Since we are learning the 300th technical word commonly used in
financial markets today, i have attached the document containing all
300 terms and their definitions.
Definition of 'Soft Loan'
A loan with no interest or a below-market rate of interest, or loans
made by multinational development banks (such as the Asian Development
fund), affiliates of the World Bank and government agencies to
developing countries that would be unable to borrow at the market
rate. Soft loans are loans that have lenient terms, such as extended
grace periods in which only interest or service charges are due, and
interest holidays. Soft loans typically offer longer amortization
schedules (in some cases up to 50 years) and lower interest rates than
conventional bank loans.
Also knows as "soft financing" or "concessional funding."
Investopedia explains 'Soft Loan'
For example, Ethiopia received a soft loan from the Chinese
government, in September 2012. The Chinese government announced a
grant and soft loan package totaling US$23 million to support
Ethiopian development activities. The loan is part of China's plan to
support Ethiopia and to promote the development of trade between
Ethiopia and China. In another example, the Chinese government
extended a $2 billion soft loan to Angola in March 2004. The loan was
made in exchange for its commitment to provide a continuous supply of
crude oil to China.
terms used in share markets :
1. Definition of 'U-Shaped Recovery'
A type of economic recession and recovery that resembles a "U" shape
in charting. Specifically, a U-shaped recovery represents the shape of
the chart of certain economic measures, such as employment, GDP and
industrial output. A U-shaped recovery involves a gradual decline in
these metrics followed by a gradual rise back to its previous peak.
Compared to a V-shaped recovery, the U-shaped recovery takes longer to
reach levels seen prior to the start of the recession.
Investopedia Says
Investopedia explains 'U-Shaped Recovery'
There are countless other shapes a recession and recovery chart could
take, including V-shaped, W-shaped, L-shaped and J-shaped. Each shape
represents the general shape of the chart of the economic metrics that
gauge the health of the economy.
2. Definition of 'Labor Theory Of Value '
An economic theory that stipulates that the value of a good or service
is dependent upon the labor used in its production. The theory was
first proposed by Adam Smith (1723-1790), the founder of modern
economics, and was an important concept in the philosophical ideals of
Karl Marx. The labor theory of value suggests that goods which take
the same amount of time to produce should cost the same.
Investopedia Says
Investopedia explains 'Labor Theory Of Value '
Opponents of the labor theory of value purport that it is not labor
that determines the price of a good or service; rather, it is simply a
function of supply and demand for a given good or service that
determines its price. According to the theory, if the cost of
purchasing something is greater than the amount that the purchaser
values the time it would take to produce the good, then he will make
it himself rather than buy it.
3. Definition of 'Pain Trade'
The tendency of markets to deliver the maximum amount of punishment to
the most investors from time to time. A pain trade occurs when a
popular asset class or widely followed investing strategy takes an
unexpected turn that catches most investors flat-footed. Under this
definition, a sudden reversal in a niche sector or strategy would not
qualify as a pain trade, since not many investors are likely to be in
it. Pain trades sorely test the resolve of even the best traders and
investors, since they must face the dilemma of whether to hold on in
the hope that the trade will eventually work out, or take their losses
before the situation worsens.
Investopedia Says
Investopedia explains 'Pain Trade'
The periodic peaks and valleys in equity indices over the years
provide a perfect example of pain trades at work. Consider the dot-com
boom and bust of the late 1990s/early 2000s. As the Nasdaq soared over
this period and reached a record high in March 2000, technology stocks
accounted for a disproportionate part of portfolios held by most
investors and mutual funds. The subsequent collapse in technology
stocks and the Nasdaq led to a recession in the U.S. and a global bear
market, wiping out trillions of dollars in market capitalization and
household wealth. The pain trade here was being long technology
stocks, as the subsequent collapse in the sector reverberated around
the world and had an impact on the broad economy.
In 2008, the pain trade was being long equities in general. The U.S.
and many major global equity indices had reached record highs in the
fourth quarter of 2007, despite a simmering credit crisis that was
rapidly coming to a boil. The collapse of global equity markets in
2008 made this the biggest pain trade by far in terms of the number of
people affected and the amount of wealth destroyed. More than $35
trillion, or 60% of global market capitalization, was wiped out within
18 months, while the global economy suffered its deepest recession and
biggest financial crisis since the Great Depression of the 1930s. In
the U.S., plunging housing and stock prices led to the greatest
destruction of household wealth in history, even as the recession
threw millions of people out of work.
The strong recovery in global markets from 2009 onward proves that
even pain trades can turn to gain over a period of time, with the Dow
Jones Industrial Average and S&P 500 reaching new highs by 2013.
However, rising yields in 2013 made the bond market the new pain trade
for numerous investors in that year.
4. Definition of 'Salad Oil Scandal'
One of the worst corporate scandals of its time. It occurred when
Allied Crude Vegetable Oil Company discovered that banks would make
loans secured by its salad oil inventory.
When the ships full of salad oil would arrive in the docks, inspectors
would test it and confirm that the ship was full of salad oil.
However, the company didn't remind anyone that oil floats on water.
They had filled salad oil tanks with water and put a few feet of oil
on top, fooling everyone. The company would even transfer oil to
different tanks while taking inspectors out to lunch. In 1963, the
scam was busted and over $175 million worth of salad oil was missing.
Investopedia Says
Investopedia explains 'Salad Oil Scandal'
Commodities trader and company founder Anthony De Angelis was
convicted of fraud and conspiracy in the scandal and served seven
years in prison. American Express took one of the biggest hits from
the scandal, losing nearly $58 million and experiencing a 50% drop in
AMEX stock as a result.
5. Definition of 'Kakaku Yusen'
The system of pricing that is used by the Tokyo Stock Exchange. Under
the Kakaku Yusen system, a lower-priced trade is given priority over a
higher-priced trade for a sell order. Conversely, higher-priced trades
take precedence over lower-priced trades for buy orders.
Investopedia Says
Investopedia explains 'Kakaku Yusen'
The Kakaku Yusen system serves as a tiebreaker for trades that are
received or placed at the same time. This system is complementary to
the exchange's other tiebreaker mechanism, which gives priority to an
earlier-placed trade when two trades come in at the same price. The
Kakaku Yusen system is opposite of how trades are filled on American
exchanges.
6. Definition of 'Bear Tack'
A decline in the price of a stock, sector or market that may be a
harbinger of a bearish trend. A bear tack suggests that the asset or
market could be in for a significant price correction. However, it
does not mean that the asset or market will slump into an official
bear market, which is defined as a price decline of 20% or more. The
term “tack” is derived from the lexicon of sailing, and means a
maneuver in which a sailboat turns its bow to put the wind on the
opposite side of the vessel. Likewise, bear tack has come to mean a
change in the price movement of an asset or market to lower levels.
Investopedia Says
Investopedia explains 'Bear Tack'
A bear tack may indicate a short-lived, temporary price decline or a
longer-lasting price plunge. Just as a sailboat may have to change
tack several times to stay on course as the wind shifts, investors
need to position their portfolios to navigate choppy markets and stay
on track to meet their investment portfolio goals.
A bear tack should be especially heeded when it comes after a
prolonged advance period, since it may signal a big shift in investor
sentiment. This is particularly true if the economic environment has
been deteriorating, in the case of financial markets, or fundamentals
have been worsening, in the case of sectors or stocks.
For example, investors who heeded the bear tack after the S&P 500 and
Dow Jones Industrial Average hit record highs in October 2007 would
have saved themselves a packet, since these equity indexes
subsequently proceeded to lose more than half their value over the
next 18 months. The global credit crisis was just unfolding in October
2007, and although few could have predicted the scale of the carnage
that followed, heeding the warning signs of the bear tack – evidenced
by the 5% slide in the indices within two weeks of reaching their
highs – would have been a prudent course of action in retrospect.
Likewise, for a stock, a bear tack may be a decline on an earnings
miss after it has recently set a new record high. The earnings miss
may indicate that profit expectations have been ratcheted too high and
further misses may be in store.
Reaction to a bear tack depends on whether the investor follows an
active or passive investing style. While the active investor may take
proactive steps such as taking profits on certain positions and/or
initiating hedges to mitigate downside risk, the passive investor may
prefer to ride out the decline as a normal part of the market cycle.
7. Definition of 'Darvas Box Theory'
A trading strategy that was developed in 1956 by former ballroom
dancer Nicolas Darvas. Darvas' trading technique involved buying into
stocks that were trading at new 52-week highs with correspondingly
high volumes.
A Darvas box is created when the price of a stock rises above the
previous 52-week high, but then falls back to a price not far from
that high. If the price falls too much, it can be a signal of a false
breakout, otherwise the lower price is used as the bottom of the box
and the high as the top.
Investopedia Says
Investopedia explains 'Darvas Box Theory'
In 1956, Darvas was able to turn an investment of $10,000 into $2
million over an 18-month period. While traveling for his dancing,
Darvas would obtain copies of The Wall Street Journal and Barron's,
but he would only look at the stock prices to make his decisions. It
has been said that Darvas was less happy about the profits that he
made than he was about the ease and peace of mind that he got from
implementing his system.
Skeptics of Darvas' technique attribute his success to the fact that
he was trading in a very bullish market. They also say that returns
comparable to the ones he saw can't be attained if this technique is
used in a bear market.
8. Definition of 'Baby Boomer Age Wave Theory '
An economic theory popularized by economist and writer Harry Dent, who
concludes that the U.S. and other European markets will peak between
2008 and 2012. This is based on Dent's finding that a human's consumer
spending habits peak by age 50; therefore, as the baby boomer
generation reaches this age, the economy may be approaching a peak in
consumer spending and in the markets.
Investopedia Says
Investopedia explains 'Baby Boomer Age Wave Theory '
Because American soldiers returned from WWII earlier than European
soldiers, the theory concludes that markets in the U.S. will peak
around 2008, while European markets will peak around 2012.
Assuming that the theory's predictions are accurate, some expect this
to have wide-ranging implications. In addition, when baby boomers
retire, this could cause spikes in unemployment and decreases in the
housing market as aging baby boomers spend less. Others believe that
the influx of immigration will help stave off these effects in the
United States.
9. Definition of 'Cabinet Crowd'
Members of the NYSE who typically trade in inactive bonds. The cabinet
crowd is made up of a relatively small group of traders and investors
who deal in inactive fixed-income securities. These bonds are inactive
due to the fact that they are not actively traded and, thus, are
deemed more illiquid, causing bid-ask spreads to be much wider than
active or more liquid bonds.
Also known as the "inactive bond crowd" or "book crowd."
Investopedia Says
Investopedia explains 'Cabinet Crowd'
The name cabinet crowd arises from the fact that historically these
members would typically enter limit orders for transacting these
bonds, which were kept in "cabinets" adjacent to the bond trading
floor until the limit prices were attained. Once these limit prices
were reached, the orders would then be removed from said cabinets and
executed.
10. Definition of 'Eating Someone's Lunch'
The act of an aggressive competition that results in one company
taking portions of another company's market share. Market share is the
percentage of an industry or market's total sales that is achieved by
one company during a specified time period. A more aggressive company
"eats the lunch" of another company when it take some of its
competitor's market share. This can be achieved through the release of
a better or newer product, aggressive pricing or marketing strategies
or other competitive advantages. When these strategies result in one
company having a bigger market share for a particular product or
service, the company enjoying the larger market share is said to be
eating someone's lunch.
Investopedia Says
Investopedia explains 'Eating Someone's Lunch'
Eating someone's lunch generally refers to defeating or outwitting an
opponent. In the business world, it describes situations where one
company outperforms another and earns a larger market share. Eating
someone's lunch is considered a necessary component of a competitive
market, and may help bring better pricing and services to consumers as
companies compete for larger market shares. A company may eat
someone's lunch at one point in time, only to have their own lunch
eaten during a subsequent time as competitors fight back for market
share.
11. Definition of 'Fallen Angel'
1. A bond that was once investment grade but has since been reduced to
junk bond status.
2. A stock that has fallen substantially from its all time highs.
Investopedia Says
Investopedia explains 'Fallen Angel'
There is a fine line between fallen angels that are value stocks and
those that are headed straight towards bankruptcy.
12. Definition of 'Gaming Industry ETF'
A sector exchange-traded fund that invests solely in gaming companies,
so as to generate investment returns that correspond to those of an
underlying gaming index. A gaming ETF consists of a wide range of
stocks, from casino operators and manufacturers of gaming systems to
companies that accept bets on sporting events. A gaming ETF may be
vulnerable to economic downturns.
Investopedia Says
Investopedia explains 'Gaming Industry ETF'
A gaming ETF may hold stocks of international gaming companies, in
addition to those of domestic companies. It is yet another example of
a niche ETF. U.S. companies that would be included in a gaming ETF are
well-known casino resort operators.
By owning an ETF, you get the diversification of an index fund as well
as the ability to sell short, buy on margin and purchase as little as
one share. Another advantage is that the expense ratios for most ETFs
are lower than those of the average mutual fund. When buying and
selling ETFs, you have to pay the same commission to your broker that
you'd pay on any regular order.
13. Definition of 'Lady Macbeth Strategy'
A corporate-takeover strategy with which a third party poses as a
white knight to gain trust, but then turns around and joins with
unfriendly bidders.
Investopedia Says
Investopedia explains 'Lady Macbeth Strategy'
Lady Macbeth, one of Shakespeare's most frightful and ambitious
characters, devises a cunning plan for her husband, the Scottish
general, to kill Duncan, the King of Scotland. The success of Lady
Macbeth's scheme lies in her deceptive ability to appear noble and
virtuous, and thereby secure Duncan's trust in the Macbeths' false
loyalty.
13. Definition of 'K-Percent Rule'
A theory of macroeconomic money-supply growth first postulated by
Nobel Prize-winning economist Milton Friedman. The theory states that
the best way to control inflation over the long term is to have
central banking authorities automatically grow the money supply by a
set amount (the "k" variable) each year, regardless of the cyclical
state of the economy.
The k-percent rule proposes to set the growth variable at a rate equal
to the growth of real GDP each year. This would typically be in the
range of 2-4%, based on averages seen in the United States.
Investopedia Says
Investopedia explains 'K-Percent Rule'
Milton Friedman is the godfather of monetarism, a branch of economics
that singles out monetary growth and related policies as the most
important driver of future inflation. While the U.S. Federal Reserve
Board is well-versed on the k-percent rule's merits, in practice most
advanced economies do in fact base their monetary growth decisions on
the state of the broad economy.
When the economy is cyclically weak, the Federal Reserve and others
may look to grow the money supply by more than what the k-percent rule
would suggest. Conversely, when the economy is performing well, most
central banking authorities will seek to constrain money-supply
growth.
14. Definition of 'Jointly and Severally'
1. A legal term describing a partnership in which individual decisions
are bound to all parties involved and thus undivided.
2. A term used in underwriting syndicates to refer to the distinct
responsibility of individual companies to sell a certain portion of
unsold new issue.
Investopedia Says
Investopedia explains 'Jointly and Severally'
1. When an investor authorizes power of attorney to two separate
lawyers jointly and severally, both lawyers can make binding decisions
without the approval of the other lawyer.
2. For example, an underwriter who has jointly and severally agreed to
a 30% stake in the sale of a new issue must sell 30% of any remaining
unsold portion, even if that underwriter has already sold more than
this amount in the initial sale. All members of the syndicate are
responsible for any leftover shares.
15. Definition of 'Icarus Factor'
The term Icarus factor describes a situation where managers or
executives initiate an overly ambitious project which then fails.
Fueled by excitement for the project, the executives are unable to
reign in their misguided enthusiasm before it is too late to avoid the
failure.
Investopedia Says
Investopedia explains 'Icarus Factor'
In Greek mythology, Icarus and his father, Daedalus, were imprisoned
in Crete by King Minos. Daedalus created two sets of wings made from
wax and feathers. He and his son were to use them to escape by flying.
Daedalus warned his son not to fly too close to the sun. Icarus was
overcome with the excitement of flying and disregarded his father's
warning. He flew higher and higher, approaching the sun. As the wax
melted and the feathers fell, so too did Icarus fall to his death in
what is now called the Icarian Sea, near Icaria, an island southwest
of Samos.
The Icarus factor is most often seen when companies plow into
businesses that work on different models from their existing lines. As
they spend more and more money to try and catch up to companies
already dominant in those fields, they use up the cash reserves built
up by their core business - sometimes this drain can be fatal.
16. Definition of 'Hanging Man'
A bearish candlestick pattern that forms at the end of an uptrend. It
is created when there is a significant sell-off near the market open,
but buyers are able to push this stock back up so that it closes at or
near the opening price. Generally the large sell-off is seen as an
early indication that the bulls (buyers) are losing control and demand
for the asset is waning.
Hanging Man
Investopedia Says
Investopedia explains 'Hanging Man'
This formation does not mean that the bulls have definitively lost
control, but it may be an early sign that the momentum is decreasing
and the direction of the asset may be getting ready to change. The
reliability of this signal is drastically improved when the price of
the asset decreases the day after the signal. Hanging man formations
can be more easily identified in intraday charts than daily charts and
are a very popular formation used by day traders.
If this pattern is found at the end of a downtrend, it is known as a "hammer".
17. Definition of 'Narrow Moat'
A slight competitive advantage that one company enjoys over competing
firms operating in the same or similar type of industry. A narrow moat
is still an advantage for a company, but it is one that only provides
a limited amount of economic benefit and will typically last for only
a relatively short period of time before competition marginalizes its
importance.
Investopedia Says
Investopedia explains 'Narrow Moat'
The phrase "economic moat" was coined by legendary investor Warren
Buffett. This phrase has since been refined to differentiate between
"wide moats" and "narrow moats". Wide economic moats offer substantial
economic benefits and are expected to endure for a prolonged period of
time, while narrow moats offer more modest economic benefits and
typically last for a shorter period of time.
18. Definition of 'Razor-Razorblade Model'
A business tactic involving the sale of dependent goods for different
prices - one good is sold at a discount, while the second dependent
good is sold at a considerably higher price.
Investopedia Says
Investopedia explains 'Razor-Razorblade Model'
If you've ever purchased razors and their replacement blades, you know
this business method well. The razors are practically free, but the
replacement blades are extremely expensive.
The video game industry is another user of this pricing strategy. They
sell the game consoles at a relatively low price, recouping the lost
profits on the high-priced games.
19. Definition of 'Sandbag'
A tactic used to hide or limit expectations of a company's or
individual's strength in order to produce greater than anticipated
results. Sandbagging, in business, is most often seen when company
managers temper the expectations of superiors or shareholders by
giving guidance below what they know will be achieved. Once the better
than expected results are presented, the firm looks all the better.
Investopedia Says
Investopedia explains 'Sandbag'
Let's imagine for example that Orange Inc had gained a reputation in
the late 2000s for sandbagging quarterly expectations leading up to
earnings season. Analysts and pundits alike would be confident that
quarterly numbers would be strong. However, when results were released
they would be markedly higher than most expected, thus leading to a
surge in share value, which may be a more favorable outcome in terms
of press coverage.
20. Definition of 'Quasi-Public Corporation'
A type of corporation in the private sector that is backed by a branch
of government that has a public mandate to provide a given service.
Most quasi-public corporations began as government agencies, but have
since become separate entities. It is not uncommon to see the shares
of this type of corporation trade on major stock exchanges, which
allows individual investors to gain exposure to the company's profit.
Investopedia Says
Investopedia explains 'Quasi-Public Corporation'
For example, the Federal National Mortgage Association (Fannie Mae) is
regarded as a quasi-public corporation because it operates as an
independent corporation. This company operates under a congressional
charter that aims to increase the availability and affordability of
homeownership, but is not treated as any part of the government.
Contrary to popular opinion, employees of quasi-public corporations do
not work for the government.
21. Definition of 'Palisades Water Index'
A stock market index that gauges the performance of global water
industry companies. These companies encompass such subsectors as water
utilities, pump and filter manufacturers, and irrigation equipment.
The index was created in order to capitalize on the growing public
awareness of water provision and treatment.
Investopedia Says
Investopedia explains 'Palisades Water Index'
As of December 31, 2003, the index was set at 1,000. In order to find
out where it is now, look for ticker symbol ZWI. The index is a
modified, equal weighted dollar index and trades on the AMEX.
22. Definition of 'Ultra Vires Acts'
Any act that lies beyond the authority of a corporation to perform.
Ultra Vires acts fall outside the powers that are specifically listed
in a corporate charter or state law. They can also be any action that
is specifically prohibited by the corporate charter.
Investopedia Says
Investopedia explains 'Ultra Vires Acts'
Ultra Vires acts can also be defined as any excessive use of corporate
power that has been granted. These acts cannot be legally defended in
court. They will, in fact, leave the corporation vulnerable to
lawsuits by employees or other parties.
23. Definition of 'Tape Is Late'
A situation on the trading floor where trading volume is so heavy that
the real-time ticker quotes are delayed by a minute or two. When the
tape is late some price or volume digits will be deleted.
Investopedia Says
Investopedia explains 'Tape Is Late'
The term comes from years ago when the "tape" was actually paper and
the printer couldn't keep up with trading activity. In the modern
stock market this isn't as much of an issue because data is generally
delivered electronically.
24. Definition of 'Xenocurrency'
A currency that trades in markets outside of its domestic borders. The
term "xenocurrency" is derived from the prefix "xeno," which literally
means foreign or strange.
Investopedia Says
Investopedia explains 'Xenocurrency'
An example of a xenocurrency would be the euro traded in the United
States, or the Japanese yen traded in Europe. The term "xenocurrency"
is seldom used in markets, perhaps because of the somewhat negative
connotation of the word "xeno." Xenophobia, for example, means an
irrational fear or hatred of foreigners. "Foreign currency,"
therefore, is the preferred term when referring to a non-domestic
currency.
25. Definition of 'Wall Of Worry'
The financial markets' periodic tendency to surmount a host of
negative factors and keep ascending. Wall of worry is generally used
in connection with the stock markets, referring to their resilience
when running into a temporary stumbling block, rather than a permanent
impediment to a market advance.
Investopedia Says
Investopedia explains 'Wall Of Worry'
While a "wall of worry" may sometimes consist of a single economic,
political or geopolitical issue significant enough to affect consumer
and investor sentiment, it more commonly comprises concerns on
numerous fronts. The markets' ability to climb a wall of worry
reflects investor confidence that these issues will be resolved at
some point. However, market direction once the wall of worry has been
surmounted is impossible to ascertain, and depends on the stage of the
economic cycle at which it occurs.
For example, the markets' ability to climb the wall of worry is most
clearly discernible at the end of major bear trends, which means that
the markets may continue to advance once the wall has been surmounted.
However, a continued advance is much less certain if the wall of worry
forms near a major market peak, in which case a subsequent decline is
more likely.
26. Definition of 'Veblen Good'
Goods that are perceived to be exclusive as long as prices remain high
or increase. Veblen goods get their name from economist Thorstein
Veblen, who was one of the first to look into and write about
conspicuous consumption and the concept of seeking status through
consumption.
Veblen goods are often referred to as "status symbols".
Investopedia Says
Investopedia explains 'Veblen Good'
High-status items such as luxury cars, expensive shoes or pricey
watches remain appealing to certain consumers as long as prices remain
high or increase. A decrease in the price of a Veblen good could cause
it to become less exclusive, which may reduce consumers' fondness for
it.
27. Definition of 'Yellow Knight'
A company that was once making a takeover attempt but ends up
discussing a merger with the target company. Yellow knights have
various reasons for backing out of the takeover attempt, but
frequently are attributable to the target company's ability to fend
off takeover. The "yellow" in "yellow knight" may refer to the color's
association with cowardice. Since a yellow knight backs down from a
takeover attempt and retreats to merger discussions, a yellow knight
may be viewed as weak.
Investopedia Says
Investopedia explains 'Yellow Knight'
In mergers and acquisitions (M&A), various colored knights are used to
identify the nature of a takeover or potential takeover. A black
knight is a company that makes a hostile takeover offer for the target
company. A white knight makes a friendly takeover offer to a target
company that is being faced with a hostile takeover. A gray knight
(sometimes spelled grey knight) is a second unsolicited bidder in a
corporate takeover.
28. Definition of 'Binary Option'
A type of option in which the payoff is structured to be either a
fixed amount of compensation if the option expires in the money, or
nothing at all if the option expires out of the money.
These types of options are different from plain vanilla options
Also sometimes referred to as "all-or-nothing options" or "digital options".
Investopedia Says
Investopedia explains 'Binary Option'
For example, suppose you were interested in buying binary call options
for common shares of ABC company with a strike price of $50 per share
and a specified binary payoff of $500. If the stock is trading above
$50 when the expiration date is reached, you would receive the $500
payoff for your option contract. However, if the stock is trading
below $50 per share at the expiration date, you receive nothing.
29. Definition of 'Vanilla Option'
A financial instrument that gives the holder the right, but not the
obligation, to buy or sell an underlying asset at a predetermined
price, within a given time frame. A vanilla option is a normal call or
put option that has standardized terms and no special or unusual
features. It is generally traded on an exchange such as the Chicago
Board Options Exchange.
Investopedia Says
Investopedia explains 'Vanilla Option'
Individual and institutional investors can take advantage of the
versatility of options to design an investment that best meets their
need to hedge or speculate on the price movement of an asset. If a
vanilla option is not the right fit, they can explore exotic options
such as barrier options, Asian options and digital options. Exotic
options have more complex features and are generally traded over the
counter.
30. Definition of 'Balanced ANOVA'
A statistical test used to determine whether or not different groups
have different means. An ANOVA analysis is typically applied to a set
of data in which sample sizes are kept equal for each treatment
combination.
Balanced ANOVA tests are often done with computer softwares due to the
complexity of mathematical calculations. It does not work well in
experiments in which missing or extra observations are present.
Investopedia Says
Investopedia explains 'Balanced ANOVA'
ANOVA is used to test the differences between means for statistical
significance. A one-way ANOVA test checks for significance for one
factor only, while a two-way ANOVA test analyzes the effects of two
factors simultaneously. Two-way ANOVA tests are the most useful when
the replicate examples are equal, or "balanced."
31. Definition of 'Zeta Model'
A mathematical formula developed in the 1960s by NYU Professor Edward
Altman that attempts to express the chances of a public company going
bankrupt within a two-year time period. The number produced by the
model is referred to as the company's Z-score, which is a reasonably
accurate predictor of future bankruptcy. The model is specified as:
Zeta Model
Where:
Z = Score
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets
Investopedia Says
Investopedia explains 'Zeta Model'
The zeta model returns a single number, the z-score, to represent the
likelihood of a company going bankrupt in the next two years. The
lower the z-score, the more likely a company is to go bankrupt. A
z-score lower than 1.8 indicates that bankruptcy is likely, while
scores greater than 3.0 indicate bankruptcy is unlikely to occur in
the next two years. Companies that have a z-score between 1.8 and 3.0
are in the gray area, bankruptcy is not easily predicted one way or
the other.
32. Definition of 'Altman Z-Score'
The output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. The Altman Z-score,
is based on five financial ratios that can be calculated from data
found on a company's annual 10K report. The Altman Z-score is
calculated as follows:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets
A score below 1.8 means the company is probably headed for bankruptcy,
while companies with scores above 3.0 are not likely to go bankrupt.
The lower/higher the score, the lower/higher the likelihood of
bankruptcy.
Investopedia Says
Investopedia explains 'Altman Z-Score'
NYU Stern Finance Professor, Edward Altman, developed the Altman
Z-score formula in 1967. In 2012, he released an updated version
called the Altman Z-score Plus, that can be used to evaluate both
public and private companies, both manufacturing and nonmanufacturing
companies and both U.S. and non-U.S. companies. Investors can use
Altman Z-scores to help determine whether they should buy or sell a
particular stock if they're concerned about the underlying company's
financial strength. The Altman Z-score Plus can be used to evaluate
corporate credit risk.
33. Definition of 'Featherbedding'
Term used to describe the practice of a labor union requiring an
employer to hire more workers than necessary for a particular task.
Investopedia Says
Investopedia explains 'Featherbedding'
Featherbedding has developed over time as unions respond to workers
being laid off because of technological change. These lay-offs have
caused unions to seek some way to retain workers, even though there
may be little work for them to perform.
34. Definition of 'Calamity Call'
A call feature of a Collateralized Mortgage Obligation (CMO) designed
primarily to reduce the issuer's reinvestment risk. If the cash flow
generated by the underlying collateral is not enough to support the
scheduled principal and interest payments, then the issuer is required
to retire a portion of the CMO issue.
Also known as a "clean-up call."
Investopedia Says
Investopedia explains 'Calamity Call'
A Calamity Call is only one type of protection used in CMOs. Other
types of protection include overcollateralization and pool insurance.
In addition to protecting against reinvestment risk, Calamity Calls
can be used to protect against default losses. They can be used in
CMOs structured from second lien mortgages, where there is more
limited protection against default losses. This is in contrast to
overcollateralization which may be enough to provide sufficient
protection to underlying pools of conventional fixed-rate mortgages.
35. Definition of 'Dead Hand Provision'
A stipulation on a defense mechanism (or poison pill) used by
companies in order to protect against a merger or takeover by another
company. The dead hand provision prevents the removal of the poison
pill, a strategy used to discourage a hostile takeover, even if
shareholders of the target company favor the takeover.
Investopedia Says
Investopedia explains 'Dead Hand Provision'
A dead hand provision states that only the original directors who put
the provision into place can dismantle the pill, so any new directors
are prevented from interfering.
36. Definition of 'Echo Bubble'
A post-bubble rally that becomes another, smaller bubble. The echo
bubble usually occurs in the sector in which the preceding bubble was
most prominent, but the echo is less dramatic.
Investopedia Says
Investopedia explains 'Echo Bubble'
People point to the rally that occurred after the market crash of 1929
as an example of an echo bubble. Just like its more prominent
predecessor, the smaller echo bubble eventually burst. Also, after the
technology bubble that occurred at the turn of the 21st century - one
of the biggest bubbles of all time - people believed that another echo
bubble was on the way.
37. Definition of 'Half Commission Man'
A half commission man is an individual who introduces clients to stock
brokers or other market professionals in exchange for an agreed upon
percentage of any commissions earned as a result of the new client.
Although a stock broker must share some of his or her commissions, the
theory is that the broker will come out ahead due to an increase in
the number or quality of clients.
Investopedia Says
Investopedia explains 'Half Commission Man'
A half commission man can either work for a specific stock broker or
be a freelancer. They earn money by establishing relationships between
stock brokers and clients. Any commissions that the stock broker earns
from the client will be shared at a specified rate (usually half) with
the half commission man.
38. Definition of 'Gazelle Company'
A high-growth company that is increasing its revenues by at least 20%
annually for four years or more, starting from a revenue base of at
least $1 million. This growth pace means that the company has
effectively doubled its revenues over a four-year period. As gazelle
companies are characterized by their rapid growth pace, rather than
their absolute size, they can range in size from small companies to
very large enterprises.
Investopedia Says
Investopedia explains 'Gazelle Company'
David Birch's identification of gazelle companies followed from his
1979 report titled "The Job Generation Process," wherein he identified
small companies as the biggest creators of new jobs in the economy.
Birch estimated that gazelles accounted for only 4% of all U.S.
companies, but accounted for 70% of all new jobs. Birch noted that the
growth pace of gazelle companies far outpaced that of the Fortune 500
"elephants" and Main Street "mice."
39. Definition of 'In The Penalty Box'
A phrase referring to a company whose stock has plummeted with no
rebound in sight. A company in the penalty box is often one that has
received some bad news, ensuring the future lethargy of its stock. An
example of this is a drug company with a key drug that doesn't get FDA
approval. These types of companies will often stay in the penalty box
for a long period of time.
Investopedia Says
Investopedia explains 'In The Penalty Box'
The term "penalty box" comes from the sport of hockey. In hockey, when
a player commits a rules infraction, he or she is put in the penalty
box near the player's bench. For a designated period of time,
typically two minutes, a player is out of action and his or her team
must play shorthanded. As a result, most teams go on the defensive and
aim only to stay even (prevent the opposition from scoring versus
scoring themselves).
40. Definition of 'Jarrow Turnbull Model'
One of the first reduced-form models for pricing credit risk.
Developed by Robert Jarrow and Stuart Turnbull, the model utilizes
multi-factor and dynamic analysis of interest rates to calculate the
probability of default. Reduced-form models are one of two approaches
to credit risk modeling, the other being structural.
Investopedia Says
Investopedia explains 'Jarrow Turnbull Model'
Structural models assume that the modeler - like a company's managers
- has complete knowledge of its assets and liabilities, leading to a
predictable default time. Reduced-form models assume that the modeler
- like the market - has incomplete knowledge about the company's
condition, leading to an inaccessible default time. Jarrow concludes
that for pricing and hedging, reduced-form models are the preferred
methodology.
41. Definition of 'Kagi Chart'
A type of chart developed by the Japanese in the 1870s that uses a
series of vertical lines to illustrate general levels of supply and
demand for certain assets. Thick lines are drawn when the price of the
underlying asset breaks above the previous high price and is
interpreted as an increase in demand for the asset. Thin lines are
used to represent increased supply when the price falls below the
previous low.
Kagi Chart
Investopedia Says
Investopedia explains 'Kagi Chart'
An entry signal is triggered when the vertical line changes from thin
to thick and is not reversed until the thick line changes back to
thin.
One important note about these charts is that they are independent of
time and only change direction once a predefined reversal amount is
reached.
42. Definition of 'Laffer Curve'
Invented by Arthur Laffer, this curve shows the relationship between
tax rates and tax revenue collected by governments. The chart below
shows the Laffer Curve:
Laffer Curve
The curve suggests that, as taxes increase from low levels, tax
revenue collected by the government also increases. It also shows that
tax rates increasing after a certain point (T*) would cause people not
to work as hard or not at all, thereby reducing tax revenue.
Eventually, if tax rates reached 100% (the far right of the curve),
then all people would choose not to work because everything they
earned would go to the government.
Investopedia Says
Investopedia explains 'Laffer Curve'
Governments would like to be at point T*, because it is the point at
which the government collects maximum amount of tax revenue while
people continue to work hard.
43. Definition of 'Macaroni Defense'
An approach taken by a company that does not want to be taken over.
The company issues a large number of bonds with the condition they
must be redeemed at a high price if the company is taken over.
Investopedia Says
Investopedia explains 'Macaroni Defense'
Why is it called Macaroni Defense? Because if a company is in danger,
the redemption price of the bonds expands like Macaroni in a pot!
44. Definition of 'Nano Cap'
Small public companies with a market capitalization below $50 million.
Investors looking to invest in nano-cap companies should be aware that
these small firms are often associated with a very high risk of
failure. Conversely, nano-cap stocks are often referred to as "penny
stocks," which are quite popular with novice investors who have a
large appetite for risk.
Investopedia Says
Investopedia explains 'Nano Cap'
This is as small as you can get. Nano caps are very risky because they
are such small companies. Keep in mind that classifications such as
"large cap" or "small cap" are only approximations that change over
time. Also, the exact definition of the various sizes of market cap
can vary between brokerage houses.
Definition of 'Small Cap'
Refers to stocks with a relatively small market capitalization. The
definition of small cap can vary among brokerages, but generally it is
a company with a market capitalization of between $300 million and $2
billion.
Investopedia Says
Investopedia explains 'Small Cap'
One of the biggest advantages of investing in small-cap stocks is the
opportunity to beat institutional investors. Because mutual funds have
restrictions that limit them from buying large portions of any one
issuer's outstanding shares, some mutual funds would not be able to
give the small cap a meaningful position in the fund. To overcome
these limitations, the fund would usually have to file with the SEC,
which means tipping its hand and inflating the previously attractive
price.
Keep in mind that classifications such as "large cap" or "small cap"
are only approximations that change over time. Also, the exact
definition can vary between brokerage houses.
Definition of 'Large Cap - Big Cap'
A term used by the investment community to refer to companies with a
market capitalization value of more than $10 billion. Large cap is an
abbreviation of the term "large market capitalization". Market
capitalization is calculated by multiplying the number of a company's
shares outstanding by its stock price per share.
Investopedia Says
Investopedia explains 'Large Cap - Big Cap'
Large cap companies are the big Kahunas of the financial world.
Examples include Wal-Mart, Microsoft and General Electric.
Keep in mind that the dollar amounts used for the classifications
"large cap", mid cap", or "small cap" are only approximations that
change over time. Among market participants, their exact definitions
can vary.
45. Definition of 'Ocean Bill Of Lading'
A document required for the transportation of goods overseas. An ocean
bill of lading serves as both the carrier's receipt to the shipper and
as a collection document. The document specifies the details of the
goods being transported, such as quantity, type and destination.
Investopedia Says
Investopedia explains 'Ocean Bill Of Lading'
A non-negotiable ocean bill of lading allows the buyer to receive the
goods upon showing identification. If the bill is deemed negotiable,
then the buyer will be required to pay the shipper for the products
and meet any of the seller's other conditions.
An ocean bill of lading allows the shipper to move goods across
international waters. If the goods are to be initially shipped over
land, an additional document, known as an "inland bill of lading",
will be required. The inland bill only allows the materials to reach
the shore, while the ocean bill allows them to be transported
overseas.
46. Definition of 'Uberrimae Fidei Contract'
A legal agreement requiring the highest standard good faith.
"Uberrimae fidei" or "uberrima fides" is Latin for "utmost good
faith." Insurance contracts are the most common type of uberrimae
fidei contract. Because the insurance company agrees to share the risk
of loss with the policyholder, it is imperative that the policyholder
act in good faith by fully disclosing all information that affects the
insurance company's level of risk. Full disclosure allows the insurer
to protect itself by charging the policyholder a premium that
accurately reflects the level of risk it is undertaking or even
refusing to issue a policy if the risk is too high.
Investopedia Says
Investopedia explains 'Uberrimae Fidei Contract'
Because the insurance applicant often has more information about the
risk that is being insured against than the insurer does, the
principle of uberrimae fidei is used in an attempt to eliminate moral
hazard. For example, someone applying for health insurance knows more
about their eating habits, exercise patterns, family medical history
and personal medical history than the potential insurer does. In order
to determine how risky the applicant is, the insurer requires him or
her to honestly answer a medical questionnaire and submit to a review
of medical records before being approved for a policy. If the
policyholder is later found to not have acted in utmost good faith at
the time of application, his policy and benefits can be rescinded.
47. Definition of 'Tailgating'
When a broker or advisor buys or sells a security for a client(s) and
then immediately makes the same transaction in his or her own account.
Investopedia Says
Investopedia explains 'Tailgating'
This is not illegal like front running, but it is not looked upon
favorably because the broker is mostly likely placing a trade for his
or her own account based on what the client knows (like inside
information).
48. Definition of 'Wage Push Inflation'
A general increase in the cost of goods that is preceded by and
results from an increase in wages. In order to maintain corporate
profits after an increase in wages, employers must increase the prices
they charge for the goods and services they provide. The overall
increased cost of goods and services has a negative effect on the wage
increase, and eventually, higher wages will be again needed to
compensate for the increased prices for consumer goods.
Investopedia Says
Investopedia explains 'Wage Push Inflation'
Wage push inflation is an inflationary spiral that occurs when wages
are increased and business must, in order to pay the higher wages,
charge more for their products and/or services. The wage increase,
then, is not as helpful to employees since the cost of goods has also
risen. If prices remain increased, workers will eventually require
another wage increase to compensate for the cost of living increase.
49. Definition of 'Valoren Number'
An identification number assigned to financial instruments in
Switzerland. These numbers are similar to the CUSIP numbers that are
used in Canada and the U.S. A typical valoren number is between six to
nine digits in length.
Investopedia Says
Investopedia explains 'Valoren Number'
Market data firms and other financial institutions throughout Europe
typically refer to Swiss companies and/or store trade data on these
companies using valoren numbers as a means of security identification.
50. Definition of 'Saitori'
A member of the Tokyo Stock Exchange who facilitates the trading of
securities by matching buy and sell orders. Their role is to make the
market as orderly and efficient as possible.
Investopedia Says
Investopedia explains 'Saitori'
The saitori are similar to specialists on the NYSE; however,
specialists are not allowed to trade for their own account or for the
general public. They trade for the members of the NYSE.
51. Definition of 'X-Mark Signature'
An X-mark made by a person in lieu of a signature. Due to illiteracy
or disability, a person may be unable to append a full signature to a
document as attestation that he or she has reviewed and approved its
contents. In order to be legally valid, the X-mark signature must be
witnessed.
Investopedia Says
Investopedia explains 'X-Mark Signature'
Due to the obvious potential for fraud, doubts may arise about the
validity and enforceability of documents signed with X-mark
signatures. In some U.S. states, for example, the law requires courts
to invalidate wills signed with an X unless the testator was
physically or mentally incapable of signing his or her full name.
52. Definition of 'Yield Variance'
The difference between actual output and standard output of a
production or manufacturing process, based on standard inputs of
materials and labor. The yield variance is valued at standard cost.
Yield variance is generally unfavorable, i.e., actual output is less
than standard or expected output, and only rarely favorable.
Investopedia Says
Investopedia explains 'Yield Variance'
For example, if 1,000 units of a product is the standard output based
on 1,000 kilograms of materials in an 8-hour production unit, and the
actual output is 990 units, there is an unfavorable yield variance of
10 units. If the standard cost is $25 per unit, the unfavorable yield
variance would be $250.
53. Definition of 'Backward Integration'
A form of vertical integration that involves the purchase of
suppliers. Companies will pursue backward integration when it will
result in improved efficiency and cost savings. For example, backward
integration might cut transportation costs, improve profit margins and
make the firm more competitive.
By way of contrast, forward integration is a type of vertical
integration that involves the purchase or control of distributors.
Investopedia Says
Investopedia explains 'Backward Integration'
An example of backward integration would be if a bakery business
bought a wheat processor and a wheat farm.
Vertical integration is not inherently good. For many firms, it is
more efficient and cost effective to rely on independent distributors
and suppliers. For example, backward integration would be undesirable
if a supplier could achieve greater economies of scale and provide
inputs at a lower cost as an independent business, than if the
manufacturer were also the supplier.
An example of forward integration would be if the bakery sold its
goods itself at local farmers markets or owned a chain of retail
stores, through which it could sell its goods. If the bakery did not
own a wheat farm, a wheat processor or a retail outlet, it would not
be vertically integrated at all.
54. Definition of 'Christmas Tree'
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