Financial Lexicon: A-F

G-L | M-S | T-Z

A

Arbitrage:

striking a deal and profiting from a difference in price of an asset between two markets.
involves buying the asset at a lower price in one market and then simultaneously selling that same asset on a different market at a higher price, before the divergence in price vanishes.
while frowned upon by many, it has a vital role to play to ensure market forces price assets correctly across different markets and around the globe.

Ask:

price a potential seller is asking for and is prepared to accept for a security or asset.

Asset:

any resource of monetary value owned by a person, corporation or institution.
can be real (i.e. touchable) or nonmaterial (i.e. unable to physically touch) that is owned to produce a positive economic value to the owner.
appears on the left side of a balance sheet.

B

Back-Loaded Fund

mutual fund that does not charge a commission to purchase but follows a schedule of fees charged to sell the mutual fund.
schedule of fees usually follows a time decay model, meaning less is paid in commission the longer the mutual fund is held; normally after seven years, the fee is reduced to zero.
also known as deferred sales charge (DSC) funds.
see also Front-Load Fund and No-Load Fund.

Balance Sheet:

financial statement that summarizes a person's, corporation's or institution's assets and liabilities at a specific point in time.
also presents the net worth or owner equity at that same particular point in time.
name stems from fact that two sides of an equation must balance -- assets on one (left) side versus liabilities and owner equity (or net worth) on the other (right) side.

Bid:

price a potential buyer is prepared to pay for a security or asset.

Blue Chip:

a stock of high investment quality.
usually a company that is well-established and that holds high public regard of being stable.
deemed by many to be great to hold due to strong performance in up markets while holding value in down markets.

Bond:

IOU whereby the issuing company or government is borrowing money from the investor with the promise to pay a set rate of interest at set intervals until maturity, at which time the principal amount invested is also returned to the investor.
does not grant ownership privileges (ex. voting power) in the corporation.
has higher ranking over stocks in corporate capital structure.

C

Carry Trade:

practice of borrowing money in low interest markets and investing the borrowed funds for profit in markets where returns are higher.
positive carry results when invested returns are higher than cost of borrowing, while negative carry occurs when borrowing costs are higher than invested returns.

Call Option:

contract that gives the holder the right, but not obligation, to buy a specific quantity of an asset at a specified price by a specific date.
must either be traded or exercised by the expiry date; otherwise, it expires worthless.
typically viewed as "insurance policy" against the increase in price of an asset that may need to be purchased in the future.

Common Stock:

share of ownership of a public corporation.
generally bestows holder with ability to vote on all important business matters.
may pay dividends, depending on the success and/or business strategy of the company.

Compound Interest:

earning or paying "interest on interest".
calculation based on both initial principal as well as accrued interest from earlier periods of time.
makes growth of investment or liability accumulate faster.

Coupon:

interest rate on a debt instrument.
annual percent of face value that issuer promises to lender until maturity.
evolves from the small detachable segment of a paper certificate, which entitled the holder to the interest payment on the due date.

Correction:

decline of 10% or more in the price of a security or index, after a sustained upward trend.
to be expected over long periods of time as no price can continue to rising without end.

Credit:

lender's agreement to lend funds, based on analysis and estimate that the debt will eventually be repaid in full and with interest.
examples of bank credits are loan, lines of credit, and mortgages.

Credit Bureau:

agency that gathers data and information about a consumer's borrowing and bill payment history.
compiles a credit score (see below) based on the consumer's history and experience profile.
Equifax and TransUnion are primary providers of such services.

Credit Score:

numeric index ranking an individual's creditworthiness and capacity to repay credit obligations.
factors that contribute to an individual's overall score include, though not exhaustive:
- amount of time credit history accumulating
- promptness in paying bills
- amount of credit available to individual
- amount of credit actually used
- history of bankruptcy and other negative events
scores range from 500 to 850, with any score over 720 generally viewed a "good credit" while a score under 600 pointing to a higher credit risk individual.

D

Derivative:

financial contract whose value is derived from another financial asset (eg. stock, commodity, currency).
often used to protect those assets against significant change in value.
can be either exchange-traded (ex. futures) or over-the-counter (ex. forwards).

Dividend:

portion of a company's income paid out to the company owners (shareholders).
normally paid from money available after all other financial obligations are met and usually only in situations where company management does not see a better internal investment opportunity to grow the company.
usually paid quarterly, with the amount decided by the company's board of directors.

E

Equity Value:

in terms of home ownership, equals the current fair market value (usually determined through appraisal) minus any other outstanding mortgage amounts owing.

Exchange-Traded:

process of listing and trading financial assets on the floor of an organized exchange (ex. TSX).
price is determined in real time during business hours, based on such factors as supply/demand and liquidity, among others.
regulation brings more transparency, simplicity and liquidity when compared to over-the-counter method of listing and trading financial assets.

F

Face Value:

value of a debt instrument as it appears on the face of the certificate.
amount payable to the holder at the time of redemption/maturity.
used to calculate the annual dollar value of the interest payable, as per terms of the debt instrument.

Front-Load Fund:

sales fee charged for the purchase of a mutual fund, levied by the broker at time of sale.
normally range from 0% to 5%, at discretion of broker.
see also Back-Load Fund and No-Load Fund.

Future Value:

applying assumed rate of growth to estimate the value of a current asset in the future.
tool in assisting investors make responsible investment decisions based on assessed future needs.
complexity and accuracy of calculation depends on various internal (ex. rate of growth) and external (ex. inflation) influences.