Financial Lexicon: A-F

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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.

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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.

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