| [Futures Terms] [Options Terms] [General Investing Terms] [Bond Terms] |
| FUTURES TERMS |
| Commodity |
A physical substance, such as metal, food or grain, which is interchangeable with other product of the same type, and which investors buy or sell, usually through futures contracts |
| Commodity Exchange |
(COMEX) The leading U.S. exchange for futures and options trading. |
| Exchange |
A place where futures and/or options are traded. |
| Futures Contracts |
A commodity exchange agreement to sell or buy a specific amount of a commodity or security at a specific price and time. |
| Speculator |
An investor who hopes to profit from the changing price of a commodity without actually expecting to take or make delivery on a contract. |
| Hedger |
One who buys a futures contract as an insurance policy to offset the risk of fluctuating prices. |
| OPTIONS TERMS |
| Call |
An option to buy an asset. Investors who buy calls are bullish. |
| Expiration Date |
The date on which an option contract expires, usually the third Friday of the option's expiration month. |
| LEAPS |
The acronym stands for Long-Term Equity AnticiPation Securities. LEAPS are just options with terms from 1 to 3 years. |
| Naked Call |
Agreement to sell a stock you do not already own. Losses on a naked call can be significant because if a stock rises in price, there's no telling how high it can go. |
| Option |
This gives its buyer the right, but not the obligation, to trade something at a certain price on a certain date. With stock options, each option corresponds to 100 shares of the underlying stock. |
| Put |
An option to sell an asset. Investors who buy puts are bearish. |
| Premium |
The cost of an option contract. For a premium, investors acquire the right to buy or sell a security for a locked-in price within a specified time frame. |
| Straddle |
Buying a put and call option on the same underlying stock with the same strike price and expiration date. Investors use this strategy if they expect the stock or other trading instrument to move sharply before the options' expiration date, but they aren't sure in which direction it will go. |
| Strangle |
Buying a call and put with different strike prices. This costs less than a straddle, but it also carries more risk. |
| Strike Price |
The price of a stock as specified in an option contract. |
| Writing an Option |
Selling a put or a call. Unlike option buyers, option writers are obligated to carry through with their end of the bargain. Executed when a security trades at or above the stop price. A stop order to sell must be executed when a security trades at or below the stop price. |
| GENERAL INVESTING TERMS |
| Ask |
The lowest price any seller is willing to take for a given security or commodity at a given time. |
| Bid |
The highest price any buyer is willing to pay for a given security or commodity at a given time. |
Cover
(a short sale) |
To eliminate a short position by buying the securities shorted. |
| Debt Financing |
Borrowing money under an agreement to repay over a period of time at a specific interest rate in order to finance an on-going business. |
| Derivative Security |
A financial instrument whose value is based on, and determined by, another security or benchmark. This includes: options, futures, interest rate swaps, and floating-rate notes. |
| Equity Financing |
Selling an ownership stake in a company in order to raise money to finance an on-going business. |
| Good Till Canceled |
A command given to a broker ensuring that the order will be filled unless it is cancelled by the investor. |
| Leverage |
In investments, this is the control of a large amount of money by a smaller amount of money. In finance, this is the relationship of debt to equity on a company's balance sheet. The higher the debt in relation to equity, the more leverage exists. |
| Protective Stop |
An order placed in order to limit the loss on a particular investment. |
| Short Sale |
The act of selling a borrowed security that the investor does not own in the hopes of buying it back later at a lower price. |
| Spread |
The difference between the bid and the ask price. |
| Stop Order |
An order placed to buy or sell a security when the security trades at a specified price on the market. A stop order to buy must be executed when a security trades at or above the stop price. A stop order to sell must be executed when a security trades at or below the stop price. |
| BOND TERMS |
| Accrued Interest |
Interest earned on a bond but not yet paid to the investor. |
| Basis Point |
Each percentage point of the yield in bonds equals 100 basis points: one basis point is 1/100 of 1.0% (0.01%).
|
| Bond |
A type of security that pays a fixed amount of interest at a regular interval over a certain period of time. Bonds are debt and are issued for a period of more than one year. When an investor buys bonds, he or she is lending money to some other party, usually a corporation or government. |
| Bond Indenture |
In corporate bonds, the contract that states the promises of an issuer and the rights of investors. |
| Bond Rating |
A bond's rating is like a person's credit rating. A letter grade from a rating agency indicates the risk of default on corporate or municipal bonds. Rating agencies (Moody's is the largest) assign a rating when a bond is issued. They continue to monitor the bond and will change the rating if the issuer's financial condition changes. The highest rating is AAA (Aaa for Moody's). Bonds rated BBB (or Baa) and above are considered investment grade. Anything below is a junk bond, which typically carries a higher interest rate to compensate for risk. Bonds with a D rating (C for Moody's) are in default. |
| Callable Bond |
A bond that is redeemable by the issuer prior to the maturity date at a specified price at or above par. When interest rates fall, corporations frequently "call" their bonds, because the company can sell new bonds at a lower interest rate and pay off the older, more expensive bonds with the proceeds of the new sale. |
| Call Premium |
A dollar amount, usually stated as a percent of the principal amount called, paid by the issuer as a "penalty" for calling a bond. . |
| Corporate Bonds |
Debt instruments issued by private companies. They have a face value of $1,000. |
| Convertible Bond |
A security that can be converted into shares of the company that issues the bonds. The price of the conversion is generally set high enough to make it worthwhile only if the stock increases in price significantly. Convertible bonds are very complicated. |
| Coupon |
The interest rate paid on a bond. |
Coupon Rate
(Coupon Yield) |
The interest rate stated on a bond, expressed as a percentage of the principal, or face value. |
| Current Yield |
See yield. |
| Discount |
The amount by which a bond's face value exceeds its market price. |
| Discount Note |
Short-term debt obligations issued at discount from face value, with maturities ranging from overnight to 360 days. These notes have no periodic interest payments; the investor receives the note's face value at maturity. |
| Federal Discount Rate |
The rate the Federal Reserve charges on loans to member banks. |
| Federal Funds Rate |
The interest rate charged by banks on loans to other banks. The Federal Reserve maintains control over this rate by adding or withdrawing reserves from the banking system. Economists and investors study changes in the federal funds rate for clues to what Federal Reserve is planning to do. |
| Face Value |
See par. |
| Interest |
Compensation paid for the use of money. Interest on a bond is expressed as an annual percentage rate. |
| Investment-grade Bond |
A bond rated Baa or BBB or above. |
| Junk Bond |
A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower. Because it is risky, it usually has a high yield. The opposite of an investment-grade bond. |
| Long Bond |
A bond with a maturity of more than 10 years is called a long bond, a long-term instrument or a long-term note. |
| Market Price |
The purchase price of a bond; what an investor pays for it. |
Maturity
(Maturity Date) |
The date on which a bond becomes due for payment. |
| Medium Bond |
A bond with a maturity between two and 10 years. |
| Municipal Bonds |
Also known as "munis," these are bonds issued by a state or local government. They are not subject to taxes if they are public purpose bonds. Private purpose municipal bonds, however, are taxable unless specifically exempted. |
| Non-callable Bond |
A bond that cannot be called for redemption by the issuer before its specified maturity date. |
Par
(Par Value) |
The amount repaid to the investor when the bond matures. Corporate bonds usually have a par value of $1000, municipal bonds $5000, and federal bonds $10,000). |
| Principal |
The face amount of a bond, payable at maturity. |
| Premium |
The amount by which the price of a security exceeds its principal amount. |
| Principal Amount |
The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest.) |
| Price |
The price of a bond goes up and down with interest rates. As rates go up, the price of the bond goes down, because that particular bond becomes less attractive (i.e., pays less interest) when compared to new bonds being issued based on the current interest rate. As rates go down, the price of an existing bond goes up. The price also fluctuates in response to the risk perceived for the debt of the particular organization. Risk associated with a bond can also affect the price; for instance, if the company that issued the bond is near bankruptcy. |
| Short Bond |
A bond with a maturity of less than two years is called a short bond, a short-term instrument or short-term note. |
| Strip |
A bond, issued by the U.S. Treasury, whose two components, interest and repayment of principal, are separated and sold individually as zero-coupon bonds. Strip stands for Separated Trading of Registered Interest and Principal of Securities. |
| Trade Date |
The date when the purchase or sale of a bond is executed. |
Treasury Bond
(US Treasury Bond) |
A negotiable, interest-bearing bond issued by the U.S. government. Treasury bonds have a maturity of more than seven years, are exempt from state and local taxes, and interest is paid semi-annually. |
| Treasury Notes |
T-notes are longer-term government debt instruments with maturities from one to 10 years. |
Treasury Bill
(T-Bill) |
A negotiable, interest-bearing debt obligation issued by the U.S. government that is exempt from state and local taxes and has a maturity of one year or less. |
| Yield |
The ratio of interest to the actual market price of the bond, stated as a percentage. A bond that has a current market price of $1,000 and pays $70 per year in interest would have a current yield of 7%. |
| Yield Curve |
A line tracing relative yields on a type of security over a range of maturities ranging from three months to 30 years. |
| Zero-coupon Bond |
A bond, sold at a deep discount, where no periodic interest payments are made. The investor receives one payment, which includes principal and interest, at redemption (call or maturity). |
