Stock Cycle

Stock Cycle

The evolution of a stock's price from an early uptrend to a price high and eventually to a downtrend. The stock cycle is a buy-and-sell cycle that occurs over several years and has four stages: accumulation, markup, distribution, markdown. The stock cycle has expansion and contraction periods, much like the economic cycle. It can be used for portfolio management allocation, allowing for more investment during the accumulation and markup phases and less investment during the distribution and markdown phases.

Trade Trigger

Trade Trigger

Any type of event that triggers a securities trade. A trade trigger is usually a market condition, such as a rise or fall in the price of an index or security. Trade triggers are used to automate certain types of trades, such as selling shares of a stock when the price reaches a certain level. Day traders often use trade triggers in order to avoid having to constantly monitor market conditions. Trade triggers are automatic, thus freeing the trader to focus on other tasks. Most online brokers and day trading programs both teach and offer this strategy to investors.

Bank Rate

Bank Rate

The rate of interest charged by the Reserve Bank of India (RBI) on financial accommodation extended to banks and FINANCIAL INSTITUTIONS. The support is provided in the form of a bills rediscounting facility and advances or REFINANCE against specified ASSETS (e.g. TREASURY BILLS and DATED SECURITIES) or PROMISSORY NOTES. The intent behind changing the Bank Rate at certain junctures is to raise or lower the cost of funds that banks obtain from the RBI. This, in turn, would alter the structure of banks' interest rates and thereby serve to curb or encourage the use of credit. However, the Bank Rate is a relatively passive instrument of credit control. In the wake of the East Asian currency crisis, the RBI used the Bank Rate in conjunction with the CASH RESERVE RATIO and other measures to stabilize the exchange rate of the Rupee. In recent times, it has been RBI's endeavor to make the Bank Rae and effective signaling device as well as a reference rate. However, since frequent changes in the Bank Rate may be undesirable, the short-term REPOS interest rate seems to be a useful supplement in influencing the flow and cost of funds in the short term.

Balance of Payments

Balance of Payments

A statement that contains details of all the economic transactions of a country with the rest of the world, for a given time period, usually one year. The statement has two parts: the Current Account and the Capital Account. The 'Current Account' gives a record of a country's: (a) Trade Balance which shows the difference of exports and imports of physical goods such as machinery, textiles, chemicals and tea, (b) 'Invisibles' that comprise services (rendered and received) such as transportation and insurance and certain other flows, notably private transfers by individuals. When imports of goods exceed exports, it is referred to as a 'Trade Deficit'. However, the overall current account position depends on both the trade balance and the performance of 'Invisibles'. The 'Capital Account' contains details of the inward and outward flows of capital and international grants and loans. Examples of such flows are external assistance, foreign (direct and PORTFOLIO) investments, subscription to Global Depository Receipts or EUROCONVERTIBLE BONDS and deposits of non-residents. Inflows on the capital account are helpful in financing a current account DEFICIT. Any gap that remains is covered by drawing on exchange or gold reserves, or by credit from the International Monetary Fund. Depending on the nature of imports, a deficit on the current account indicates an excess of investment over domestic saving in an economy. So long as this deficit is kept in check (evaluated as a percentage of the CROSS DOMESTIC PRODUCT), the DEBT SERVICE RATIO would remain within manageable limits. A challenge posed to India some years ago was the upward pressure on the Rupee's exchange rate in the wake of large capital account inflows. So, to maintain the competitiveness of India's exports, the Reserve Bank of India (RBI) resorted to purchases of foreign exchange. However, this has also caused money supply to increase, and the RBI has had to 'sterilize' such monetization by raising the CASH RESERVE RATIO or by engaging in OPEN MARKET OPERATIONS.

At-the-Money

At-the-Money

The term relates to trading in listed OPTIONS. An option is said to be trading "at-the-money" when the STRIKING PRICE and the market price of the underlying share are equal.

Asset Management Company (AMC)

Asset Management Company (AMC)

A company set up for floating and managing schemes of a MUTUAL FUND. An AMC earns fees by acting as the PORTFOLIO manager of a fund. The AMC is appointed by the Board of Trustees, which oversees its activities. Thus, a mutual fund is generally established as a trust by a SPONSOR, which could be a registered company, bank or FINANCIAL INSTITUTION. Also, a custodian and a registrar are appointed to ensure safe keeping of the fund's securities and to deal with investors' applications, correspondence, etc.

Arbitrage

Arbitrage

The simultaneous purchase and sale transactions in a security or a commodity, undertaken in different markets to profit from price differences. For example, an arbitrageur may find that the share of The Tata Iron and Steel Company (TISCO) is trading at a lower price, at the Vadodara Stock Exchange compared to the exchange at Bombay. Hence, he may simultaneously purchase TISCO stock in Vadodara at, say Rs.250, and sell in Bombay at a higher price, say Rs.256, making a profit of Rs.6 per share less expenses.

Torpedo Stock

Torpedo Stock

A stock that has fallen substantially in value and that looks like it will continue to fall in value in the foreseeable future. This name refers to this type of stock's similarity to a battleship after it has been struck by a torpedo: it goes down fast and continues to sink until hits the bottom. A change in a business's underlying fundamentals can turn a company's stock into a torpedo stock. For example, investors see earnings as a good indicator of a business' success, as even a gradual rate of earnings growth indicates that a business is doing well. However, quarter after quarter of declining earnings with no end in sight can be enough to cause investors to "jump ship" as a stock's price starts to plummet.

Capitulation

Capitulation

When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling. After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.

Selling Away

Selling Away

When a broker solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations. Typically, when a broker is "selling away," the investments are in the form of private placements or other non-public investments.

Gold Certificate

Gold Certificate

A certificate of ownership that gold investors hold instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the hassles associated with the transfer of actual physical gold.

Gold Option

Gold Option

Right to buy or sell any amount of gold bullion in the future if a specific price is reached, and is therefore not an obligation on the part of the investor to either buy or sell the gold.

Money Market Securities

Money Market Securities

Money Market Securities is generally used to represent the market for securities maturing within one year. These include short-term CDs, repurchase agreements, commercial paper (low-risk corporate issues), among others. These are low risk, short-term securities that have yields similar to Treasuries.

Split-Funded Annuity

Split-Funded Annuity

A type of annuity that uses a portion of the principal to fund immediate monthly payments and then saves the remaining portion to fund a deferred annuity. The two funding methods let the annuity holder receive dependable income and simultaneously save for future needs. Using a split-funded annuity means that individuals do not have to wait for the annuity to reach the payout phase, because the stream of income begins immediately. At the same time, the annuity's remaining balance compounds tax deferred.

Unitranche Debt

Unitranche Debt

A type of debt that combines senior and subordinated debt into one debt instrument; it is usually used to facilitate a leveraged buyout. The borrower would pay one interest rate to one lender, and the rate would usually fall between the rate for senior debt and subordinated notes. The unitranche debt instrument was created to simplify debt structure and accelerate the acquisition process. Unitranche lending has its detractors because the loan is often split between secured and unsecured instruments. The interest rate benefit of a secured debt instrument is at least partially obscured by the increased risk attached to the unsecured portion of the instrument.

Put Warrant

Put Warrant

A security which grants the holder the right to sell the underlying security at a specified price. This is somewhat uncommon, since warrants usually grant the holder the right to buy a security at a particular price.

Put Option

Put Option

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. 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 fall significantly below the exercise price.

Put Ratio Backspread

Put Ratio Backspread

An investment strategy that combines options to create a spread which has limited loss potential and a mixed profit potential. It's created by combining long and short puts in a ratio such as 2:1 or 3:1.

Backspread

Backspread

A type of options spread in which a trader holds more long positions than short positions. The premium collected from the sale of the short option is used to help finance the purchase of the long options. This type of spread enables the trader to have significant exposure to expected moves in the underlying asset while limiting the amount of loss in the event prices do not move in the direction the trader had hoped for. This spread can be created using either all call options or all put options.

Canary Call

Canary Call

A step-up bond that cannot be called after completing its first-step period. The issuer of the bond reserves the option to call back the bond until the first step is reached. A canary call may only be exercised on predetermined dates. The canary call is similar to a Bermuda option, as it must be called on specific dates. If the issuer of the bond chooses not to call before the canary call expires, the bond will remain a standard step-up bond, where the coupon rate will increase with each step-up period.

Companion Bond

Companion Bond

A class of tranche found in a planned amortization class (PAC) bond that is responsible for protecting the PAC tranche from both contraction and extension risk. The companion bond is designed to absorb excess principal payments during times of high prepayment speeds and defer receiving principal payments during times of low prepayment speeds. More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess prepayments from the PAC tranche as possible and uses them to repay its own principal amount. Once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond. Conversely, in situations of low prepayment speeds, the companion bond defers the reception of any payments. The principal payments then go toward paying off the PAC bond. As long as the prepayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed.

Planned Amortization Class (PAC) Tranche

Planned Amortization Class (PAC) Tranche

A class of tranche in a planned amortization class (PAC) bond that receives a primary payment schedule. As long as the actual prepayment rate is between a designated range of prepayment speeds, the life of the PAC tranche will remain relatively stable. This tranche of the PAC bond receives some measure of protection against prepayment risk. The measure of prepayment risk protection, which includes both contraction and extension risk, is limited by the size of the companion bond and the speed of prepayment. If the speed of repayment is too slow (below the lower PAC collar), the life of the PAC tranche is extended; if the speed of repayment is too fast (above of the upper PAC collar), the life of the PAC tranche is shortened.

Deferred Payment Option

Deferred Payment Option Deferred Payment Option An option with all the characteristics of an American vanilla option, with one exception: payment is deferred until the original expiration date. The option can be exercised at any time; however, payment is deferred until the original expiration date of the option. These options are considered long term options, with expiration dates at least one year away.

An option with all the characteristics of an American vanilla option, with one exception: payment is deferred until the original expiration date. The option can be exercised at any time; however, payment is deferred until the original expiration date of the option. These options are considered long term options, with expiration dates at least one year away.

VIX Option

VIX Option

A type of non-equity option that uses the CBOE Volatility Index as the underlying asset. This is the first exchange-traded option that gives individual investors the ability to trade market volatility. Trading VIX options can be a useful tool for investors wanting to hedge their portfolios against sudden market declines, as well as to speculate on future moves in volatility. A trader who believes that market volatility will increase now has the ability to profit on this outlook by purchasing VIX call options. Sharp increases in volatility generally coincide with a falling market, so this type of option can be used as a natural hedge rather than using index options. For advanced option traders, it is possible to incorporate many different advanced strategies - such as bull call spreads, butterfly spreads, etc. - by using VIX options.

Front Fee

Front fee

Amount paid for initiating a compound or split-fee option contract. While all option contracts require a fee (the option premium) to be paid up-front to the seller, only compound or split-fee options require another amount (the back fee) for exercising them.

Funded Debt

Funded Debt

A company's debt, such as bonds, long-term notes payables or debentures that will mature in more than one year or one business cycle. This type of debt is classified as funded debt because it is funded by interest payments made by the borrowing firm over the term of the loan. Funded debt is one form of financing a company can use to finance its long-term capital projects, such as the addition of a new product line or the expansion of operations. The firm may also use short-term financing to fund its long-term operations. This exposes the firm to a higher degree of interest rate and refinancing risk, but allows for more flexibility in its financing.

Auction Market Preferred Stock (AMPS)

Auction Market Preferred Stock (AMPS)

A type of preferred stock which has its dividend rate reset by Dutch auction. The interest rate on the stock generally has a ceiling, and the dividend rate is often reset every forty-nine days. It is a type of floating-rate investment. The auction market preferred stock can be a beneficial investment for larger investors. The auction process will most likely reveal the current market yield for less-risky asset classes, such as preferred stock, and will self-adjust for the effects of alternative investments and inflation.

Unissued Stock

Unissued Stock

Stock that a publicly-traded company's charter permits the company to issue, but which the board of directors has not elected to issue. A company may keep unissued stock from public trade to reduce its earnings per share, which can increase the share price. Having unissued stock also gives the company flexibility to issue more shares if it so chooses.

Restricted Stock

Restricted stock

A stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award. Restricted stock (also known as letter stock or restricted securities) must be traded in compliance with special SEC regulations.

Stock Jobbing

Stock Jobbing

The buying and selling of securities with the intent of generating quick profits. While most investors seek value through long-term investments, stock jobbing takes on a more speculative short-term tone.

Stub Stock

Stub

Stock in a company that is over-leveraged as a result of recapitalization. Stub stock is very speculative and risky. Stub stock's advantage over junk bonds is that it has unlimited potential if the company turns things around.

Leveraged Recapitalization

Leveraged Recapitalization

A strategy where a company takes on significant additional debt with the purpose of either paying a large dividend or repurchasing shares. The result is a far more financially leveraged company. This is often used in risk arbitrage. It is also a form of shark repellent.