study did mention that this negative return had disappeared in the period from post-1987 to 1998. Since 1998, volatility over the weekends has increased again, and the phenomenon of the weekend effect remains a much debated topic.
Friday October 23, 2009
Mini Forex Account
What Does Mini Forex Account Mean?
A type of forex account that allows the trader to enter positions that are one-tenth the size of the standard lot of 100,000 units. A one-pip change in a currency pair (based in U.S. dollars), is equal to $1 when trading a mini lot, compared to $10 for a standard-lot trade. Mini lots are available to trade if you open a mini account with a forex dealer.
Investopedia explains Mini Forex Account
Mini forex accounts are commonly used by beginner traders who are looking to gain experience in the forex markets. Traders are not limited to only trading one lot at a time, so these accounts are ideal for increasing exposure as trading confidence builds. To make an equivalent trade to one standard lot, a trader can just trade 10 mini lots. By using mini lots instead of standard lots, a trader is able to customize the trade and obtain greater control of his or her risk.
Saturday October 24, 2009
Men's Underwear Index
What Does Men's Underwear Index Mean?
An unconventional measure of how well the economy is doing based on sales of men's underwear. The reasoning behind this measure assumes that men view underwear as a necessity (not a luxury item), so sales of this product should be steady - except during severe economic downturns, when men will wait longer to buy new underwear. The notable decrease in underwear sales is said to reflect the poor overall state of the economy. Conversely, when underwear sales pick up, the economy is considered to be improving.
Investopedia explains Men's Underwear Index
Former Fed Chairman Alan Greenspan subscribes to this theory, but its critics say it may not be accurate because women purchase a significant amount of underwear for men. Other critics argue that men do not buy new underwear until it's threadbare, regardless of how well the economy is doing.
October 11th to 17th
Sunday October 11, 2009
Alligator Spread
What Does Alligator Spread Mean?
An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market movements. An alligator spread is usually used in the options market to describe a collection of put and call options that may not be profitable.
Investopedia explains Alligator Spread
Pricing models and a more efficient market can help reduce the traditional spread on a security, but it is commissions that create the alligator spread, not market inefficiencies. The commissions are dependent on a transaction's brokers. Investors should check the commission schedules carefully to avoid having their profits devoured by the alligator spread.
Monday October 12, 2009
Piercing Pattern
What Does Piercing Pattern Mean?
A technical trading signal that is marked by a closing down day with a good-sized trading range, followed by a trading gap (drop) lower the following day that covers at least half of the upward length of the previous day's real body (the range between the opening and closing prices), and then closes up for the day. A piercing pattern often signals the end of a small to moderate downward trend.
Tuesday October 13, 2009
Repackaging
What Does Repackaging Mean?
When a private equity firm takes a public firm private by purchasing all of its common stock with leverage loans. The private equity firm then makes changes to the company, in effect "dressing up" the company, with an eye toward bringing it public again via an initial public offering (IPO).
Investopedia explains Repackaging
Repackaging is a very common and popular route taken by private equity firms. For instance, there were 77 IPOs brought to the market by private equity buyout firms in 2006. The goal is to improve the company that is taken over enough so that the funds received for the IPO of the newly packaged company will exceed the amount of funds sunk into the company. The risk is that changes made to the company will not actually improve it. In those cases, the company may not be able to be sold or must be sold for less than the original purchase price.
Wednesday October 14, 2009
Chinese Wall
What Does Chinese Wall Mean?
The ethical barrier between different divisions of a financial (or other) institution to avoid conflict of interest. A Chinese Wall is said to exist, for example, between the corporate-advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The "wall" is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, and allow staff to take advantage of facts that are not yet known to the general public.
Investopedia explains Chinese Wall
Maintaining client confidentiality is crucial to any firm, but particularly large multiservice businesses. Where firms are providing a wide range of services, clients must be able to trust that information about themselves will not be exploited for the benefit of other clients with different interests. And that means clients must be able to trust in Chinese Walls. Some Wall Street scandals in recent years, however, have made some people doubt the effectiveness of Chinese Walls, as well placed executives of respectable firms have traded illegally on inside information for their own benefit.
Thursday October 15, 2009
Mechanical Investing
What Does Mechanical Investing Mean?
Buying and selling stocks according to a screen based on predetermined criteria, usually with the help of technical indicators such as relative strength or momentum. This method allows traders to enter transactions without emotion and backtest their strategies by using historical data from any time period.
Investopedia explains Mechanical Investing
For example, one of the most common mechanical investing systems is called the Dogs of the Dow. This strategy involves buying the 10 stocks on the Dow Jones Industrial Average with the highest dividend yield at the beginning of each year. The portfolio is then adjusted each year to only include the 10 highest yielding stocks. Proponents of mechanical investing say that using this method of investing removes all emotion by allowing a computer to do the work of deciding whether investing in a certain asset is warranted
Friday October 16, 2009
October Effect
What Does October Effect Mean?
The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory.
Investopedia explains October Effect
Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month. Black Monday, Tuesday and Thursday all occurred in October 1929, after which came the Great Depression. In addition, the great crash of 1987 occurred on October 19, and saw the Dow plummet 22.6% in a single day.
Saturday October 17, 2009
Black Monday
What Does Black Monday Mean?
October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline, making Black Monday one of the most notorious days in recent financial history. By the end of the month, most of the major exchanges had dropped more than 20%.
Investopedia explains Black Monday
Interestingly enough, the cause of the massive drop cannot be attributed to any single news event because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, most agree that mass panic caused the crash to escalate.
Since Black Monday, a number of protective mechanisms have been built into the market to prevent panic selling, such as trading curbs and circuit breakers
October 4th to 10th
Sunday October 4, 2009
Short-Sale Rule
What Does Short-Sale Rule Mean?
A Securities and Exchange Commission (SEC) trading regulation that restricted short sales of stock from being placed on a downtick in the market price of the shares. Short sales could only be permitted on upticks (last trade higher than the one before) or zero-plus ticks (last trade is the same as previous, which was an uptick). The regulation was passed in 1938 to prevent selling shares short into a declining market; at the time market mechanisms and liquidity couldn't be guaranteed to prevent panic share declines or outright manipulation.
This regulation was rescinded in July 2007 by decree of the SEC; as a result short sales can occur (where eligible) on any price tick in the market, whether up or down.
The short sale rule was also known as the "plus-tick rule", "tick-test rule", or "uptick rule".
Investopedia explains Short-Sale Rule
The SEC began examining the possibility of eliminating this short-sale rule following the decimalization of the major stock exchanges in the early 2000s. Because tick changes were shrinking in magnitude following the change away from fractions, and U.S. stock markets had become more stable, it was felt that the restriction was no longer necessary.
The SEC ran a test program of stocks in 2003 to see if removing the short-sale rule would have any negative effects. After reviewing the results it was decided that the rule no longer needed to exist. However, naked shorting - selling shares short that don't exist or can't be verified - is still illegal.
Monday October 5, 2009
Inside Day
What Does Inside Day Mean?
A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
Investopedia explains Inside Day
An inside day is often used to signal indecision because neither the bulls nor the bears are able to send the price beyond the range of the previous day. If an inside day is found at the end of a prolonged downtrend and is located near a level of support, it can be used to signal a bullish shift in trend. Conversely, an inside day found near the end of a prolonged uptrend may suggest that the rally is getting exhausted and is likely to reverse.
Tuesday October 6, 2009
Harami Cross
What Does Harami Cross Mean?
A trend indicated by a large candlestick followed by a doji that is located within the top and bottom of the candlestick's body. This indicates that the previous trend is about to reverse.
Investopedia explains Harami Cross
A Harami cross can be either bullish or bearish, depending on the previous trend. The appearance of a Harami Cross, rather than a smaller body, increases the likelihood that the trend will reverse.
Wednesday October 7, 2009
Doji
What Does Doji Mean?
A name for candlesticks that provide information on their own and also feature in a number of important patterns. Dojis form when a security's open and close are virtually equal.
Investopedia explains Doji
A doji candlestick looks like a cross, inverted cross, or plus sign. Alone, doji are neutral patterns.
Thursday October 8, 2009
Bar Chart
What Does Bar Chart Mean?
A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates the highest price a security traded at during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. A single bar like the one below represents one day of trading.
Investopedia explains Bar Chart
These are the most popular type of chart used in technical analysis. The visual representation of price activity over a given period of time is used to spot trends and patterns.
Friday October 9, 2009
Daily Chart
What Does Daily Chart Mean?
A line graph that displays the intraday movements of a given security. This contrasts to longer term charts, such as those that show a security's movement over a period of days, months or even years
Investopedia explains Daily Chart
Daily charts display all of the price movement for the period and are typically used by day traders to implement short-term strategies.
Because the forex operates 24 hours a day, there is technically no stoppage of trading between one trading day and the next as there is in other markets. As a result, the convention is to consider a forex day to be from 5pm EST to the same time on the following day, and most daily charts are displayed this way.
September 29th to October 3rd
Tuesday September 29, 2009
Cash And Cash Equivalents – CCE
What Does Cash And Cash Equivalents - CCE Mean?
An item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately.
Investopedia explains Cash And Cash Equivalents - CCE
Examples of cash and cash equivalents are bank accounts, marketable securities and Treasury bills.
Wednesday September 30, 2009
Market Capitalization
What Does Market Capitalization Mean?
The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determining a company's size, as opposed to sales or total asset figures.
Frequently referred to as "market cap".
Investopedia explains Market Capitalization
If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).
Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual funds. The term should not be confused with a company's "capitalization," which is a financial statement term that refers to the sum of a company's shareholders' equity plus long-term debt.
The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Investment professionals differ on their exact definitions, but the current approximate categories of market capitalization are:
Large Cap: $10 billion plus and include the companies with the largest market capitalization.
Mid Cap: $2 billion to $10 billion
Small Cap: Less than $2 billion
Thursday October 1, 2009
Long Squeeze
What Does Long Squeeze Mean?
A long squeeze, which involves a single stock, occurs when a sudden drop in price incites further selling, pressuring long holders of the stock into selling their shares to protect against a dramatic loss. Less popular than its more famous brother, the short squeeze, long squeezes are most apt to be found in smaller, more illiquid stocks, where a few determined or panicking shareholders can create unwarranted price volatility in a short period of time.
Investopedia explains Long Squeeze
Short sellers can monopolize the trading in a stock for a brief period of time, creating a sudden drop in price. The main reason why long squeezes are so rare is that value buyers will step in once the price falls to a point deemed "too low", and bid the shares back up. A rapidly falling stock, without a fundamental basis for the drop, will soon be seen as a "value" play, but a rapidly rising stock will be seen as increasingly risky with every upward tick.
Friday October 2, 2009
Short Squeeze
What Does Short Squeeze Mean?
A situation in which a lack of supply and an excess demand for a traded stock forces the price upward.
Investopedia explains Short Squeeze
Short squeezes occur more often in smaller cap stocks with small floats.
If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.
Saturday October 3, 2009
Short Covering
What Does Short Covering Mean?
Purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price.
Also referred to as "buy to cover" or "buyback".
Investopedia explains Short Covering
For example, suppose a trader has sold short 50 shares of ABC stock at a price of $10 per share because he speculated that ABC will not be successful in the near future. Unfortunately for the trader, the company has been very lucky recently and its price rises to $15 per share. In order to limit his losses, this trader decides to cover his short position by buying back the 50 short sold shares at a price of $15 per share.
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Tuesday July 7, 2009
Socionomics
What Does Socionomics Mean?
The study of social mood and its effects of social behavior. Socionomic theory suggests that trends in social actions such as the economy, financial markets and political preferences are influenced by trends in social moods
Investopedia explains Socionomics
The socionomic perspective can be applied to any area of social activity, including economics and finance. Some examples of socionomic views in contrast to traditional views of human behavior are:
• Where the traditional view would be that recessions cause businesses to become cautious, the socionomic view says that businesses become cautious and cause recessions.
• Traditionally, it is thought that a bull market makes investors optimistic. Socionomics says that optimistic investors create a bull market.
• It is thought in the traditional view that scandals make people outraged. Socionomics believes that outraged people will seek out a scandal.
Monday July 6, 2009
Out Of The Money - OTM
What Does Out Of The Money - OTM Mean?
1. For a call, when an option's strike price is higher than the market price of the underlying asset.
2. For a put, when the strike price is below the market price of the underlying asset.
Investopedia explains Out Of The Money - OTM
Basically, an option that would be worthless if it expired today.
Sunday July 5, 2009
In The Money
What Does In The Money Mean?
1. For a call option, when the option's strike price is below the market price of the underlying asset.
2. For a put option, when the strike price is above the market price of the underlying asset.
Investopedia explains In The Money
In other words, this is when your stock option is worth money and you can turn around and sell or exercise it for a profit.
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Saturday July 4, 2009
At The Money
What Does At The Money Mean?
An option is at-the-money if the strike price of the option equals the market price of the underlying security.
Investopedia explains At The Money
For example, if XYZ stock is trading at 75, then the XYZ 75 option is at-the-money. You can essentially think of this as the break-even point (when you don't take into account transaction
Friday July 3, 2009
Strike Price
What Does Strike Price Mean?
The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold.
The difference between the underlying security's current market price and the option's strike price represents the amount of profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum amount that can be lost is the premium paid.
Also known as the "exercise price".
Investopedia explains Strike Price
Strike prices are one of the key determinants of the premium, which represents the market value of an options contract. Other determinants include the time until expiration, the volatility of the underlying security and prevailing interest rates. Strike prices are established when a contract is first written. Most strike prices are in increments of $2.50 and $5.
Thursday July 2, 2009
Intrapreneur
What Does Intrapreneur Mean?
An inside entrepreneur, or an entrepreneur within a large firm, who uses entrepreneurial skills without incurring the risks associated with those activities. Intrapreneurs are usually employees within a company who are assigned a special idea or project, and are instructed to develop the project like an entrepreneur would. Intrapreneurs usually have the resources and capabilities of the firm at their disposal. The intrapreneur's main job is to turn that special idea or project into a profitable venture for the company.
Investopedia explains Intrapreneur
Coined in the 1980s by management consultant Gifford Pinchot, intrapreneurs are used by companies that are in great need of new, innovative ideas. Today, instead of waiting until the company is in a bind, most companies try to create an environment where employees are free to explore ideas. If the idea looks profitable, the person behind it is given an opportunity to become an intrapreneur.
Wednesday July 1, 2009
Friendly Takeover
What Does Friendly Takeover Mean?
A situation in which a target company's management and board of directors agree to a merger or acquisition by another company. In a friendly takeover, a public offer of stock or cash is made by the acquiring firm, and the board of the target firm will publicly approve the buyout terms, which may yet be subject to shareholder or regulatory approval. This stands in contrast to a hostile takeover, where the company being acquired does not approve of the buyout and fights against the acquisition.
Investopedia explains Friendly Takeover
In most cases, if the board approves a buyout offer from an acquiring firm, the shareholders will vote to pass it as well. The key determinant in whether the buyout will occur is the price per share being offered. The acquiring company will offer a premium to the current market price, but the size of this premium (given the company's growth prospects) will determine the overall support for the buyout within the target company.
Tuesday June 30, 2009
Hostile Takeover
What Does Hostile Takeover Mean?
A takeover attempt that is strongly resisted by the target firm.
Investopedia explains Hostile Takeover
Hostile takeovers are usually bad news, as the employee morale of the target firm can quickly turn to animosity against the acquiring firm.
Monday June 29, 2009
Target Firm
What Does Target Firm Mean?
A firm that has been targeted by another firm for a takeover.
Investopedia explains Target Firm
Companies are targeted for a number of reasons. A firm may be attractive because it possesses large cash reserves, undervalued real estate or otherwise huge potential.
Sunday June 28, 2009
Takeover Artist
What Does Takeover Artist Mean?
An investor or company whose primary goal is to identify companies that are attractive to buy and that can be turned around to make a profit. A takeover artist will usually use a lot of debt (leverage) to make the purchase, and restructure the company for resale or add the company to an existing group of companies.
Investopedia explains Takeover Artist
Takeover artists are also sometimes referred to as corporate raiders. Frequently, the reason for a takeover is to remove entrenched management that the corporate raider believes is incompetent. For example, in the 1980s, Carl Icahn (a well-known takeover artist), launched a takeover of Trans World Airlines and turned the company from an unprofitable company to a profitable one in a few short years. He took the company from a loss of $193 million in 1985 to a profit of $106 million in 1987, and $250 million the next year. However, it was short-lived, as Trans World Airlines posted a $298 million loss in 1989.
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Saturday June 27, 2009
Stagnation
What Does Stagnation Mean?
A period of little or no growth in the economy. Economic growth of less than 2-3% is considered stagnation. Sometimes used to describe low trading volume or inactive trading in securities
Investopedia explains Stagnation
A good example of stagnation was the U.S. economy in the 1970s.
Friday June 26, 2009
Stagflation
What Does Stagflation Mean?
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
Investopedia explains Stagflation
Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.
Thursday June 25, 2009
Disinflation
What Does Disinflation Mean?
A slowing in the rate of price inflation. Disinflation is used to describe instances when the inflation rate has reduced marginally over the short term. Although it is used to describe periods of slowing inflation, disinflation should not be confused with deflation.
Investopedia explains Disinflation
Disinflation is commonly used by the Federal Reserve to describe situations of slowing inflation. Instances of disinflation are not uncommon and are viewed as normal during healthy economic times. Although sometimes confused with deflation, disinflation is not considered to be as problematic because prices do not actually drop and disinflation does not usually signal the onset of a slowing economy
Wednesday June 24, 2009
Hyperinflation
What Does Hyperinflation Mean?
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.
Investopedia explains Hyperinflation
When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value.
When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency's ability to maintain its value in the aftermath. Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices.
One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.
Tuesday June 23, 2009
Deflation
What Does Deflation Mean?
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
The decline in prices of assets is often known as Asset Deflation.
Investopedia explains Deflation
Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.
Deflationary periods can be either short or long, relatively speaking. Japan, for example, had a period of deflation lasting decades starting in the early 1990's. The Japanese government lowered interest rates to try and stimulate inflation, to no avail. Zero interest rate policy was ended in July of 2006.
Monday June 22, 2009
Reaganomics
What Does Reaganomics Mean?
A popular term used to refer to the economic policies of Ronald Reagan, the 40th U.S. President (1981–1989), which called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets.
Investopedia explains Reaganomics
The term was used by supporters and detractors of Reagan's policies alike. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. These theories hold the view that decreases in taxes, especially for corporations, is the best way to stimulate economic growth: the idea is that if the expenses of corporations are reduced, the savings will "trickle down" to the rest of the economy, spurring growth.
Prior to becoming Reagan's Vice President, George H. Bush coined the term "voodoo economics" as a proposed synonym for Reaganomics.
Sunday June 21, 2009
Obamanomics
What Does Obamanomics Mean?
A buzzword that describes the economic philosophy of 2008 democratic presidential candidate Barack Obama. Obamanomics calls for lower tax rates for companies that meet certain criteria, such as providing decent healthcare and maintaining a U.S. workforce and headquarters. Obama's economic platform also calls for higher taxes for high-income families and investment in education, healthcare and the sciences.
Investopedia explains Obamanomics
Obamanomics generally stands in opposition to supply-side, or "trickle-down", economics, which holds that people (including the rich) should keep more of what they earn because they will spend that money, promoting economic growth. Obamanomics shares some similarities with Keynesian economics, which states that active government intervention and monetary policy can smooth out bumps in economic cycles and promote stability.
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Saturday June 20, 2009
Quick-Rinse Bankruptcy
What Does Quick-Rinse Bankruptcy Mean?
A bankruptcy proceeding that is structured to move through legal proceedings faster than the average bankruptcy. The term "quick-rinse bankruptcy" first emerged during the credit crisis that started in 2008 and was used to describe the planned bankruptcies of U.S. automotive giants Chrysler and General Motors. In order for quick-rinse bankruptcies to be effective, interested parties must negotiate prior to the proceedings. These negotiations take place between the government, debtholders, unions, shareholders and other parties in order to prevent filings by these parties in court that would otherwise clog up the process.
Investopedia explains Quick-Rinse Bankruptcy
Pre-negotiated bankruptcies arose during the credit crisis of 2008 due to the perceived impact that the Chrysler and GM failures would have on the economy. It was argued that an untimely bankruptcy would result in massive layoffs and further stunt economic growth. As an example of a normal bankruptcy for an automotive company, one should look at the bankruptcy of Delphi Corp., which went into bankruptcy in 2005 and still had not emerged by 2009.
Friday June 19, 2009
Recession Proof
What Does Recession Proof Mean?
A term used to describe an asset, company, industry or other entity that is believed to be economically resistant to the outcomes of a recession. Oftentimes, recession-proof stocks are added to many investment portfolios during times of economic decline, which may be the onset of a recession. Securities that are believed to be recession proof often have a negative beta values, which would indicate an inverse relationship to the greater market.
Investopedia explains Recession Proof
Although many items have been labeled as recession proof, very few turn out to be so. Quite often, the long-reaching consequences of a recessionary period are too much for even the most recession-proof firms, assets etc. to withstand.
Securities that are believed to be recession proof often have negative beta values, which indicate an inverse relationship to the greater market. It was once believed that gold and gold stocks, for example, were recession proof due to gold's negative beta value. However this belief has been disproved over the long run.
Thursday June 18, 2009
Green Shoots
What Does Green Shoots Mean?
A term used to describe signs of economic recovery or positive data during an economic downturn. The term green shoots is a reference to plant growth and recovery, and has been used during down economies to describe signs of similar growth.
Investopedia explains Green Shoots
One of the first uses of the term green shoots was to describe signals of economic growth during the economic downturn in the United Kingdom in 1991. The term gained greater notoriety when it was used by U.S. Federal Reserve chairman Ben Bernanke to describe positive economic data during the financial crisis of 2008-2009.
Wednesday June 17, 2009
Recession Rich
What Does Recession Rich Mean?
A slang term used to describe an individual who manages to do well financially, relative to broader population, during a recession. Someone that is recession rich does not necessarily need to be considered wealthy, but rather has managed to maintain a good standard of living during a time when others worry about their financial stability.
Investopedia explains Recession Rich
Coined during the financial crisis of 2008-2009, the term was most commonly used in social circles to describe someone from the same socioeconomic class who was enjoying financial success relative to his or her peers. Some examples of a recession rich individual would be someone who buys a luxury vehicle during an economic downturn, or an individual who spends disposable income freely rather than safe guarding his or her money.
Tuesday June 16, 2009
Recessionship
What Does Recessionship Mean?
A slang term used to describe an intimate relationship that forms during a recession. People in a recessionship usually meet after losing their jobs or after incurring some sort of financial hardship. The term recessionship was originally coined during the financial crisis of 2008-2009.
Investopedia explains Recessionship
The loss of jobs often leaves individuals feeling vulnerable and seeking companionship. During a recession, the number of people who lose their jobs is compounded, which means that more individuals are entering the dating market. Many people in recessionships point to extra free time, less disposable income and lack of work stress as contributing factors to their recessionships.
Monday June 15, 2009
Federal Funds Rate
What Does Federal Funds Rate Mean?
The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.
Investopedia explains Federal Funds Rate
This is what news reports are referring to when they talk about the Fed changing interest rates. In fact, the FOMC sets a target for this rate, but not the actual rate itself (because it is determined by the open market).
Sunday June 14, 2009
Prime Rate
What Does Prime Rate Mean?
The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations
Investopedia explains Prime Rate
Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.
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Saturday June 13, 2009
Discount Rate
What Does Discount Rate Mean?
1. The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.
2. The interest rate used in determining the present value of future cash flows.
Investopedia explains Discount Rate
1. This type of borrowing from the Fed is fairly limited. Institutions will often seek other means of meeting short-term liquidity needs. The Federal funds discount rate is one of two interest rates the Fed sets, the other being the overnight lending rate, or the Fed funds rate.
2. For example, let's say you expect $1,000 dollars in one year's time. To determine the present value of this $1,000 (what it is worth to you today) you would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the $1,000 in a year's time would be the equivalent of $909.09 to you today (1000/[1.00 + 0.10]).
Friday June 12, 2009
Federal Open Market Committee – FOMC
What Does Federal Open Market Committee - FOMC Mean?
The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the Board of Governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate in their service of one-year terms.
Investopedia explains Federal Open Market Committee - FOMC
The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does through buying and selling government securities. For example, to tighten the money supply, or decrease the amount of money available in the banking system, the Fed sells government securities. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.
Thursday June 11, 2009
Reserve Requirements
What Does Reserve Requirements Mean?
Requirements regarding the amount of funds that banks must hold in reserve against deposits made by their customers. This money must be in the bank's vaults or at the closest Federal Reserve bank.
Also known as "required reserves".
Investopedia explains Reserve Requirements
Set by the Fed's board of governors, reserve requirements are one of the three main tools of monetary policy. The other two tools are open market operations and the discount rate.
Wednesday June 10, 2009
Open Market Operations – OMO
What Does Open Market Operations - OMO Mean?
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.
Investopedia explains Open Market Operations - OMO
Open market operations are the principal tools of monetary policy. (The discount rate and reserve requirements are also used.) The U.S. Federal Reserve's goal in using this technique is to adjust the federal funds rate--the rate at which banks borrow reserves from each other.
Tuesday June 9, 2009
Accommodative Monetary Policy
What Does Accommodative Monetary Policy Mean?
When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate. Furthermore, the Federal Reserve also has the authority to purchase Treasuries on the open market to infuse capital into a weakening economy.
Also known as an "easy monetary policy".
Investopedia explains Accommodative Monetary Policy
The Federal Reserve adopted an accommodative monetary policy during the late stages of the bear market that began in late 2000. When the economy finally showed signs of a rebound, the Fed eased up on the accommodative measures, eventually moving to a tight monetary policy in 2003.
Monday June 8, 2009
Monetary Policy
What Does Monetary Policy Mean?
The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.
Investopedia explains Monetary Policy
In the United States; the Federal Reserve is in charge of monetary policy.
Sunday June 7, 2009
Sterilization
What Does Sterilization Mean?
A form of monetary action in which a central bank or federal reserve attempts to insulate itself from the foreign exchange market to counteract the effects of a changing monetary base. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the forex market.
Investopedia explains Sterilization
For example, to weaken the U.S. dollar against another currency; the Fed would sell more U.S. dollars and buy the foreign currency. The increased supply of the U.S. dollar would lower the value of the currency. The Fed would do the opposite if it wanted to strengthen the U.S. dollar.
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Saturday June 6, 2009
Kyoto Protocol
What Does Kyoto Protocol Mean?
An international agreement that aims to reduce carbon dioxide emissions and the presence of greenhouse gases. Countries that ratify the Kyoto Protocol are assigned maximum carbon emission levels and can participate in carbon credit trading. Emitting more than the assigned limit will result in a penalty for the violating country in the form of a lower emission limit in the following period.
Investopedia explains Kyoto Protocol
The Kyoto Protocol separates countries into two groups. Annex I includes developed nations, while Non-Annex I refers to developing countries. Emission limitations are only placed on Annex I countries. Non-Annex I nations participate by investing in projects that lower emissions in their own countries. For these projects, they earn carbon credits. These credits can be traded or sold to Annex I countries, which allow them a higher level of maximum carbon emissions for that period.
Friday June 5, 2009
Carbon Credit
What Does Carbon Credit Mean?
A permit that allows the holder to emit one ton of carbon dioxide. Credits are awarded to countries or groups that have reduced their green house gases below their emission quota. Carbon credits can be traded in the international market at their current market price.
Investopedia explains Carbon Credit
The carbon credit system was ratified in conjunction with the Kyoto Protocol. Its goal is to stop the increase of carbon dioxide emissions.
For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.
Thursday June 4, 2009
Green Economics
What Does Green Economics Mean?
A methodology of economics that supports the harmonious interaction between humans and nature and attempts to meet the needs of both simultaneously. The green economic theories encompass a wide range of ideas all dealing with the interconnected relationship between people and the environment. Green economists assert that the basis for all economic decisions should be in some way tied to the ecosystem.
Investopedia explains Green Economics
Green economists perceive nature as being extremely valuable and seek to maintain it. Supporters of this branch of economics are concerned with the environment and believe that actions should be taken to protect nature and encourage the positive co-existence of both humans and nature. Emphasis is placed on creating value through quality rather than on accumulating material items and money.
Wednesday June 3, 2009
Chicago Board Of Trade – CBOT
What Does Chicago Board Of Trade - CBOT Mean?
A commodity exchange established in 1848 that today trades in both agricultural and financial contracts. The CBOT originally traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts on a wide range of products including gold, silver, U.S. Treasury bonds and energy.
Investopedia explains Chicago Board Of Trade - CBOT
The CBOT has added electronic trading of futures contracts in recent years, but for decades was an open auction market, where traders meet in a trading pit and primarily use hand signals to execute trades.
On October 18th, 2005, the Chicago Board of Trade transformed from a non-profit organization to a for-profit organization with an initial public offering on the NYSE, listed as CBOT Holdings Inc. Its ticker symbol is "BOT".
Tuesday June 2, 2009
Commodity
What Does Commodity Mean?
1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.
Investopedia explains Commodity
1. The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer - a barrel of oil is basically the same product, regardless of the producer. Compare this to, say, electronics, where the quality and features of a given product will be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace: for example, cell phone minutes and bandwidth.
2. The sale and purchase of commodities is usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade stipulates that one wheat contract is for 5,000 bushels and also states what grades of wheat (e.g. No. 2 Northern Spring) can be used to satisfy the contract.
Monday June 1, 2009
Subprime Meltdown
What Does Subprime Meltdown Mean?
A financial crisis that arose in the mortgage market after a sharp increase in mortgage foreclosures, mainly subprime, collapsed numerous mortgage lenders and hedge funds.
The meltdown spilled over into the global credit market as risk premiums increased rapidly and capital liquidity was reduced. The sharp increase in foreclosures and the problems in the subprime mortgage market were largely blamed on loose lending practices, low interest rates, a housing bubble and excessive risk taking by lenders and investors.
It is also known as the "subprime collapse" or "subprime crisis".
Investopedia explains Subprime Meltdown
Following the tech bubble and the events of September 11, the Federal Reserve stimulated a struggling economy by cutting interest rates to historically low levels. As a result, a housing bull market was created. People with poor credit got in on the action when mortgage lenders created non-traditional mortgages: interest-only loans, payment-option ARMs and mortgages with extended amortization periods. Eventually, interest rates climbed back up and many subprime borrowers defaulted when their mortgages were reset to much higher monthly payments. This left mortgage lenders with property that was worth less than the loan value due to a weakening housing market. Defaults increased; the problem snowballed, and several lenders went bankrupt.
Investors and hedge funds also suffered because lenders sold mortgages they originated into the secondary market. Here the mortgages were bundled together and sold to investors as collateralized debt obligations (CDOs) and other mortgage-backed securities (MBSs). When the higher risk underlying mortgages started to default, investors were left with properties that were quickly losing value. In the wake of the meltdown, central banks released liquidity into the market place, which allowed struggling lenders and hedge funds to continue operations and make the necessary payments on their obligations.
Sunday May 31, 2009
Financial Stability Plan (FSP)
What Does Financial Stability Plan (FSP) Mean?
A plan unveiled by the Obama administration in April, 2009, that was designed to stabilize the U.S. economy during the financial crisis of 2008-2009. The Financial Stability Plan (FSP) promised to take measures to solidify the American banking system, securities markets, mortgage and consumer credit markets. This somewhat controversial plan came as a response to the 2008 fallout in the mortgage and financial markets.
Investopedia explains Financial Stability Plan (FSP)
The Financial Stability Plan (FSP) is estimated to cost the American taxpayer about $1 trillion. The FSP promised to create a new "public-private" governmental fund to absorb toxic assets and leverage private capital to stimulate the financial markets. It also aimed to further standardize the banking system and provide capital to unstable lending institutions. A consumer-business lending initiative was also included to restore consumer credit for stable borrowers.
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Saturday May 30, 2009
Disclosable Event
What Does Disclosable Event Mean?
A corporate event that is disclosed to shareholders. Securites law states that all material information be disclosed. When this occurs it is said to be a disclosable event. Non-disclosable events - in which material information is withheld from shareholders - go against securities law as enforced by the Securities and Exchange Commission (SEC).
Investopedia explains Disclosable Event
The term "disclosable event" was popularized in April 2009 by former Treasury Secretary Hank Paulson in his talks with Ken Lewis regarding keeping quiet about Merrill Lynch's mounting billion-dollar losses. "We do not want a disclosable event" said Paulson, implying that if this information was disclosed and Bank of America didn't go ahead with the acquisition of the failing brokerage firm, it could pose major systemic risk.
Friday May 29, 2009
American Recovery And Reinvestment Act
What Does American Recovery And Reinvestment Act Mean?
An act initiated and signed by U.S. President Barack Obama in February, 2009. The act was set into motion as a response to the weak economic state facing the country. The American Recovery and Reinvestment Act was created to stimulate the economy through individual and corporate tax cuts, leniency in unemployment benefits, increased domestic spending, and increased social welfare funding.
Investopedia explains American Recovery And Reinvestment Act
The plan will amount to around $787 billion in government spending. The following is a breakdown of the spending in billions:
-Tax Cuts - $288
-Healthcare - $147.7
-Education - $90.9
-Environment - $7.2
-Social Welfare - $82.5
-Infrastructure - $80.9
-Energy - $61.3
-Housing - $12.7
-Research - $8.9
-Other investments - $18.1
Thursday May 28, 2009
TARP Bonuses
What Does TARP Bonuses Mean?
A buzzword coined by the financial media during the financial crisis of 2008/09 to describe bonuses paid to employees and executives of banks and other financial firms that received Troubled Asset Relief Program (TARP) funds. TARP bonuses were controversial because employees were receiving additional pay even as their companies required bailout funds.
Investopedia explains TARP Bonuses
Companies argue that they have to pay bonuses to retain talent. But critics contend that because the companies led by the executives in question were being rescued with taxpayer money, the bonuses were not well-deserved and the recipients should not be considered "talent".
On March 19, 2009, the House approved a bill to create legislation that would put a 90% tax on bonuses earned during the 2008 year. This tax would apply to banks receiving TARP bailout funds of more than $5 billion. This legislation was created in response to the public anger surrounding $165 million in bonuses that was paid to traders in the AIG Financial Products (A.I.G.F.P.) division, the division responsible for the majority of losses surrounding the fall of A.I.G.
Wednesday May 27, 2009
Troubled Asset Relief Program – TARP
What Does Troubled Asset Relief Program - TARP Mean?
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts.
Investopedia explains Troubled Asset Relief Program - TARP
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.
In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.
Tuesday May 26, 2009
Bailout
What Does Bailout Mean?
A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement.
Investopedia explains Bailout
Bailouts have traditionally occurred in industries or businesses that may be perceived as no longer being viable, or are just sustaining huge losses. Typically, these companies employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business folded.
For example, Chrysler, a large U.S. automaker was in need of a bailout in the early 1980s. The U.S. government stepped in and offered roughly $1.2 billion to the failing company. Chrysler was able to pay the entire bailout back, and is currently a profitable firm.
One of the biggest bailouts is the one proposed by the U.S. government in 2008 that will see $700 billion put toward bailing out various financial organizations and those affected by the credit crisis.
Monday May 25, 2009
Too Big To Fail
What Does it Mean?
The idea that a business has become so large and ingrained in the economy that a government will provide assistance to prevent its failure. "Too big to fail" describes the belief that if an enormous company fails, it will have a disastrous ripple effect throughout the economy.
Investopedia explains Too Big To Fail
Large companies generally do business with many other companies for supplies and services. If a large company fails, the companies that rely on it for portions of their income might be brought down as well, not to mention the number jobs that would be eliminated. Therefore, if the cost of a bailout is less than the
Sunday May 24, 2009
Put
What Does Put Mean?
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.
Investopedia explains Put
When an individual purchases a put, they expect the underlying asset will decline in price. They would then profit by either selling the put options at a profit, or by exercising the option. If an individual writes a put contract, they are estimating the stock will not decline below the exercise price, and will not increase significantly beyond the exercise price.
Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10.
If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling his contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price.
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May 23, 2009
Bear Call Spread
What Does Bear Call Spread Mean?
A type of options strategy used when a decline in the price of the underlying asset is expected. It is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option.
Investopedia explains Bear Call Spread
For example, let's assume that a stock is trading at $30. An option investor has purchased one call option with a strike price of $35 for a premium of $0.50 and sold one call option with a strike price of $30 for a premium of $2.50. If the price of the underlying asset closes below $30 upon expiration, then the investor collects $200 (($2.50 - $0.50) * 100 shares/contract).
May 22, 2009
Bull Call Spread
What Does Bull Call Spread Mean?
A type of options strategy used when a moderate rise in the price of the underlying asset is expected. It is achieved by purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options. Most often, bull call spreads are vertical spreads.
Investopedia explains Bull Call Spread
Let's assume that a stock is trading at $18 and an investor has purchased one call option with a strike price of $20 and sold one call option with a strike price of $25. If the price of the stock jumps up to $35, the investor must provide 100 shares to the buyer of the short call at $25. This is where the purchased call option allows the trader to buy the shares at $20 and sell them for $25, rather than buying the shares at the market price of $35 and selling them for a loss
May 21, 2009
Call Option
What Does Call Option Mean?
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
Investopedia explains Call Option
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.
May 20, 2009
Call
What Does Call Mean?
1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process.
2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.
Investopedia explains Call
1. In some exchanges, the call period is an important time in which to match and execute a large number of orders before opening and closing.
2. A call becomes more valuable as the price of the underlying asset (stock) appreciates.
May 19, 2009
Preferred Stock
English
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".
Investopedia explains Preferred Stock
There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the negatives, including giving up their voting rights and less potential for appreciation.
May 18, 2009
Common Stock
What Does Common Stock Mean?
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full.
In the U.K., these are called "ordinary shares".
Investopedia explains Common Stock
If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.
May 17, 2009
Financial Instrument
What Does Financial Instrument Mean?
A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example.
Investopedia explains Financial Instrument
Financial instruments can be thought of as easily tradable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.
May 16, 2009
Convertible Bond
What Does Convertible Bond Mean?
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.
Convertibles are sometimes called "CVs".
Investopedia explains Convertible Bond
Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well.
From the investor's perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.
May 15, 2009
Callable Bond
What Does Callable Bond Mean?
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.
Also known as a "redeemable bond".
Investopedia explains Callable Bond
The main cause of a call is a decline in interest rates. If interest rates have declined since a company first issued the bonds, it will likely want to refinance this debt at a lower rate of interest. In this case, company will call its current bonds and reissue them at a lower rate of interest.
May 14, 2009
Bond Swap
What Does Bond Swap Mean?
A strategy in which an investor sells a bond and at the same time purchases a different bond with the proceeds from the sale.
Investopedia explains Bond Swap
There are several reasons why people use a bond swap: to seek tax benefits, to change investment objectives, to upgrade a portfolio's credit quality or to speculate on the performance of a particular bond.
May 13, 2009
Bond Rating
What Does Bond Rating Mean?
A grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of a bond issuer's financial strength, or its the ability to pay a bond's principal and interest in a timely fashion.
Investopedia explains Bond Rating
Bond ratings are expressed as letters ranging from 'AAA', which is the highest grade, to 'C' ("junk"), which is the lowest grade. Different rating services use the same letter grades, but use various combinations of upper- and lower-case letters to differentiate themselves.
To illustrate the bond ratings and their meaning, we'll use the Standard & Poor's format:
AAA and AA: High credit-quality investment grade
AA and BBB: Medium credit-quality investment grade
BB, B, CCC, CC, and C: Low credit-quality (non-investment grade), or "junk bonds"
D: Bonds in default for non-payment of principal and/or interest
May 12, 2009
Bond
What Does Bond Mean?
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents...
Investopedia explains Bond
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid
May 11, 2009
Fixed-Rate Mortgage
What Does Fixed-Rate Mortgage Mean?
A mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.
Investopedia explains Fixed-Rate Mortgage
There is typically a tradeoff when it comes to choosing a mortgage between risk and reward, or between an adjustable-rate mortgage and a fixed-rate mortgage. Depending on market conditions (the shape of the yield curve), an adjustable-rate mortgage might have a large initial payment advantage over a fixed-rate mortgage. However, if such a scenario exists, there is a probability that the payments on the adjustable-rate mortgage will rise over time. Mortgage borrowers need to understand and measure risks when deciding between an adjustable-rate and fixed-rate mortgage.
May 10, 2009
Adjustable-Rate Mortgage - ARM
What Does Adjustable-Rate Mortgage - ARM Mean?
A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage".
Investopedia explains Adjustable-Rate Mortgage - ARM
Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage.
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May 9, 2009
Floating-Rate Note – FRN
What Does Floating-Rate Note - FRN Mean?
A note with a variable interest rate. The adjustments to the interest rate are usually made every six months and are tied to a certain money-market index.
Also known as a "floater".
Investopedia explains Floating-Rate Note - FRN
These protect investors against a rise in interest rates (which have an inverse relationship with bond prices), but also carry lower yields than fixed notes of the same maturity. It's essentially the same concept as a adjustable-rate mortgage, except FRNs are investments (not debt).
May 8, 2009
Stress Testing
What Does Stress Testing Mean?
A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge how certain stressors will affect a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios.
This is also known as a "stress test".
Investopedia explains Stress Testing
Stress testing is a useful method for determining how a portfolio will fare during a period of financial crisis. The Monte Carlo simulation is one of the most widely used methods of stress testing.
A stress test is also used to evaluate the strength of institutions. For example, the Treasury Department could run stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Changing factors could include interest rates, lending requirements or unemployment.
May 7, 2009
Over-The-Counter Market
What Does Over-The-Counter Market Mean?
A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Also referred to as the "OTC market".
Investopedia explains Over-The-Counter Market
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges such as the NYSE.
May 6, 2009
Over-The-Counter Market
What Does Over-The-Counter Market Mean?
A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Also referred to as the "OTC market".
Investopedia explains Over-The-Counter Market
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges such as the NYSE.
May 5, 2009
Irrational Exuberance
What Does Irrational Exuberance Mean?
An infamous phrase uttered by Alan Greenspan in 1996 to describe the overvalued market at the time.
Investopedia explains Irrational Exuberance
Although every word spoken by Mr. Greenspan, former chairman of the Federal Reserve Board, is scrutinized, this phrase was even more so examined as market analysts tried to uncover any and all possible results. The phrase even became the title of a New York Times best-selling book by Robert Schiller.
On February 1, 2006, Ben Bernanke replaced Alan Greenspan as the Federal Reserve Board chairman.
May 4, 2009
Fed Speak
What Does Fed Speak Mean?
A phrase used to describe former Federal Reserve Board Chairman Alan Greenspan's tendency to make wordy statements with little substance. Many analysts felt that Greenspan's ambiguous "Fed speak" was an intentional strategy used to prevent the markets from overreacting to his remarks.
Investopedia explains Fed Speak
Greenspan, who was chairman of the Fed from 1986 to 2006, was known for making vague statements that were not easily interpreted. For example, following a speech Greenspan gave in 1995, a headline in the New York Times read, "Doubts Voiced by Greenspan on a Rate Cut," while the Washington Post's headline that day said "Greenspan Hints Fed May Cut Interest Rates". Greenspan's successor, Ben Bernanke, is known for making more direct statements.
May 3, 2009
Triple Witching
What Does Triple Witching Mean?
An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December.
This phenomenon is sometimes referred to as "freaky Friday".
Investopedia explains Triple Witching
The final trading hour for that Friday is the hour known as triple witching. The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell. If you are a long-term investor, triple witching will have a minimal impact on you
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May 2, 2009
Witching Hour
What Does Witching Hour Mean?
The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. It is typically controlled by large professional traders, program traders and large institutional traders, and can be characterized by higher than average volatility.
Investopedia explains Witching Hour
The witching hour is most commonly known in the context of triple witching, which is the third Friday of every quarter, when stock index options, stock options and stock index futures expire and roll to the next series. The last hour of these Fridays can be very volatile as positions are adjusted or closed out in anticipation of expiration. Since single stock index options now expire on the same day, triple witching and quadruple witching are used somewhat interchangeably.
May 1, 2009
Double Witching
What Does Double Witching Mean?
Similar to triple witching, but instead of three classes of options or futures expiring on the same day, double witching is when only two classes (any two) are expiring. The three classes are stock options, index options, and index futures.
Investopedia explains Double Witching
In other words, this is when option contracts and futures contracts expire on the exact same day.
Double and triple witching days can be volatile at times as arbitrageurs scramble to close out their positions.
April 30, 2009
Cook The Books
What Does Cook The Books Mean?
A buzzword describing fraudulent activities performed by corporations in order to falsify their financial statements. Typically, cooking the books involves augmenting financial data to yield previously non-existent earnings.
Examples of techniques used to cook the books involve accelerating revenues, delaying expenses, manipulating pension plans and implementing synthetic leases.
Investopedia explains Cook The Books
During the first couple of years of the new millennium, large Fortune 500 companies such as Enron and WorldCom were found to have been cooking the books to improve their financial figures. The resulting scandals gave investors and regulators a rude awakening concerning the reality that companies were hiding the ugly truth between the lines of financial data.
In order to rally investor confidence, the Sarbanes-Oxley Act of 2002 was created. This act of Congress created policies to protect investors against future incidents of corporate fraud.
April 29, 2009
Voodoo Accounting
What Does Voodoo Accounting Mean?
Any form of accounting that does not follow principles of conservatism. While there are many methods by which financial statements can be fudged, it always comes down to inflating revenue or hiding expenses. Examples of accounting shenanigans include the big bath, cookie jar accounting and improper recognition of revenue.
Investopedia explains Voodoo Accounting
Any method that boosts profitability through accounting tricks eventually catches up with the company. As soon as it does "poof", past profits disappear like magic. (Hence the name "voodoo accounting
April 28, 2009
Zombies
What Does Zombies Mean?
Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to the high costs associated with certain operations, such as research and development. Most analysts expect zombie companies to be unable to meet their financial obligations.
Also known as the "living dead" or "zombie stocks".
Investopedia explains Zombies
Because a zombie's life expectancy tends to be highly unpredictable, zombie stocks are extremely risky and are not suitable for all investors. For example, a small biotech firm may stretch its funds extremely thin by concentrating its efforts in research and development in the hope of creating a blockbuster drug. If the drug fails, the company can go bankrupt within days of the announcement. On the other hand, if the drug is successful, the company could profit and reduce its liabilities. In most cases, however, zombie stocks are unable to overcome the financial burdens of their high burn rates and most eventually go bankrupt.
Given the lack of attention paid to this group, there can often be interesting opportunities for investors who have a high risk tolerance and are seeking speculative opportunities.
April 27, 2009
Accounting Insolvency
What Does Accounting Insolvency Mean?
A situation where the value of a company's liabilities exceeds its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative.
Investopedia explains Accounting Insolvency
Accounting insolvency is a different approach to standard insolvency. The latter involves a firm missing or being unable to make a debt-servicing payment, while the former examines the firm's balance sheet.
When a firm appears to be insolvent on the books, it is likely the debtholders will force a response. The company may attempt to restructure the business to alleviate its debt obligations, or be placed in bankruptcy by the debtholders.
April 26, 2009
Insolvency
What Does Insolvency Mean?
When an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts.
Investopedia explains Insolvency
Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in more informal arrangements with creditors, such as making alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in the forecasted cash inflow or from an increase in cash expenses.
April 25, 2009
Uptick Rule
What Does Uptick Rule Mean?
A former rule established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.
The uptick rule is also known as the "plus tick rule".
Investopedia explains Uptick Rule
The SEC eliminated the rule on July 6, 2007, but in March of 2009, following a conversation with SEC Chair Mary Schapiro, Rep. Barney Frank of the House Financial Services Committee said that the rule could be restored. Frank's conversations were spurred by a call for the return of the rule by several members of Congress and legislation reintroduced on January 9, 2009, for its reinstatement. On April 9, 2009, the SEC approved the release of five proposals for reinstating the uptick rule, which will each be put out for a 60-day public comment period.
By entering a short sale order with a price above the current bid, a short seller ensures that his or her order is filled on an uptick. The uptick rule is disregarded when trading some types of financial instruments such as futures, single stock futures, currencies or market ETFs such as the QQQQ or SPDRs. These instruments can be shorted on a downtick because they are highly liquid and have enough buyers willing to enter into a long position, ensuring that the price will rarely be driven to unjustifiably low levels.
April 24, 2009
Derivative
What Does Derivative Mean?
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the
underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
Investopedia explains Derivative
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.
April 23, 2009
Islamic Banking
What Does Islamic Banking Mean?
A banking system that is based on the principles of Islamic law (also known Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law.
Investopedia explains Islamic Banking
Here's an example of how the Islamic banking system uses methods of profit/loss sharing to facilitate financial transactions: for some types of loans, the borrower only needs to pay back the amount owed to the lender, but the borrower can choose to pay the lender a small amount of money to serve as a gratuity.
Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investing (for example, investments involving alcohol, gambling, pork, etc. are prohibited). The Dubai Islamic Bank has the distinction of being the world's first full-fledged Islamic bank, formed in 1975.
April 22, 2009
Gharar
What Does Gharar Mean?
An Islamic finance term describing a risky or hazardous sale, where details concerning the sale item are unknown or uncertain. Gharar is forbidden by the Qur'an, which explicitly forbids trades that are considered to have excessive risk due to uncertainty.
Investopedia explains Gharar
There are strict rules in Islamic finance against transactions that are highly uncertain or may cause any injustice or deceit against any of the parties.
In finance, gharar is observed within derivative transactions, such as forwards, futures and options, in short selling, and in speculation. In Islamic finance, most derivative contracts are forbidden and considered invalid because of the uncertainty involved in the future delivery of the underlying asset.
April 21, 2009
Call Option
What Does Call Option Mean?
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
Investopedia explains Call Option
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.
April 20, 2009
Call
What Does Call Mean?
1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process.
2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.
Investopedia explains Call
1. In some exchanges, the call period is an important time in which to match and execute a large number of orders before opening and closing.
2. A call becomes more valuable as the price of the underlying asset (stock) appreciates.
April 19, 2009
Option
What Does Option Mean?
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (excercise date).
Investopedia explains Option
Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.
In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security.
For example, because the option writer will need to provide the underlying shares in the event that the stock's market price will exceed the strike, an option writer that sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he or she will reap maximum profit.
This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower price and then sell it for a profit.
April 18, 2009
Face Value
What Does Face Value Mean?
The nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity (generally $1,000). Also known as "par value" or simply "par".
Investopedia explains Face Value
In bond investing, face value, or par value, is commonly referred to the amount paid to a bondholder at the maturity date, given the issuer doesn't default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond's coupon rate, then the bond is sold at a discount (below par). Conversely, if interest rates are lower than the bond's coupon rate, then the bond is sold at a premium (above par).
April 17, 2009
Below Par
What Does Below Par Mean?
A term describing a bond whose price is below the face value or principal value, usually $1,000. As bond prices are quoted as a percentage of face value, a price below par would typically be anything less than 100.
Investopedia explains Below Par
A bond trading below par is the same as a bond trading at a discount. When a bond trades below par, its current yield is higher than its fixed coupon rate.
Bonds may trade below par when interest rates have risen since it was issued, its credit rating has declined, there are concerns about a default, or there is an excess supply. A bond's discount may narrow as it approaches maturity or its first call date, when investors will receive par value.
April 16, 2009
Par Value
What Does Par Value Mean?
1. The face value of a bond.
2. A dollar amount that is assigned to a security when representing the value contributed for each share in cash or goods.
Investopedia explains Par Value
1. The par values for different fixed-income products will vary. Bonds generally have a par value of $1,000, while most money market instruments have higher par values.
2. Stocks will typically have a par value of $0.01 or none at all.
April 15, 2009
Convexity
What Does Convexity Mean?
A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.
Investopedia explains Convexity
In the example above, Bond A has a higher convexity than Bond B, which means that all else being equal, Bond A will always have a higher price than Bond B as interest rates rise or fall.
As convexity increases, the systemic risk to which the portfolio is exposed increases. As convexity decreases, the exposure to market interest rates decreases and the bond portfolio can be considered hedged. In general, the higher the coupon rate, the lower the convexity (or market risk) of a bond. This is because market rates would have to increase greatly to surpass the coupon on the bond, meaning there is less risk to the investor.
April 14 2009
Out Of The Money – OTM
What Does Out Of The Money - OTM Mean?
1. For a call, when an option's strike price is higher than the market price of the underlying asset.
2. For a put, when the strike price is below the market price of the underlying asset.
Investopedia explains Out Of The Money - OTM
Basically, an option that would be worthless if it expired today.
April 13, 2009
In The Money
What Does In The Money Mean?
1. For a call option, when the option's strike price is below the market price of the underlying asset.
2. For a put option, when the strike price is above the market price of the underlying asset.
Investopedia explains In The Money
In other words, this is when your stock option is worth money and you can turn around and sell or exercise it for a profit.
April 12, 2009
Volatility Skew
What Does Volatility Skew Mean?
The difference in implied volatility (IV) between out-of-the-money, at-the-money and in-the-money options. Volatility skew, which is affected by sentiment and the supply/demand relationship, provides information on whether fund managers prefer to write calls or puts.
Also known as "vertical skew".
Investopedia explains Volatility Skew
A situation where at-the-money options have lower IVs than out-of-the-money options is sometimes referred to as a volatility "smile", due to the shape it creates on a chart (as above). In markets such as the equity markets, a skew occurs because money managers usually prefer to write calls over puts.
April 11, 2009
Arbitrage
What Does Arbitrage Mean?
The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
Investopedia explains Arbitrage
Given the advancement in technology it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds. ces do not deviate substantially from fair value for long periods of time.
April 10, 2009
Conversion Arbitrage
What Does Conversion Arbitrage Mean?
An options trading strategy employed to exploit the inefficiencies that exist in the pricing of options. Conversion arbitrage is a risk-neutral strategy, whereby the trader buys a put and writes a covered call (on a stock that the trader already owns) with identical strike prices and expiration dates. A trader will profit through a conversion arbitrage strategy when the call option is overpriced.
Investopedia explains Conversion Arbitrage
If the price of the underlying security falls, the put purchased increases in value by the same amount as the loss incurred by writing the call. If the underlying security's price increases, both the put and the call expire worthless. In both situations, the trader is risk neutral, but profits from the difference between the price at which the call was sold and the put was purchased.
As with all arbitrage opportunities, conversion arbitrage is rarely available. This is because any opportunity for risk-free money is acted on quickly by those who can spot these opportunities quickly.
April 9, 2009
Run On The Fund
What Does Run On The Fund Mean?
A situation in which a hedge fund faces an increasing amount of redemptions, causing the fund managers to sell positions to meet the withdrawals. A run on the fund can happen for several reasons but is usually the result of poor performance from the hedge fund. If the run on the fund is large enough it could force the fund to close its operations after most investors have taken their money out of the fund.
Investopedia explains Run On The Fund
A run on a fund starts out slowly but quickly increases as investors rush for the exit, as increasing redemptions are generally considered to be negative and no one wants to be around near the end of the run. The reason for this is that redemptions force a fund to sell out of positions to produce liquidity to meet the redemptions. This selling will often weigh on the performance of the fund as the fund is forced to sell at inopportune times leading to losses.
April 8, 2009
Closed-End Credit
What Does Closed-End Credit Mean?
A loan or extension of credit in which the proceeds are dispersed in full when the loan closes and must be repaid, including any interest and finance charges, by a specified date. The loan may require periodic principal and interest payments, or may require the entire payment of principal at maturity.
Investopedia explains Closed-End Credit
In this type of loan or credit arrangement, the full amount owed must be paid back by the borrower by a set point in time. Most real estate and auto loans are closed-end credit, while credit cards and home-equity lines of credit are open-end or revolving lines of credit.
April 7, 2009
Worthless Securities
What Does Worthless Securities Mean?
Securities that have a market value of zero. Worthless securities can include stocks or bonds that are either publicly traded or privately held. These securities result in a capital loss for the owner and can be claimed as such when filing taxes.
Investopedia explains Worthless Securities
The problem with declaring worthless securities as a loss for tax purposes is that you must sell securities before making this claim. Unfortunately, worthless securities are unsellable. Another difficulty comes from investors who own securities that they are not sure are totally worthless in a given year. If they go ahead and declare them as such and then they are deemed to have value the next year, taxpayers can file an amended return for the previous year and re declare the loss the following year.
April 6, 2009
Greater Fool Theory
What Does Greater Fool Theory Mean?
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
Investopedia explains Greater Fool Theory
When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.
April 5, 2009
Sucker Rally
What Does Sucker Rally Mean?
A temporary rise in a specific stock or the market as a whole. A sucker rally occurs with little fundamental information to back the movement in price. This rally may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls.
Also known as a "dead cat bounce" or a "bull trap".
Investopedia explains Sucker Rally
A sucker rally is a buzz word describing a rise in price that does not properly reflect the true value of the stock. For example, suppose that two high-tech companies, "A" and "B", see an increase in stock price due to reporting strong financial statements, and a separate high-tech, company "C", sees a rise in stock price. If the real reason for the rally turns out to be because of potential acquisitions of A and B, then C will have had a sucker rally, rising along with A and B.
April 4, 2009
Black Monday
What Does Black Monday Mean?
The title given to one of the most notorious days in recent financial history. On October 19, 1987, the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline. By the end of the month, most of the major exchanges had dropped more than 20%.
Investopedia explains Black Monday
Interestingly enough, the cause of the massive drop cannot be attributed to any single news event because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, no consensus argument can explain why Black Monday happened, but most agree that mass panic caused the crash to escalate.
Since Black Monday, there have been multiple mechanisms built into the market to prevent panic selling, such as trading curbs and circuit breakers.
April 3, 2009
Black Friday
What Does Black Friday Mean?
1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold speculators, including Jay Gould and James Fist, who attempted to corner the gold market. The attempt failed and the gold market collapsed, causing the stock market to plummet.
2. The day after Thanksgiving in the United States. Retailers generally see an upward spike in sales and consider this to be the start of the holiday shopping season. It's common for retailers to offer special promotions and to open early to draw in customers.
Investopedia explains Black Friday
1. The term "black" has been used to describe other disastrous days in financial markets. For example, on Black Tuesday, October 29, 1929, the market fell precipitously, signaling the start of the Great Depression. The largest one-day drop in stock market history occurred on Black Monday, October 19, 1987, when the Dow Jones Industrial Average plummeted more than 22%.
2. The idea behind the term "Black Friday" is that this is the day in which retail stores have enough sales to put them "in the black" - an accounting expression that alludes to the practice of recording losses in red and profits in black.
April 2, 2009
Silver Thursday
What Does Silver Thursday Mean?
A steep fall in the price of silver that occurred on Thursday March 27, 1980. The sharp drop, on Silver Thursday, was triggered by a failed attempt to corner the silver market and it led to massive panic in other commodities.
Investopedia explains Silver Thursday
The attempt to corner the silver market was made by brothers Nelson Bunker Hunt and Herbert Hunt. The sharp sell-off occurred once the two men were unable to meet various margin calls that were caused by short-term weakness in the silver price. A group of U.S. banks needed to step in with a $1.1 billion line of credit, which helped bring stability back into the futures markets.
April 1, 2009
Credit Cliff
What Does Credit Cliff Mean?
A slang term referring to the compounding of a company's credit deterioration caused by provisions such as financial covenants, or events that trigger a change in the company's credit rating. These can put pressure on the company's liquidity or its business to a material extent.
Investopedia explains Credit Cliff
For example; if a company is performing poorly it may get a credit rating downgrade, which gives the company a higher cost of capital. This is because a lower rating increases the company's interest payments on its debt, making its situation even worse.
March 31, 2009
Commercial Credit
What Does Commercial Credit Mean?
A pre-approved amount of money issued by a bank to a company that can be accessed by the borrowing company at any time to help meet various financial obligations. Commercial credit is commonly used to fund common day-to-day operations and is often paid back once funds become available.
Also commonly referred to as a "commercial line of credit" or "business credit"
Investopedia explains Commercial Credit
Commercial credit is often used by companies to help fund new business opportunities or to pay for unexpected charges. For example, imagine that XYZ Manufacturing Inc. has the chance to buy a piece of much needed machinery at a deep discount. Let's assume that the piece of equipment normally costs $250,000, but is being sold for $100,000 on a first-come, first-serve basis. In this example, XYZ Manufacturing could access its commercial credit agreement to get the required funds immediately. The firm would then pay the borrowed amount back at a later date.
March 30, 2009
Line Of Credit – LOC
What Does Line Of Credit - LOC Mean?
An arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement.
Investopedia explains Line Of Credit - LOC
The advantage of a line of credit over a regular loan is that interest is not usually charged on the part of the line of credit that is unused, and the borrower can draw on the line of credit at any time that he or she needs to. Depending on the agreement with the financial institution, the line of credit may be classified as a demand loan, which means that any outstanding balance will have to be paid immediately at the financial institution's request.
March 29, 2009
Revolving Credit
What Does Revolving Credit Mean?
A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customer's current cash flow needs.
Often referred to as "revolver".
Investopedia explains Revolving Credit
Revolving lines of credit can be taken out by both corporations and individuals. The bank that is in agreement with the customer guarantees a maximum amount that can be loaned to the customer. Along with the commitment fee there are also interest expenses for corporate borrowers and carry forward charges for consumer accounts.
March 28, 2009
Open-End Credit
What Does Open-End Credit Mean?
A pre-approved loan between a financial institution and borrower that may be used repeatedly up to a certain limit and can subsequently be paid back prior to payments coming due. The pre-approved amount will be set out in the agreement between the lender and the borrower.
Open-end credit is also refered to as a "line of credit" or "revolving line of credit".
Investopedia explains Open-End Credit
Open-end credit agreements are advantageous to borrowers, as they exert more control over how much they borrow and when. In addition, interest is not usually charged on the part of the line of credit that is not used, which can lead to interest savings for the borrower.
March 27, 2009
Conventional Mortgage
What Does Conventional Mortgage Mean?
A type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages, depending on market conditions and consumer trends, are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages.
Investopedia explains Conventional Mortgage
The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities, which trade in a well-established forward market known as the mortgage TBA (to be announced) market. Many conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).
March 26, 2009
Conforming Loan
What Does Conforming Loan Mean?
A mortgage that is equal to or less than the dollar amount established by the conforming loan limit set by Fannie Mae and Freddie Mac's Federal regulator, The Office of Federal Housing Enterprise Oversight (OFHEO) and meets the funding criteria of Freddie Mac and Fannie Mae.
Investopedia explains Conforming Loan
The term "conforming" is most often used when speaking specifically about a mortgage amount; however, the terms "conforming" and "conventional" are frequently used interchangeably. Mortgages that exceed the conforming loan limit are classified as non-conforming or jumbo mortgages.
OFHEO, which sets the conforming loan limit on an annual basis, has regulatory oversight to ensure that Fannie Mae and Freddie Mac fulfill their charters and missions of promoting homeownership for lower income and middle class Americans. OFHEO uses the October to October percentage increase/decrease in average housing prices in the Monthly Interest Rate Survey of the Federal Housing Finance Board (FHFB) to adjust the conforming loan limits for the subsequent year.
March 25, 2009
FICO Score
What Does FICO Score Mean?
A type of credit score that makes up a substantial portion of the credit report that lenders use to assess an applicant's credit risk and whether to extend a loan.
FICO is an acronym for the Fair Isaac Corporation, the creators of the FICO score
Investopedia explains FICO Score
Using mathematical models, the FICO score takes into account various factors in each of these five areas to determine credit risk: payment history, current level of indebtedness, types of credit used and length of credit history, and new credit.
A person's FICO score will range between 300 and 850. In general, a FICO score above 650 indicates that the individual has a very good credit history. People with scores below 620 will often find it substantially more difficult to obtain financing at a favorable rate.
March 24, 2009
Legacy Hedge
What Does Legacy Hedge Mean?
A hedge position that a company holds for an extended period of time. Commodity companies, such as gold and oil producers, will often have legacy hedges on their reserves. This gives them a more stable stream of revenue as the hedge provides price guarantees
Investopedia explains Legacy Hedge
Depending on the movement of market prices over time, a legacy hedge can become extremely valuable or negative for the company. For example, suppose that a gold producer hedged five million ounces of gold over a 10-year period beginning in 1998 at $200. If the price of gold falls over the 10-year period, the hedge will benefit the gold producer because it is selling its gold above the market price. However, if the price of gold rises to $500, the gold producer will be selling at a significantly lower rate than the market price and will not benefit from the higher prices.
March 23, 2009
Bailout
What Does Bailout Mean?
A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement
Investopedia explains Bailout
Bailouts have traditionally occurred in industries or businesses that may be perceived as no longer being viable, or are just sustaining huge losses. Typically, these companies employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business folded.
For example, Chrysler, a large U.S. automaker was in need of a bailout in the early 1980s. The U.S. government stepped in and offered roughly $1.2 billion to the failing company. Chrysler was able to pay the entire bailout back, and is currently a profitable firm.
One of the biggest bailouts is the one proposed by the U.S. government in 2008 that will see $700 billion put toward bailing out various financial organizations and those affected by the credit crisis.
March 22, 2009
Troubled Asset Relief Program – TARP
What Does Troubled Asset Relief Program - TARP Mean?
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts
Investopedia explains Troubled Asset Relief Program - TARP
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.
In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.
March 21, 2009 TARP Bonuses
What Does TARP Bonuses Mean?
A buzzword coined by the financial media during the financial crisis of 2008/09 to describe bonuses paid to employees and executives of banks and other financial firms that received Troubled Asset Relief Program (TARP) funds. TARP bonuses were controversial because employees were receiving additional pay even as their companies required bailout funds
Investopedia explains TARP Bonuses
Companies argue that they have to pay bonuses to retain talent. But critics contend that because the companies led by the executives in question were being rescued with taxpayer money, the bonuses were not well-deserved and the recipients should not be considered "talent".
On March 19, 2009, the House approved a bill to create legislation that would put a 90% tax on bonuses earned during the 2008 year. This tax would apply to banks receiving TARP bailout funds of more than $5 billion. This legislation was created in response to the public anger surrounding $165 million in bonuses that was paid to traders in the AIG Financial Products (A.I.G.F.P.) division, the division responsible for the majority of losses surrounding the fall of
March 20, 2009 Mini-Lot
What Does Mini-Lot Mean?
A currency trading lot size that is 1/10 the size of the standard lot of 100,000 units. One pip of a currency pair based in USD is equal to $1 when trading a mini-lot, compared to $10 for a standard-lot trade. Mini-lots are available to trade if you open a mini-account with a forex dealer.
Investopedia explains Mini-Lot
Mini-accounts are not limited to only trading with one mini-lot at a time. To make an equivalent trade to a one standard-lot, a trader can trade 10 mini-lots. By using mini-lots instead of standard-lots, a trader can customize the trade, and have greater control of their risk exposure.
March 19, 2009
Leveraged Loan
What Does Leveraged Loan Mean?
Loans extended to companies or individuals that already have considerable amounts of debt. Lenders consider leveraged loans to carry a higher risk of default and, as a result, a leveraged loan is more costly to the borrower
Investopedia explains Leveraged Loan
Leveraged loans for companies or individuals with debt tend to have higher interest rates than typical loans. These rates reflect the higher level of risk involved in issuing the loan. In business, leveraged loans are also used in the leveraged buy-outs (LBOs) of other companies.
March 18, 2009
Derogatory Information
What Does Derogatory Information Mean?
Information on a person's credit report that can be legally used to turn down a loan application; it includes late payments, charge-offs and bankruptcies. As a general rule, derogatory information remains on a person's credit report for seven years; but there are exceptions, including bankruptcies, which can remain for 10 years.
Investopedia explains Derogatory Information
Various federal laws and statutes protect consumers from unfair denial of credit. Under the Equal Credit Opportunity Act, credit applications cannot ask applicants their sex, race, color, religious affiliation or national origin. Creditors can ask applicants how old they are for certain purposes; however, they cannot use age to deny credit to applicants older than 62. Under the Fair Credit Reporting Act, consumers have the right to review their credit reports and have wrong information corrected
March 17, 2009
Total Debt Service Ratio – TDS
What Does Total Debt Service Ratio - TDS Mean?
A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt. More specifically, this ratio shows the proportion of gross income that is already spent on housing-related and other similar payments.
Receiving a ratio of less than 40% means that the potential borrower has an acceptable level of debt.
Investopedia explains Total Debt Service Ratio - TDS
For example, Jack and Jill, two law students, have a monthly mortgage payment of $1,000 (annual payment of $12,000), property taxes of $3,000, credit card balances totaling $1,000 and a gross family income of $45,000. This would give a TDS of around 36%. Based on the benchmark of 40%, Jack and Jill appear to be carrying an acceptable amount of debt.
This ratio is very similar to the gross debt service ratio (GDS) except that the GDS does not account for non-housing related payments. TDS allows for a slightly more detailed view of a potential borrower's financial situation.
March 16, 2009
Evergreen Loan
What Does Evergreen Loan Mean?
A loan that does not require the principal amount to be paid off within a specified period of time. Evergreen loans are usually in the form of a short-term line of credit that is routinely renewed leaving the principal remaining outstanding for the long term.
Also called a "standing" or "revolving loan".
Investopedia explains Evergreen Loan
Credit cards and checking account overdraft lines of credit are widely-used as evergreen or revolving loans. Evergreen loans are a useful type of personal credit because the user does not need to reapply for a new loan every time they need to use it.
March 15, 2009
Redlining
What Does Redlining Mean?
The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of high default rates. In this case, the rejection does not take the individual's qualifications and creditworthiness into account
Investopedia explains Redlining
In some cases of redlining, financial institutions would literally draw a red line on a map around the neighborhoods in which they did not want to offer financial services, giving the term its name. Although the Federal Community Reinvestment act was passed in 1977 to put an end to all redlining practices, critics say the discrimination still occurs.
March 14, 2009
House Poor
What Does House Poor Mean?
A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.
Investopedia explains House Poor
People typically become house poor because they buy more house than they can afford, but there are other ways that people can become house poor as well. For example, some people will become house poor after the birth of a child, when one spouse decides to stay at home with the new addition, rather than going back to work.
March 13, 2009
Short Refinance
What Does Short Refinance Mean?
The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. A lender might do this because it is more cost effective than foreclosure proceedings.
Investopedia explains Short Refinance
Foreclosure is an expensive solution for a lender for loans in default; not only does the lender not receive any payments for up to a year, but it may lose out on fees associated with the procedure. A short refinance is just one of several alternatives that might be more cost effective for the lender. It also allows the borrower to keep his or her home. Other potential solutions are entering into a forbearance agreement or a deed in lieu of foreclosure.
March 12, 2009
Midgets
What Does Midgets Mean?
A slang term referring to a Government National Mortgage Association (GNMA) bond, which has a 15 year maturity. The midget is secured by mortgages backed by federal agencies. GNMA is also known as "Ginnie Mae".
Investopedia explains Midgets
The GNMA was started in an attempt to make affordable housing available to lower income families. The term midget is a slang term used by dealers to refer to these bonds and it is not used by GNMA to formally describe any of its securities.
March 11, 2009
Workout Assumption
What Does Workout Assumption Mean?
The assumption of an existing mortgage by a qualified, third-party borrower from a financially distressed borrower. By having someone else assume the mortgage, the financially distressed borrower is relieved of its obligation of repaying the mortgage. The assumption must be approved by the mortgagee.
Investopedia explains Workout Assumption
Foreclosure on a mortgage that is in default is an expensive and timely solution for the lender. If a borrower's financial problems are temporary, a lender might be willing to find a temporary solution, such as a forbearance agreement. If a borrower's financial problems are lasting, a workout assumption is one of several remedies that can help the borrower avoid foreclosure. Other remedies include a mortgage short sale or a deed in lieu of foreclosure.
March 10, 2009
Foreclosure – FCL
What Does Foreclosure - FCL Mean?
A situation in which a homeowner is unable to make principal and/or interest payments on his or her mortgage, so the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.
Investopedia explains Foreclosure - FCL
In some cases, to avoid foreclosing on a home, creditors try to make adjustments to the repayment schedule to allow the homeowner to retain ownership. This situation is known as a special forbearance or mortgage modification.
March 9, 2009
Forbearance
What Does Forbearance Mean?
A postponement of loan payments, granted by a lender or creditor, for a temporary period of time. This is done to give the borrower time to make up for overdue payments.
Investopedia explains Forbearance
Basically, forbearance allows the borrower to put a temporary hold on his or her monthly payments, usually for up to one year. Forbearance is common for unemployed people with outstanding student loans.
March 8, 2009
Delinquent Mortgage
What Does Delinquent Mortgage Mean?
A mortgage for which the borrower has failed to make payments as required in the loan documents. If the borrower can't bring the payments current within a certain time period, the lender may initialize foreclosure proceedings.
Investopedia explains Delinquent Mortgage
Foreclosure is a last resort for lenders because it is an expensive procedure and lenders typically lose money in foreclosure proceedings. A forbearance agreement is a potential option to foreclosure if the borrower's financial difficulties are temporary. A deed in lieu of foreclosure is another option to foreclosure
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March 7, 2009
Deed In Lieu Of Foreclosure
What Does Deed In Lieu Of Foreclosure Mean?
A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith.
Investopedia explains Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure has advantages for both a borrower and a lender; mainly the avoidance of time consuming and costly foreclosure proceedings. In addition, the borrower avoids some public notoriety, and may even be able to lease the property back from the lender.
The lender needs to assess certain risks which include, among other things, the risk that the property is not worth more than the remaining balance on the mortgage and that junior creditors might hold liens on the property.
March 6, 2009
Loan Modification
What Does Loan Modification Mean?
A modification to an existing loan made by a lender in response to a borrower's long-term inability to repay the loan. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan or any combination of the three. A lender might be open to modifying a loan because the cost of doing so is less than the cost of default
Investopedia explains Loan Modification
A loan modification agreement is different from a forbearance agreement. A forbearance agreement provides short-term relief for borrowers who have temporary financial problems, while a loan modification agreement is a long-term solution for borrowers who will never be able to repay an existing loan.
March 5, 2009
Liar Loan
What Does Liar Loan Mean?
A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.
Investopedia explains Liar Loan
These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.
Low-documentation mortgages usually fall into the Alt-A category of mortgage lending. Alt-A lending depends heavily on a borrower's credit score (FICO score) and the mortgage's loan-to-value ratio (LTV) as tools to determine the borrower's ability to repay the mortgage.
March 4, 2009
Passive Loss
What Does Passive Loss Mean?
A loss incurred through a rental property, limited partnership, or other enterprise in which the individual is not actively involved.
Investopedia explains Passive Loss
Passive losses can only be used to offset passive income, not wage or portfolio income.
March 3, 2009
Passive Income
What Does Passive Income Mean?
Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved. As with non-passive income, passive income is usually taxable; however it is often treated differently by the Internal Revenue Service (IRS).
Investopedia explains Passive Income
There are three main categories of income: active income, passive income and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest or capital gains. For tax purposes, it is important to note that losses in passive income generally cannot offset active or portfolio income.
It is important to note that, by some, portfolio income is considered passive income; in which case dividends and interest would be considered passive. The important definition is the one the IRS uses, and to be sure your taxes are filed correctly, it would be prudent to check with the IRS or a tax professional on this matter if you have a blend of active, passive, and portfolio income.
March 2, 2009
Hidden Taxes
What Does Hidden Taxes Mean?
Taxes that are indirectly assessed upon consumer goods without the consumer's knowledge. Hidden taxes are levied upon the goods at some point during the production process and therefore raise the cost of the goods sold. However, this tax is never revealed directly to the consumer, who simply pays a higher price for the good, not knowing that part of that price is due to this tax.
Investopedia explains Hidden Taxes
Some ad valorem taxes are an example of a hidden tax, as are taxes that are imposed at the wholesale level. Most consumers are aware that there is a tax on retail goods (sales tax), but this is by no means the only tax levied on consumer goods. Hidden taxes are almost invariably passed on to the consumer
March 1, 2009
Notching
What Does Notching Mean?
When rating agencies reduce their ratings on structured financial collateral based on ratings from another agency without rating the collateral themselves. Notching arises when collateral, such as mortgage backed securities (MBS), and other asset backed securities (ABS) are included within investment vehicles that are rated, such as collateralized debt obligations (CDOs).
Investopedia explains Notching
A study by Greenberg Quinlan Rosner Research in early 2002 found that 67% of senior executives, working in structured finance, oppose the practice of notching, because they feel that it undermines competition. They feel that the two largest rating agencies employ notching to maximize their market share and undermine competition.
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February 28, 2009
Consolidated Tax Return
What Does Consolidated Tax Return Mean?
A comprehensive tax return that encompasses a group of smaller entities. Consolidated tax returns are often filed by business conglomerates on behalf of all subsidiary firms. They are filed both for simplicity and to allow the parent organization to receive tax benefits that may otherwise be forfeited. However, conglomerates do not need to file this type of return if they choose not to do so.
Investopedia explains Consolidated Tax Return
Consolidated tax returns are filed using the same forms and rules as all other taxpaying entities; however, a parent-subsidiary relationship must exist in order to allow for this type of filing. The IRS has allowed consolidated tax returns for nearly 100 years, and rules for filing have remained largely unchanged since the 1960s.
February 27, 2009
60-Plus Delinquencies
What Does 60-Plus Delinquencies Mean?
Home loans that are more than 60 days past due on their monthly mortgage payments. 60-plus delinquency rates are typically expressed as a percentage of a group of loans written within a specified time period, such as a given calendar year. Another common grouping method are the interest rates for the pool of loans that make up a mortgage-backed security (MBS) or other securitized mortgage product.
60-plus delinquencies are less than 90 days past due, and have not yet entered the foreclosure process - loan in the latter status are expressed separately. The 60-plus rate may be split into one for prime loans and subprime loans. The 60-plus rate on subprime loans can be expected to be higher than for prime. Also, 60-Plus rates are often published separately for fixed-rate versus adjustable-rate loans.
Investopedia explains 60-Plus Delinquencies
The 60-plus rate is often added to another negative event measure, the foreclosure rate for the same group of loans. The two added together give a cumulative measure of the individual mortgages that are either not being paid at all, or being paid behind schedule.
If the rate on past-due and/or foreclosed mortgages rises beyond a certain level, the mortgage-backed security may have a shortfall of cash to pay out to investors. This can cause massive re-pricing of assets, resulting in some investors losing the majority of their invested capital.
February 26, 2009
Tax Gain/Loss Harvesting
What Does Tax Gain/Loss Harvesting Mean?
Selling securities at a loss to offset a capital gains tax liability. Tax gain/loss harvesting is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains.
Also known as "tax-loss selling".
Investopedia explains Tax Gain/Loss Harvesting
For many investors, tax gain/loss harvesting is the single most important tool for reducing taxes now and in the future. If properly applied, it can save you taxes and help you diversify your portfolio in ways you may not have considered. Although it can't restore your losses, it can certainly soften the blow. For example, a loss in the value of Security A could be sold to offset the increase in value of Security B, thus eliminating the capital gains tax liability of Security B.
February 25, 2009
Windfall Tax
What Does Windfall Tax Mean?
A tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on the companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.
Investopedia explains Windfall Tax
As with all tax initiatives instituted by governments, there is always a divide between those who are for and those who are against the tax. The benefits of a windfall tax include proceeds being directly used by governments to bolster funding for social programs. However, those against windfall taxes claim that they reduce companies' initiatives to seek out profits. They also believe that profits should be reinvested to promote innovation that will in turn benefit society as a whole.
Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. This issue came to a head in 2005, when oil and gas companies, such as Exxon Mobil who reported profits of US$36 billion for the year, experienced unusually large profits due to rising energy prices.
February 24, 2009
Net Operating Loss - NOL
What Does Net Operating Loss - NOL Mean?
A period in which a company's allowable tax deductions are greater than its taxable income, resulting in a negative taxable income. This generally occurs when a company has incurred more expenses than revenues during the period.
The net operating loss for the company can generally be used to recover past tax payments or reduce future tax payments. The reasoning behind this is that because corporations are required to pay taxes when it earns money, it deserves some form of tax relief when it loses money.
Investopedia explains Net Operating Loss - NOL
If a company has a net operating loss, it can apply this tax relief in two ways or through a combination of both. The company can apply the net operating loss to their past tax payments and receive a tax credit. It could also apply the net operating loss to future income tax payments, reducing payments they need to make in future periods. The terms of the tax relief and how it can be applied varies by jurisdiction but usually the NOL can be applied to the past few years (2-3) and much more to the future (7-10) years.
This term is really just fancy jargon for the company losing money. It makes sense that you should have to pay tax before you get "out of the hole". For example, say you lose $1 million in your first year of business and make $5 million the next year. It wouldn't be fair for you to have to pay tax on a profit of $5 million, because you are really only ahead by $4 million ($5 million profit - the $1 million loss).
Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. This issue came to a head in 2005, when oil and gas companies, such as Exxon Mobil who reported profits of US$36 billion for the year, experienced unusually large profits due to rising energy prices.
February 23, 2009
National Bank
What Does it Mean?
In the United States, a commercial bank chartered by the comptroller of the currency of the U.S. Treasury. A national bank functions as a member bank of the Federal Reserve in the capacity of investing member of its district Federal Reserve Bank. These banks may facilitate the auction process of U.S. Treasury bonds and must be members of the Federal Deposit Insurance Corporation (FDIC). Internationally, "national bank" is synonymous with "central bank," or a bank controlled by the national government of a country. Central banks set monetary policies within national economies.
Investopedia explains National Bank
National banks in both structures have an important role in that they help structure a country's financial system. Having an efficient banking system, whether through a central bank or the Federal Reserve, is important to the financial stability of a country's economy.
National banks also facilitate daily transactions with their local Federal Reserve Bank, such as Fed bank wires. They must generate call reports to the Fed each quarter and also make the reports public.
The first national bank in the U.S. was founded under the plans of George Washington.
February 22, 2009
Dotcom
What Does Dotcom Mean?
A company that embraces the internet as the key component in its business.
Investopedia explains Dotcom
The dotcoms took the world by storm in the late '90s, rising faster than any industry in recent memory. Despite the fact that most internet companies were losing money hand over fist, they were given huge valuations on the stock market - but it didn't last for long. The Nasdaq hit its high in March of 2000, and within a few years most of the dotcom sector was wiped out.
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February 21, 2009
Bubble
What Does Bubble Mean?
1. An economic cycle characterized by rapid expansion followed by a contraction.
2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.
3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.
Investopedia explains Bubble
Bubbles form in economies, securities, stock markets and business sectors because of a change in the way players conduct business. This can be a real change, as occurred in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift, as happened during the dotcom boom in the late '90s and early 2000s. During the boom people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurs. Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate. Thus, there is little long-term return on those assets.
February 20, 2009
Paper Profit (Paper Loss)
What Does Paper Profit (Paper Loss) Mean?
Unrealized capital gain (or capital loss) in an investment. It is calculated by comparing the market price of a security to the original purchase price. Gains or losses only become realized when the security is sold.
Investopedia explains Paper Profit (Paper Loss)
Investors commonly justify bad investment decisions because of paper gains or losses.
Two examples:
1. Although you officially recognize a transaction when you sell a security, many investors believe they haven't lost any money in a sinking investment because they haven't yet sold it. While you don't have a capital loss for tax purposes, there is a loss in value.
2. On the flip side, the dotcom boom saw many "paper millionaires" created due to stock options. The problem was that rules in options contracts made it impossible for these people to sell their stock and realize their wealth. Consequently, after the dotcom market crashed, many paper millionaires went broke.
February 19, 2009
Paper Millionaire
What Does Paper Millionaire Mean?
An individual who has achieved a high net worth as a result of the large total market value of the assets he or she owns. This phenomenon usually occurs when investors buy marketable securities that are later bid up to much higher prices on the open market. While this creates large amounts of "paper profit", the paper millionaire's riches usually aren't safe until these holdings are liquidated.
Investopedia explains Paper Millionaire
It is important to note that paper millionaires are not the same as true millionaires, which generally refers to people who have more than $1 million in cash in the bank.
For example, consider a hypothetical investor during the 1990s technology bubble who invested in startup dotcom companies. Assuming that none of this investor's shares is sold, he or she would have become a paper millionaire, as recorded on the brokerage statement, despite having very little cash in the bank.
However, once the dotcom bubble burst, technology stocks saw their share prices collapse, and former paper millionaires once again found themselves poor, owning only pieces of paper (i.e. share certificates) that were no longer worth the millions of dollars at which the market had previously valued them.
February 18, 2009
Unrealized Loss
What Does Unrealized Loss Mean?
A loss that results from holding onto an asset rather than cashing it in and officially taking the loss.
Investopedia explains Unrealized Loss
Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss.
February 17, 2009
Unrealized Gain
What Does Unrealized Gain Mean?
A profit that results from holding on to an asset rather than cashing it in and using the funds.
Investopedia explains Unrealized Gain
Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain.
February 16, 2009
Realized Gain
What Does Realized Gain Mean?
A gain resulting from selling an asset at a price higher than the original purchase price.
Investopedia explains Realized Gain
There may be tax consequences for a realized profit.
February 15, 2009
Tax Bracket
Investopedia explains Tax Bracket
Most countries tax individual incomes using a system of tax brackets. This structure implements what is referred to as a progressive tax system, in which taxation progressively increases as an individual's income grows. This contrasts with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.
Proponents of the use of tax brackets and a progressive tax system contend that individuals with high incomes are more able to pay income taxes while maintaining a high standard of living, while low-income individuals struggle to meet their basic needs, and should be subject to less taxation.
Furthermore, the use of tax brackets has an automatic stabilizing effect on an individuals' after-tax income, as a decrease in salary is counteracted by a decrease in tax rate, leaving the individual with a less substantial decrease in after-tax income.
February 14, 2009
Tax Liability
What Does it Mean?
The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event. Tax liability can be calculated by applying the appropriate tax rate to the taxable event's tax base. Taxable events include, but are not limited to, annual income, the sale of an asset, a fiscal year-end or an inheritance.
Investopedia explains Tax Liability
A tax liability is a legal claim on assets. Should an entity default on paying its taxes, the governing authority may foreclose on the delinquent account, or take out a lien or encumbrance on an asset.
February 13, 2009
Recessionista
What Does it Mean?
A person who is able to remain stylish during times of economic hardship. A recessionista can shop on a limited budget and still manage to be up to date on the most current fashions. A recessionista does not let a bad economy, inflation, or a strong recession damage his or her wardrobe and opts to search for sales and shop at thrifty discount stores instead.
Investopedia explains Recessionista
The term recessionista derives from a combination of the words recession and fashionista. It is used to make light of a bad situation and demonstrate how people can maintain their lifestyles in times of struggle
February 12, 2009
Supply-Side Theory
What Does Supply-Side Theory Mean?
An economic theory holding that bolstering an economy's ability to supply more goods is the most effective way to stimulate economic growth.
Investopedia explains Supply-Side Theory
Supply-side theorists advocate income tax reduction because it increases private investment in corporations, facilities, and equipment.
February 11, 2009
Reaganomics
What Does Reaganomics Mean?
A popular term used to refer to the economic policies of Ronald Reagan, the 40th U.S. President (1981–1989), which called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets.
Investopedia explains Reaganomics
The term was used by supporters and detractors of Reagan's policies alike. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. These theories hold the view that decreases in taxes, especially for corporations, is the best way to stimulate economic growth: the idea is that if the expenses of corporations are reduced, the savings will "trickle down" to the rest of the economy, spurring growth.
Prior to becoming Reagan's Vice President, George H. Bush coined the term "voodoo economics" as a proposed synonym for Reaganomics.
February 10, 2009
Free Market
What Does Free Market Mean?
A market economy based on supply and demand with little or no government control. A completely free market is an idealized form of a market economy where buyers and sells are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.
In financial markets, free market stocks are securities that are widely traded and whose prices are not affected by availability.
In foreign-exchange markets, it is a market where exchange rates are not pegged (by government) and thus rise and fall freely though supply and demand for currency.
Investopedia explains Free Market
In simple terms, a free market is a summary term for an array of exchanges that take place in society. Each exchange is a voluntary agreement between two parties who trade in the form of goods and services. In reality, this is the extent to which a free market exists since there will always be government intervention in the form of taxes, price controls and restrictions that prevent new competitors from entering a market. Just like supply-side economics, free market is a term used to describe a political or ideological viewpoint on policy and is not a field within economics.
February 9, 2009
Pork-Barrel Politics
What Does Pork-Barrel Politics Mean?
A slang term used when politicians or governments "unofficially" undertake projects that benefit a group of citizens in return for that group's support or campaign donations. This spending mostly benefits the needs of a small select group despite the fact that the entire community's funds are being used.
Also referred to as "patronage".
Investopedia explains Pork-Barrel Politics
For example, let's say a city has a large number of potholes, spread evenly throughout its communities. If the mayor took campaign contributions from a group of wealthy residents in exchange for a promise to fix the potholes in their neighborhood first, this would be pork-barrel politics.
One possible derivation for the phrase comes from the practice of country stores keeping a barrel of salted pork open and available to the public. Certain high-ranking citizens would come by daily to dip into this common fund.
February 8, 2009
Capitalism
What Does Capitalism Mean?
An economic system based on a free market, open competition, profit motive and private ownership of the means of production. Capitalism encourages private investment and business, compared to a government-controlled economy. Investors in these private companies (i.e. shareholders) also own the firms and are known as capitalists.
Investopedia explains Capitalism
In such a system, individuals and firms have the right to own and use wealth to earn income and to sell and purchase labor for wages with little or no government control. The function of regulating the economy is then achieved mainly through the operation of market forces where prices and profit dictate where and how resources are used and allocated. The U.S. is a capitalistic system.
February 7, 2009
Crony Capitalism
What Does Crony Capitalism Mean?
A description of capitalist society as being based on the close relationships between businessmen and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.
Investopedia explains Crony Capitalism
Both socialists and capitalists have been at odds with each other over assigning blame to the opposite group for the rise of crony capitalism. Socialists believe that crony capitalism is the inevitable result of pure capitalism. This belief is supported by their claims that people in power, whether business or government, look to stay in power and the only way to do this is to create networks between government and business that support each other.
On the other hand, capitalists believe that crony capitalism arises from the need of socialist governments to control the state. This requires businesses to operate closely with the government to achieve the greatest success.
February 6, 2009
Capital Gains Tax
What Does it Mean?
A type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.
Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.
Investopedia explains Capital Gains Tax
Most countries' tax laws provide for some form of capital gains taxes on investors' capital gains, although capital gains tax laws vary from country to country. In the U.S., individuals and corporations are subject to capital gains taxes on their annual net capital gains.
It is important to note that it is net capital gains that are subject to tax because if an investor sells two stocks during the year, one for a profit and an equal one for a loss, the amount of the capital loss incurred on the losing investment will counteract the capital gains from the winning investment.
February 5, 2009
Write-Off
What Does it Mean?
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.
Investopedia Says...
For example, if you spend money on dinner to take out a client, that meal is a possible write-off towards your income because you presumably discussed business opportunities during the dinner.
February 4, 2009
Market Performance Committee
What Does it Mean?
A committee, consisting of members and allied members of the New York Stock Exchange (NYSE) who monitor the specialists' effectiveness in assuring an orderly market for their stocks. The Market Performance Committee has the additional responsibility of assigning new or existing issues to the specialists.
Investopedia Says...
A specialist shall be required to attend an informal meeting with the Market Performance Committee if they have had poor performance to discuss possible ways assuring better performance in the future. The Market Performance Committee will also.
February 3, 2009
Ponzi Scheme
What does it mean?
A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.
Investopedia Says...
The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.
February 2, 2009
Deferred Tax Asset
What does it mean?
An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be used in future fiscal periods.
Investopedia Says...
It must be determined that there is more than a 50% probability that the company will have positive accounting income in the next fiscal period before the deferred tax asset can be applied. If, for example, a company has.
February 1, 2009
Viral Marketing
What does it mean?
Internet advertising or marketing that spreads exponentially whenever a new user is added. Viral marketing assumes that as each new user starts using the service or product, the advertising will go to everyone with whom that user interacts with.
Investopedia Says...
An example of viral marketing is Hotmail, which offers free web-based email. Each time a user emails someone, there is.
JANUARY 31, 2009
W-2 Form
What does it mean?
The form that an employer must send to an employee and the IRS at the end of the year. The W-2 form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck.
Investopedia Says...
A W-4 is a form that individuals complete for withholding purposes, whereas a W-2 form is for employers to fill out. The employer must provide.
JANUARY 30, 2009
Free File Fillable Tax Forms
What does it mean?
Electronic versions of tax forms, first posted by the IRS in 2009, to allow taxpayers, regardless of their income, to file their taxes online at no cost. Free file fillable tax forms are meant to speed up the process of receiving refunds, and minimize errors in filing. Taxpayers file their tax returns by accessing the forms on the IRS' website, entering their tax data, and then signing and filing electronically.
Investopedia Says...
Free file fillable tax forms, are digital versions of the hard-copy forms, and are designed for advanced users that know which forms are needed to be used.
JANUARY 29, 2009
Exotic Currency
What does it mean?
A foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large.
Investopedia Says...
Exotics are not considered major currencies because they are not easily traded in a standard brokerage account. Major currencies include.
JANUARY 28, 2009
Non-Qualified Plan
What does it mean?
Any type of tax-deferred, employer-sponsored retirement plan that falls outside of employee retirement income security act (ERISA) guidelines. Non-qualified plans are designed to meet specialized retirement needs for key executives and other select employees. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to.
Investopedia Says...
The contributions made to these plans are usually nondeductible to the employer, and are usually taxable to the employee as well.
JANUARY 27, 2009
Cramdown
What does it mean?
A bankruptcy concept that is often employed to obtain Chapter 11 bankruptcy reorganization plan while there are still objections from one or more creditors. Cramdown allows the bankruptcy courts to modify loan terms subject to certain conditions in an attempt to have all parties come out better than they would have without such modifications. The conditions are mainly that the new terms are fair and equitable to all parties involved.
Investopedia Says...
The term "cramdown" comes from the idea that the loan changes are "crammed down" creditors' throats.
JANUARY 26, 2009
Non-Qualifying Investment
What does it mean?
An investment that does not qualify for any level of tax-deferred or tax-exempt status. Investments of this sort are made with after-tax money. They are purchased and held in tax-deferred accounts, plans or trusts. Returns from these investments are taxed on an annual basis.
Investopedia Says...
Some examples of investments that do not usually qualify for tax-exempt status are antiques, collectibles, and jewelry.
JANUARY 25, 2009
In-Service Withdrawal
What does it mean?
A withdrawal made from a qualified plan account before the holder experiences a triggering event. A triggering event, such as reaching a certain age, or leaving an employer, is often needed to be able to withdraw funds from a plan, such as a 401(k).
Investopedia Says...
Some plans, allow for distributions to be made before a triggering event occurs, to make house payments or pay for your children's education.
JANUARY 24, 2009
Longevity Risk
What does it mean?
The risk to which a pension fund or life insurance company could be exposed as a result of higher-than-expected payout ratios. Longevity risk exists due to the increasing life expectancy trends among policy holders and pensioners, and can result in payout levels that are higher than what a company or fund originally accounts for. The types of plans exposed to the greatest levels of longevity risk are defined-benefit pension plans and annuities, which guarantee lifetime benefits for policy or plan holders.
Investopedia Says...
Average life expectancy figures are on the rise, but even a very small change in life expectancies can create severe solvency issues for pension plans and insurance companies.
JANUARY 23, 2009
Early Withdrawal
What Does it Mean?
The removal of funds from a fixed-term investment before the maturity date, or the removal of funds from a tax-deferred investment account or retirement savings account, such as an IRA or 401(k) before a prescribed time. Early withdrawal could be anything earlier than the account owner's attainment of a prescribed minimum age requirement, or the maturity of a fixed-term investment, such as a certificate of deposit (CD).
Investopedia Says...
When an early withdrawal is made, the investor usually incurs an early withdrawal fee, which acts as a deterrent to frequent withdrawals before the end of the early withdrawal period.
JANUARY 21, 2009
Cafeteria Plan
What does it mean?
An employee benefit plan that allows staff to choose from a variety of benefits to formulate a plan that best suits their needs. Cafeteria plan options may include health and accident insurance, cash benefits, tax advantages and/or retirement plan contributions.
Also known as "cafeteria employee benefit plan" or "flexible benefit plan".
Investopedia Says...
Similar to a cafeteria where individuals select their food of choice, employees may choose benefits of their choice. These plans become more useful as diversity within workforces continues to grow.
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