Arbitrage: A trading strategy designed to generate a guaranteed profit from a transaction that requires no capital commitment or risk bearing on the part of the trader. A simple example of an arbitrage trade would be the simultaneous purchase and sales of the same security in different market at different prices.

Asset Allocation: The process of deciding how to distribute an investor’s wealth among different asset classes of investment purposes.

Assets class: Securities that have similar characteristics, attributes, and risk/return relationships.

Assets under management (AUM): The total market value of the assets managed by an investment firm.

Backwardated: A situation in a futures market where the current contract price is less than the current spot price for the underlying asset.

Balance sheet: A financial statement that shows what assets the firm control at a fixed point in time and how it has financed these assets.

Basis: The difference between the spot price of the underlying assets and the futures contract price at any point in time (e.g. the initial basis at the time of contract origination, the cover basis at the time of contract termination).

Business risk: The variability of operating income arising from the characteristics of the firm’s industry. Two sources of business risk are sales variability and operating leverage.

Closed-end investment company: An investment company that issues only a limited number of shares, which it does not redeem (buy back). Instead, shares, of a closed-end fund are traded in securities markets at price determined by supply and demand.

Commission brokers: Employees of a member firm who buy or sell securities for the customers of the firm.

Common stock: An equity investment that represents ownership of a firm, with full participation in its success or failure. The firm’s directors must prove dividend payments.

Consolidation phase: Phase in the investment life cycle during which individuals who are typically past the midpoint of their career have earnings that exceed expenses and invest them for future retirement or estate planning needs.

Contango: A situation in a future market where the current contract price is greater than the current spot price for underlying asset.

Contract price: The transaction price specified in a forward or futures contract.

Convenience yield: An adjustment made to the theoretical forward or futures contract delivery price to account for preference that consumers have for holding spot positions in the underlying asset.

Cost of carry: The net amount that would be required to store a commodity or security for future delivery, usually calculated as physical storage cost plus financial capital cost less dividends paid to the underlying asset.

Country risk: Uncertainty due to the possibility of major political or economic change in the country where an investment is located. Also called political risk
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Coupon: Indicates the interest payment on a debt security. It is the coupon rate times the par value that indicates the interest payments on a debt security.

Cross hedge: A trading strategy in which the price volatility of a commodity or security position is hedged with a forward or futures contract based on a different underlying assets or different settlement terms.
   
Debenture: Bonds that promise payments of interest and principal but pledge no specific assets. Holders have first claim on the issuer’s income and unpledged assets also known as unsecured bonds.

Exchange clearinghouse: The functional unit attached to a future exchange that guarantees contract performance, oversees delivery, serves as a bookkeeper and calculates settlement transactions.

Expected rate of return: The return that analysts’ calculation suggests a security should provide based on the market’s rate of return during the period and the security’s relationship to the market.

Expiry: The expiration date of a derivative security.

Financial risk: The variability of future income arising from the firm’s fixed financing costs, for example, interest payments. The effect of fixed financial costs is to magnify the effect of changes in operating profit on net income or earning per share.

Fixed-income investments: Loans with contractually mandated payment schedules from investors to firms or governments.

Forward contract: An agreement between two counterparties that requires the exchange of a commodity or security at a fixed time in the future at a predetermined price.

Free cash flow: This cash flow measure equals cash flow from operations minus capital expenditures and debt payments.

Growth company: A company that consistently has the opportunities and ability to invest in projects that provide rates of return that exceed the firm’s cost of capital. Because of these investment opportunities, it retains a high proportion of earnings, and its earnings grow faster than those of average firms.

Growth stock: A stock issue that generates a higher rate of returns than other stock in the market with similar risk characteristics; usually identified by high P/E or high price to book ratios.

Hedge: A trading strategy in which derivative securities are used to reduce or completely offset counterparty’s risk exposure to an underlying asset.

Income statement: A financial statement that shows the flow of the firm’s sales, expenses, and earnings over a period of time.

Initial public offering (IPO): A new issue by a firm that has no existing public market.

Interest rate parity: The relationship that must exist in an efficient market between the spot and forward foreign exchange rates between two countries and the interest rates in those countries.

Internal rate of return (IRR): The discount rate at which cash outflows of an investment equal cash inflow.

Intrinsic value: The portion of a call option’s total value equal to the greater of either zero or difference between the current value of the underlying assets and the exercise price; for a put option, intrinsic value is the greater of either zero or the exercise price less the underlying assets price. For a stock, it is the value derived from fundamental analysis of the stock’s expected returns or cash flows.

Investment: The current commitment of dollars for a period of time in order to derive future payments that will  compensate the investor for the time the funds are committed, the expected rate of inflation, and the uncertainty of future payments.

Investment Management Company: A company separate from the investment company that manage the portfolio and performs administrative functions.

Investment strategy: A decision by a portfolio manager regarding how he or she will manage the portfolio to meet the goals and objectives of the client. This will include either active or passive management and, if active, what style in term of top-down or bottom-up or fundamental versus technical.

Limit order: An order that lasts for a specified time to buy or sell a security when and if it trades at a specified price.

Liquidity: The ability to buy or sell an asset quickly and at a reasonable price.

Long hedge: A long position in a forward or future contract used to offset the price volatility of a short position in the underlying assets.

Long position: The buyer of a commodity or security or, for a forward contract, the counterparty who will be the eventual buyer of the underlying asset.

Maintenance margin: The required proportion that the investor’s equity value must be to the total market value of the stock. If the proportion drops below this percent, the investor will receive a margin call.

Margin: The percent of cost a buyers pays in cash for security, borrowing the balance from the broker. This introduces leverage, which increases the risk of transaction.

Margin call: A request by an investor’s broker for additional capital for a security bought on margin if the investor’s equity value declines below the required maintenance margin.

Marked to market: The settlement process used to adjust the margin account of a futures contract for daily changes in the price of the underlying assets.

Money market: The market for short-term debt securities with maturities of less than one year.

Moving average: The continually recalculating average of security price for a period, often 200 days, to serve as an indication of the general trend of price and also as a benchmark price.

Mutual fund: An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market securities. A mutual fund ordinarily stands ready to buy back (redeem) it shares at their current net asset value, which depends on the market value of the fund’s portfolio of securities at the time. Mutual funds generally continuously offer new shares to investors.

Net assets value (NPV) per share: The market value of an investment company’s assets (securities, cash, and any accrued earnings) after deducting liabilities, dividend by the number of shares outstanding.

Net present value (NPV): A measure of the excess cash flows expected from an investment proposal .It is equal to the present value of the cash inflows from an investment proposal, discounted at the required rate of return for the investment, minus the present value of the cash outflows required by the investment, also discounted at the investment’s required rate of return. If the derived net present value is a positive value (i.e., there is an excess net present value), the investment should be acquired since it will provide a rate of return above its required returns.

Portfolio: A group of investments. Ideally, the investment should have different patterns of returns over time.

Premium: A bond selling at a price above per value due to capital market condition.

Price/earnings (P/E) ratio: The number by which expected earnings per shares is multiplied to estimate a stock’s value; also called the earnings multiplier.

Real estate investment trusts (REITs): Investment funds that hold portfolios of real estate investments.

Registered traders: Members of the stock exchange who are allowed to use their memberships to buy and sell for their own account, which means they save commissions on their trading but they provide liquidity to the market, and they abide by exchange regulations on how they can trade.

Relative-strength (RS) ratio: The ratio of a stock price or an industry index value to a market indicator series, indicating the stock’s or the industry’s performance relative to the overall market.

Resistance level: A price at which a technician would expect a substantial increase in the supply of a stock to reverse a rising trend.

Risk: The uncertainty that an investment will earn its expected rate of return.

Settlement price: The price determined by the exchange clearinghouse with which futures contract margin account are marked to market.

Short hedge: A short position in a forward or future contract used to offset the price volatility of a long position in the underlying assets.

Short position: The seller of a commodity or security or, for a forward contract, the counterparty who will be the eventual seller of the underlying asset.

Spot rate: The required yield for a cash flow to be received at some specific date in the future-for example, the spot rate for a flow to be received in one year, for a cash flow in two years, and so on.

Standard deviation: A measure of variability equal to the square root of the variance.

SWOT analysis: An examination of a firm’s Strengths, Weakness, Opportunities, and Threats. This analysis helps an analyst evaluate a firm’s strategies to exploit its competitive advantages or defend against its weaknesses.

Treasury bill: A negotiable U.S. government security with a maturity of less than one year that pays no periodic interest but yields the difference between its par value and its discounted purchase price.

Yield: The promised rate of return on an investment under certain assumptions.