Finance

Long Position

The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

Short Position

The sale of a BORROWED security, commodity or currency with the expectation that the asset will fall in value.

Short Selling

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold sh

Street Name

When securities are held in the name of a broker or other nominee, as opposed to holding them in the customer's name.

Margin Trading

Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".

Initial Margin

The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.

Restricted Account

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Maintenace Margin

The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in th

Margin Loan

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Leverage

The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Indexes - What are they?

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology an

Indexes - What purpose do they serve?

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Indexes - Why are there so many?

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Indexes - How to compare

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Benchmarks

A standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.

Stockbrokers

An agent that charges a fee or commission for executing buy and sell orders submitted by an investor.

Flash Crash

The quick drop and recovery in securities prices that occurred shortly after 2:30pm Eastern Standard Time on May 6, 2010. Initial reports that the crash was caused by a mistyped order proved to be erroneous, and the causes of the flash crash remain unknow

Market Timing

The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.

Market Orders

An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions

Limit Orders

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Stop Orders

An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses th

Pros & Cons of Market Orders

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Pros & Cons of LImit Orders

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Pros & Cons of Stop Orders

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Order Precedence

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Time Limits of Orders

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Capital Gains

1. An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than

Capital Loss

The loss incurred when a capital asset (investment or real estate) decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.

Current Income

The investment objective for a moderately conservative portfolio of securities or mutual funds that provides high dividend and annuity payments to satisfy an investor's steady income requirements.

Transaction Costs

Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price at which it can be sold).

Internal Risk Factors

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External Risk Factors

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Time Value of Money

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the so

Compounding

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Present Value of Money

The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining

Future Value of Money

The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains.

Discount Rate

The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money availa

Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any

Required rate of return

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The required rate of return (RRR) is used in both equity valuation and in corporate finance.
Investors use

Real Rate

The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level o

Inflation Premium

This is the rate that is added to an investment to adjust it for the market's expectation of future inflation. For example, the inflation premium required for a one year corporate bond might be a lot lower than a thirty year corporate bond by the same com

Risk Premium

The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is a form of compensation for investors who tolerate the extra risk - compared to that of a risk-free asset - in a given investment.

Risk Free Rate

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

Proxies for RAte of Return

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Holding Period returns

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Realized Returns

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Unrealized Returns

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Internal Rate of Return

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the pro

Pros & Cons of Different Return and Risk Measurements

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Sources of Risk

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Black Swan Events

An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.

Pros & Cons of Common Stock

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How and why stock prices move

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Market Capitalization

The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a co

Market Value

1. The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as "market price".
2. The market capitalization plus the market value of debt. Sometimes referred to as "total market value".

Intrinsic Value

The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value

Market Movement

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Rights Offering

Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period.

Stock Splits

A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, beca

Stock Repurchases

A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can buy shares di

Stock Classes

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Dividends

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Dividends - Why they are paid

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Dividends - How they are paid

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Dividends - Relationship to stock prices

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Dividends - Cash & Stock Dividends

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Concept of Investment Strategies

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