World of Finance: Jargon Buster

Alpha

A measure of a mutual funds risk relative to the market. Alpha of 1 means fund outperformed market by 1%. A positive alpha is the extra return awarded to the investor for taking additional risk.

Acquisition

When one company purchases another.

Analyst

Initial position held by graduate employees.

Bear

An investor who believes a particular security or market will fall.

Bear market

A market condition where prices are falling or expected to fall.

Beta

Beta coefficient: measure of the volatility of a security compared to market as a whole.

• Beta of 1 means that the security will move with the market
• Beta less than 1 means that it will be less volatile than the market
• Beta greater than 1 means that it will be more volatile than market

A higher beta signifies higher risk.

Bonds:

A debt investment in which the investor loans money to a company or government that borrows the funds for a defined period of time at a specified interest rate.

Types of bond

1. Callable (or redeemable bond) is when the bond can be redeemed prior to maturity
2. Corporate bond, issued by company not government
3. Convertible bond, can be converted into predetermined companies equity at any point

Bull

An investor who believes a particular security or market will rise.

Bull market

A market in where prices are rising or expected to rise.

Derivative

In finance, it is a security whose price is dependent upon underlying assets. The derivative itself is merely a contract between 2 parties. Its value is determined by the price of underlying assets including stocks, bonds, commodities, currencies, interest rates and market indices. Examples include futures, options and swaps.

Equities

Shares of a corporation which signify ownership.

Fixed Income

Bonds and other debt securities.

Hedge fund

Hedge funds are pooled investment vehicles and invest in publically traded securities. Aggressively managed portfolio’s by using leveraged, short and long term derivative positions – goal to create higher returns.

IPO

Initial Public Offering – first opportunity for investors to purchase shares in a respective company.

Leveraged buy-out (LBO)

Using debt to take over a company.

M&A

Mergers and acquisitions – usually a sub division of an investment bank that does what their name suggests.

Option

A privilege sold by one party to another that offers the buyer the right, but not the obligation to buy or sell a security at an agreed upon price during a certain time period or on a specific date.

Price/earning ratio

Calculated as current share price/earnings per share. In general a high PE ratio usually indicates high earnings growth in the future compared to a low PE ratio. However PE ratio values have little relevance unless compared to similar companies.

Private Equity

Invests in new companies, sometimes called merchant banking.

Proprietary trading

Trading of the firm’s own assets.

Security

An instrument representing stocks, bonds or derivatives. Essentially something that can be assigned a value and traded.

Volatility

Volatility refers to the amount of uncertainty or risk associated with the size of changes in a securities value. A higher volatility means that a security’s value may be spread out over a large range of values – the price may change significantly over a short time period in either direction.  

One measure of relative volatility of a particular stock to the market is its beta. A beta approximates the overall volatility of securities return against the return of a relevant benchmark. For example a stock with a beta of 1.1 has historically moved 110% for every 100% move in the benchmark based on index price. Conversely a beta of 0.9 has moved 90% for every 100% of the index.