Investing Terminology

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.

Base Currency

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.

Basis Point

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

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.


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.

Callable Bond

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 Control

Capital controls are government actions, including specific laws or taxes, which constrain the movement of funds into or out of a country.

Capital Gain

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.

Capital Loss

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

Cash equivalents are instruments that can very easily be transferred into cash because of their high liquidity and credit rating.


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.

Commodity Currency Pairs

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

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.

Credit Spread

The credit spread is the variance in the yield for two bonds with different credit ratings but comparable maturity dates.

Currency Pair

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

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.

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

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

Fund flow is the movement of cash into and out of funds. A positive cash inflow allows the fund to make more investments.

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.


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.

Married Put

The investment strategy called the married put involves buying put options to cover a new stock position. This strategy is used to limit risk.

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.

Open-End Fund

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

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.

PEG Ratio

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.

Pink Sheets

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.


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.


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.

Sovereign Risk

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. Also know as FOREX

Stop Order

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.

Strike Price

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.

Target Price

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.

Top-Down Investing

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

Trailing stop orders are set a certain percentage above or below the market price and are adjusted as the price changes.

Turnover Ratio

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

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.