An option that gives the holder the right to buy the underlying futures contract.
A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price.
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.
Applies mainly to convertible securities. Redeemable by the issuer before the scheduled maturity under specific conditions and at a stated price, which usually begins at a premium to par and declines annually. Bonds are usually called when interest rates fall so significantly that the issuer can save money by issuing new bonds at lower rates.
Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the assets systematic risk. Theory was invented by William Sharpe (1964) and John Lintner (1965).
When a stock is sold for a profit, the capital gain is the difference between the net sales price of the securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
The difference between the net cost of a security and the net sales price, if the security is sold at a loss.
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio. The line represents the risk premium you earn for taking on extra risk. Defined by the capital asset pricing model.
Examples include Treasury bills and Banker’s Acceptances.
In investments, cash flow represents earnings before depreciation, amortization, and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations by real estate and other investment trusts) is important because it indicates the ability to pay dividends.
Cash flow from operations
A firm’s net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses that are deducted in calculating net income.
Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: Derivative markets.
Certificate of deposit (CD)
A Certificate of Deposit (CD) is a note issued by a bank for a savings deposit that the individual agrees to leave invested in the bank for a certain term. At the end of this term, on the maturity date, the principal may either be repaid to the individual or rolled over into another CD. The bank pays interest to the individual, and interest rates between banks are competitive. Monies deposited into a Certificate of Deposit are insured by the bank, thus they are a low-risk investment and a good way of maintaining a principal. Maturities may be as short as a few weeks or as long as several years. Most banks set heavy penalties for premature withdrawal of monies from a Certificate of Deposit.
Certified Financial Planner (CFP)
A person who has passed examinations accredited by the Certified Financial Planner Board of Standards, showing that the person is able to manage a client’s banking, estate, insurance, investment, and tax affairs.
Certified Public Accountant (CPA)
An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state.
Chapter 7 Proceedings
Provisions of the Bankruptcy Reform Act under which the debtor firm’s assets are liquidated by a court because reorganization would fail to establish a profitable business.
Chapter 11 Proceedings
Provisions of the Bankruptcy Reform Act under which the debtor firm is reorganized by a court because the estimated value of the reorganized firm exceeds the expected proceeds from its liquidation.
Charitable remainder trust
An irrevocable trust that pays income to a designated person or persons until the grantor’s death, when the income is passed on to a designated charity. A charitable lead trust by contrast allows the charity to receive income during the grantor’s life, and the remaining income to pass to designated family members upon the grantor’s death.
Chartered Financial Analyst (CFA)
An individual who has passed tests in economics, accounting, security analysis, and money management, administered by the Institute of Chartered Financial Analysts of the Association for Investment Management and Research. Such an individual is also expected to have at least three years of investments-related experience, and meet certain standards of professional conduct. These individuals have an extensive economic and investing background and are competent at a high level of analysis. Individuals or corporations utilize their services as security analysts, portfolio managers or investment advisors.
Chicago Board Options Exchange (CBOE)
A securities exchange created in the early 1970s for the public trading of standardized option contracts. Primary place stock options, foreign currency options, and index options (S&P 100, 500, and OTC 250 index)
Chicago Board of Trade (CBOT)
The largest futures exchange in the US, and was a pioneer in the development of financial futures and options.
Chicago Mercantile Exchange (CME)
A not-for-profit corporation owned by its members. Its primary functions are to provide a location for trading futures and options, to collect and disseminate market information, to maintain a clearing mechanism, and to enforce trading rules. Applies to derivative products. Primary place futures (OTC 250 industrial stock price index, S& P 100 and 500 index) and futures options (S&P 500 stock index) are traded.
Excessive trading of a client’s account in order to increase the broker’s commissions.
An adjunct to a futures exchange through which transactions executed on its floor are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate
An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund.
A mutual fund that is no longer issuing shares, mainly because it has grown too large.
A very risky type of Real Estate Investment Trust investing in the residual cash flows of Collateralized Mortgage Obligation (CMOs). CMO cash flows are derived from the difference between the rates paid by the mortgage loan holders
Collateralized mortgage obligation (CMO)
A security backed by a pool of pass-through rates , structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security.
Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.
The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975, deregulation led to the establishment of discount brokers, who charge lower commissions than full service brokers. Full service brokers offer advice and usually have a staff of analysts who follow specific industries. Discount brokers simply execute a client’s order and usually do not offer an opinion on a stock. Also known as a round-turn.
A commodity is food, metal, or another fixed physical substance that investors buy or sell, usually via futures contracts.
Securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company’s profits via dividend payments or the capital appreciation of the security. Units of ownership of a public corporation with junior status to the claims of secured/unsecured creditors, bondholders and preferred shareholders in the event of liquidation.
Interest paid on previously earned interest as well as on the principal.
Consumer Price Index
The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of US inflation. The US Department of Labor publishes the CPI every month.
An investment style that leads one to buy assets that have performed poorly and sell assets that have performed well. There are two possible reasons this strategy might work. The first is a mean-reversion argument; that is, if the asset has deviated from its usual level, it should eventually return to that usual level. The second reason has to do with overreaction. Investors might have overreacted to bad news sending the asset price lower than it should be.
General debt obligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.
Convertible preferred stock
Preferred stock that can be converted into common stock at the option of the holder. See also: participating convertible preferred stock.
Debt obligations issued by corporations.
Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related. See: Correlation coefficient.
The original price of an asset, used to determine capital gains.
The periodic interest payment made to the bondholders during the life of the bond.
A bond featuring coupons that must be presented to the issuer in order to receive interest payments.
An evaluation of an individual’s or company’s ability to repay obligations or its likelihood of not defaulting See: Creditworthiness
Credit risk refers primarily to the risk involved with debt investments, such as bonds. Credit risk is essentially the risk that the principal will not be repaid by the issuer. If the issuer fails to repay the principal, the issuer is said to default.
Applies to derivative products. Hedging with a futures contract that is different from the underlying being hedged. Use of a hedging instrument different from the security being hedged. Hedging instruments are usually selected to have the highest price correlation to the underlying.
Unique number given to a security to distinguish it from other stocks and registered bonds. See: Committee on Uniform Securities Identification Procedures.
Either (1) a bank, agent, trust company, or other organization responsible for safeguarding financial assets, or (2) the individual who oversees the mutual fund assets of a minor’s custodial account.