Investment Basics Glossary
A quick overview of common terms used in the investing and finance industry:
Arbitrage – the simultaneous purchase and sale of a related asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments.
Commodity – a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.
Exchange-Traded Fund – a security known as an “ETF” that tracks an index, a commodity or a basket of assets similar to an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Exchange-Traded Note – a security known as an “ETN” that is a type of unsecured, unsubordinated debt. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees. No periodic coupon payments are distributed and no principal protection exists.
Floating Rate Bond – a bond whose interest rate fluctuates in step with market interest rates or some other external measure.
Foreign Stock – a type of security that signifies ownership in a corporation domiciled outside of the U.S. and represents a claim on part of the corporation’s assets and earnings. Additional risks involved with foreign stocks are currency risk and political risk.
Global Bond – bonds that can be offered within the Euromarket and several other markets simultaneously. Global bonds can be issued in the same currency as the country of issuance.
High-Yield Bond – also known as “junk” or “speculative” bonds. These bonds are rated ‘BB’ or lower because of their higher risk of default. Junk bonds typically offer higher interest rates when compared to safer government issues to compensate for the higher inherent credit risk.
Market Capitalization – the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s outstanding shares by the current market price of a share of stock. Small-cap companies have a market cap of $2 billion and under. Mid-cap companies have a market cap of $2-$10 billion. Large-cap companies have a market cap of $10 billion and up.
Real Estate Investment Trust – a security know as a “REIT” that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Disclosure: An Index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.