American Depository Receipts (ADR)
American Depository Receipts (ADRs) are securities listed on an American exchange in United States dollars that represent shares in a foreign company.
Arbitrage is the buying and selling of similar securities to make a profit from slight price variations.
Asset-Backed Securities (ABS)
These securities are financial products that gain their value from a basket of assets, usually in the form of debt, such as car loans or credit card debt. Payments on the debt are given to the holder of the ABS instead of the bank that made the loans.
At the Money
At the money options are for the current market price of a share and therefore do not have the intrinsic value of in the money options. At the money options are priced in accordance with their time value.
This term was developed to collectively refer to Estonia, Latvia, and Lithuania because of their high growth rates and capital inflows from 2000 until the global recession of the late 2000s.
The base currency is the currency listed first in a currency pair – USD in USD/JPY. It can also be the domestic currency used by a corporation to record profit and loss figures.
Basel Regulations (I/II/III)
The three stages of Basel regulations, proposed in 1988, 2004, and 2010, are increasingly rigorous international banking regulations concerning capital and liquidity requirements that were designed to help stress test banks.
A basis point is equal to .01%. It is usually used in the context of changes in interest rates.
Beta describes the volatility of a security compared to a characteristic major benchmark index, like the S&P 500 for American securities or the SENSEX for Indian securities. A beta of one represents the same volatility as the index. A beta above or below one shows more or less volatility than the index, respectively. A security with a beta of 1.5 is expected to beat the index by 50% when the index is rising and is expected to fall by 50% more than the index when the index is falling.
Bottom-up investing is a strategy that focuses on specific companies under the idea that one company can provide returns while both the specific industry and the global economy may be faring badly.
The Bovespa Index is the flagship index of the Brazilian BM&FBOVESPA exchange that includes 68 companies (out of a total of 370 that are listed on the exchange) that represent roughly 70% of the exchange’s total capitalization and 80% of its trades.
Brazil cost is an informal term used to describe the additional expenses that a company incurs while operating in Brazil due to corruption, high taxes, and incomplete infrastructure.
Brazil, Russia, India, and China were collectively referred to as BRIC countries by Jim O'Neill of Goldman Sachs in 2001. He theorized that these countries would be important emerging markets in coming years because of high rates of economic growth and their large populations and land areas.
When issuers sell callable bonds they have the ability to buy back the bonds, for a slight premium, before the maturation date. Issuers would exercise this option if interest rates have fallen and new bonds could be issued at a lower interest rate.
Capital controls are government actions, including specific laws or taxes, which constrain the movement of funds into or out of a country.
A capital gain is the positive difference between the prices at which an asset was bought and sold. The gain is said to be “unrealized” while the asset is still held and “realized” once the asset is sold.
A capital loss is the negative difference between the prices at which an asset was bought and sold. The loss is said to be “unrealized” while the asset is still held and “realized” once the asset is sold.
Cash equivalents are instruments that can very easily be transferred into cash because of their high liquidity and credit rating.
The South Korean chaebol are powerful, family-owned conglomerates that include some of the largest Korean corporations and the most internationally-recognized Korean brands. They were originally promoted to help spur economic growth, but misleading accounting practices have led to increased regulation and breakup of some chaebol.
Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa were given the CIVETS label by Robert Ward of the Economist Intelligence Unit and Michael Geoghegan of HSBC bank as a group of emerging market economies that could lead the next stage of global growth. Their shared young populations are expected to fuel consumer spending and economic growth in coming years.
The commodity pairs are the USD/CAD, AUD/USD, and NZD/USD currency pairs. Canada, Australia, and New Zealand have large commodities sectors and widely traded currencies that allow investors to expose their currency portfolios to the effects of the commodities markets.
Consumer Price Index (CPI)
The Consumer Price Index determines the price of a basket of goods relative to the same goods at a previous time in order to measure inflation.
Covered call options occur when the seller owns a sufficient number of shares to meet the demands of the call options.
Credit Default Swap (CDS)
When an institution sells a credit default swap it is agreeing to pay the buyer if a certain loan is not paid. The buyer of a CDS may want insurance for loans that it possesses or may be positioning to profit from the default of third-party loans.
The credit spread is the variance in the yield for two bonds with different credit ratings but comparable maturity dates.
A currency basket is a collection of differently weighted currencies that is used to set the value of another currency.
Currency Carry Trade
A currency carry trade uses the forex market to take advantage of higher interest rates in foreign countries. In this type of trade, a low-yielding currency is sold for a higher-yielding currency. After the investment is closed, the original currency is repurchased. This trading strategy can be risky due to the possibility of losing money because of changing exchange rates.
A currency pair expresses the exchange rate between two currencies. The currency pair USD/JPY shows how many yen (the quote currency) can be bought with one US dollar (the base currency).
EBITDA are the earnings before interest, tax, depreciation, and amortization.
Emerging markets are found in developing economies that have relatively liquid markets, an exchange that is accessible to foreigners, and some governmental reporting standards. They are less liquid and accessible and have fewer effective accounting regulations than developed markets but are improving in these measures.
European Financial Stability Facility
The European Financial Stability Facility (EFSF) is a temporary institution of the Eurozone that can lend to troubled member states. So far it has been a part of the Irish, Portuguese, and Greek bailouts.
European Stability Mechanism
The European Stability Mechanism (ESM) is the planned permanent successor to the European Financial Stability Facility (EFSF).
Exchange-Traded Fund (ETF)
Exchange-traded funds are investment funds that follow an index or underlying group of assets and are traded like stocks on an exchange.
Buying a stock after the ex-dividend date will not allow the transaction to “clear” by the record date, and therefore buyers will not be able to receive the dividend.
Exotic currencies, such as the Gambian dalasi and Mongolian tugrik, are illiquid currencies that cannot easily be accessed by American retail investors.
Federal Funds Rate
The federal funds rate is the overnight interest rate that American banks use to lend to each other in order to meet mandated reserve requirements. This rate is targeted by the Federal Reserve’s Open Market Committee.
Federal Open Market Committee (FOMC)
The Federal Open Market Committee is the part of the United States Federal Reserve System that buys and sells government securities to direct the country’s monetary policy and set targets for the money supply, inflation, and the federal funds rate.
Fixed Exchange Rate
A fixed, or pegged, exchange rate occurs when a government mandates the exchange value of a currency based on another country’s currency, gold, or another asset.
The float of a company is an expression of the number of shares that can be freely traded. It is a better indicator of the shares in the market than the total number of shares because the float excludes insiders that have trading restrictions and long-term shareholders that will not easily sell their shares.
Floating Exchange Rate
A floating exchange rate mechanism prices a currency against other currencies by supply and demand in the foreign exchange market.
Foreign Exchange Market
The foreign exchange market allows institutions and individuals to buy and sell currencies globally.
Forward Exchange Rate
The forward exchange rate represents the exchange rate between two currencies that will be settled at a specified time in the future.
Frontier markets are less developed than emerging markets and foreign investors find making investments in these countries difficult because of little liquidity, government barriers, and little financial infrastructure.
Fund flow is the movement of cash into and out of funds. A positive cash inflow allows the fund to make more investments.
The IBGE, or Brazilian Institute of Geography and Statistics, is the Brazilian governmental body that publishes much of Brazil’s economic data.
In the Money
In the money options have an immediate intrinsic value in addition to the time value of the option. Examples are a call option for a value below the current share price and a put option for a value above the current share price.
Interest Rate Parity
Interest rate parity is the principle in foreign exchange markets that the interest rate difference found between two countries is the same as the difference found between the contracts for foreign currency exchanges in the future and the present.
Interest-rate risk is the possibility that a bond buyer faces of interest rates increasing after the purchase of the bonds because the higher interest rate will lower the price of the bond.
The iShares brand is the largest set of exchange-traded funds globally. The funds have been managed by BlackRock since its purchase of Barclays Global Investors, the original fund manager.
The KOSPI is the primary index used to measure all of the listed stocks on the Korea Exchange (KRX).
A load is the commission that an investor pays when buying and selling mutual fund shares.
The investment strategy called the married put involves buying put options to cover a new stock position. This strategy is used to limit risk.
The MICEX is one of the benchmark indices of the MICEX-RTS exchange that was formed by the 2011 merger of the Moscow Interbank Currency Exchange and the Russian Trading System. The MICEX includes 30 of the largest and most liquid companies traded on the exchange.
Mortgage-Backed Securities (MBS)
These securities are financial products that gain their value from a basket of home loans. Payments on the debt are given to the holder of the MBS instead of the bank that made the loans.
The moving average is the average of a security’s price over a set number of days. After each trading day the most recent day’s data is added to the moving average and the oldest day’s data is removed from the moving average.
MSCI, formerly Morgan Stanley Capital International, is an independent firm that publishes a variety of indices, including the MSCI Emerging Markets Index and country-specific indices, which are used as benchmarks by many major exchange-traded funds and investors.
Multijurisdictional Disclosure System
A Multijurisdictional Disclosure System allows a country’s banks to issue securities in a foreign country using the home country’s regulations. This decrease in international regulation simplifies foreign investment and mergers.
Net Asset Value per Share (NAVPS)
Net Asset Value per Share (NAVPS) for an exchange-traded fund is the total value of the fund’s portfolio, minus its liabilities, divided by the total number of shares.
The NIFTY is the benchmark index of the National Stock Exchange of India (NSE). It is composed of 50 of the largest companies listed on the exchange that collectively account for about 65% of the total market capitalization of all companies listed on the NSE.
Off-the-run securities are all but the latest-issued bonds at various maturity levels. They are less liquid than their recently-issued counterparts and are therefore priced lower and have higher yields.
On-the-run securities are the latest-issued bonds at various maturity levels. They are the most liquid securities of their respective maturities and are priced above their older counterparts.
Open-end funds are investment companies that issue new shares to the public as demand increases and buy shares from the public as demand decreases.
Out of the Money
Out of the money options are similar to at the money options in that they have no intrinsic value and are priced according to their time value. However, out of the money call options are below the current share price and put options are above the current share price.
Passive management occurs when fund managers use a previously-chosen strategy to try to mimic, not outperform, the returns of a certain index. It is the opposite of active management.
The price-to-earnings-to-growth (PEG) ratio is found by dividing the P/E ratio by the expected annual growth in earnings-per-share. This can be a better metric than a simple P/E ratio for companies that are on a high-growth trajectory.
The pink sheets include quote information for thinly traded stocks that are not listed on a major exchange (usually due to a company’s small size or its listing on a foreign exchange) but are instead traded directly between the buyer and seller.
Purchasing Managers’ Index (PMI)
The Purchasing Managers’ Index (PMI) measures the strength of the manufacturing sector based on newly placed orders, output, employment in the sector, delivery rate, and inventory. A PMI of 50 shows no manufacturing growth. PMI values above and below 50 show growth and contraction in the industry, respectively.
Renminbi, or “people’s money,” is the official name of the currency of the People’s Republic of China. It uses the yuan as its unit.
Resistance is found at a price that a stock has not been able to rise above during a certain time period. If the stock price rises above the resistance level, it could continue to rise until the next resistance level is reached.
The roll is the yield difference between the most recently issued securities of a certain maturity and a particular past issue of that same security.
SELIC (Sistema Especial de Liquidação e de Custódia) or the Special System for Settlement and Custody, is the Brazilian Central Bank’s vehicle for undertaking open market operations – much like the Federal Open Market Committee of the United States Federal Reserve. Government securities are bought and sold by SELIC in an effort to control the money supply and target desired inflation and interest rates. Bonds, bills, and notes of a variety of denominations and maturities are floated on behalf of the Brazilian National Treasury and Brazilian Central Bank.
The yield on many of these securities is tied to the SELIC rate, which is the BCB-targeted overnight bank-to-bank lending rate that is used by banks to meet reserve requirements set by the BCB. The SELIC rate is the Brazilian analogue to the federal funds rate in the United States.
The SENSEX is the primary benchmark index of the Bombay Stock Exchange (BSE) and includes 30 of the exchange’s largest and most liquid companies. The index has a market capitalization that is about 40% of the total market capitalization of all companies that are listed on the BSE.
A short position in a company occurs when an investor borrows shares of a company and sells them in the hope that the stock price will decrease. When the price decreases the investor can buy back the shares and return them to their owners.
When investors take part in the foreign exchange market they face sovereign risk – the possibility that a foreign government will intervene in the foreign exchange market and drastically reduce the value of investors’ holdings.
SPDRs, the first of which were the Standard & Poor's Depositary Receipts that tracked the S&P 500, are a variety of index and commodity-linked exchange-traded funds managed by State Street Global Advisors.
Spot Exchange Rate
The spot exchange rate represents the exchange rate between two currencies that can be settled almost immediately (within two days).
A stop order directs the broker to either buy or sell a certain security when its price reaches a specified level. This tactic is often used to curb losses if investors are not able to constantly track their portfolios for a length of time.
The straddle option strategy involves buying both put and call options for the same security, duration, and strike price. If traders think that a security’s price is going to move significantly higher or lower, without knowing the specific direction, this strategy allows them to act on that idea. However, if the move in price is small, the trader will experience a loss.
The strike price of an option is the price at which the option’s related security can be bought or sold.
Support is found at a price that a stock has not been able to fall under during a certain time period. If the stock price falls below the support level, it could continue to fall until the next support level is reached.
The target price can refer to either an analyst’s future price estimate for a security or the price at which exercising an option will yield a profit.
The Tobin tax proposal stated that a small transaction tax on foreign exchange transactions would lessen short-term speculation and therefore reduce volatility in the currency markets.
Top-down investing involves looking at the macroeconomic conditions and using this thematic view of the economy to find the most promising industries.
Trailing stop orders are set a certain percentage above or below the market price and are adjusted as the price changes.
Turnover ratio is the fraction of a fund’s portfolio that has been replaced by new holdings each year. Different categories of funds will have different usual values for their turnover ratio; passively managed funds will have a lower turnover than actively managed funds.
Uncovered call options occur when the seller of an option does not own the stock that the options concern. This can be a very risky investment strategy.
A weak currency is one that has consistently been losing value relative to other widely traded currencies globally. Short-term currency weakness can help exporters, but chronic weakness in a currency often causes a downward spiral as slow growth and high inflation continue to force down the value of the currency.