3 main asset classes:
Bonds, Stocks and Cash Equivalents.
Long (Long Position):
Buying a security with the expectation that the asset’s value will rise.
Short (Short
Position): Selling a borrowed security with the expectation that the
asset’s value with fall.
Bull: A position
to buy securities with the assumption that they can be sold later at a higher
price.
Bear: An attempt
to profit from an assumed coming decline in markets (Bears are generally
pessimistic).
Stock: A type of
security representing ownership in a corporation and a claim on part of its
assets and earnings. There are two main types: Common Stock and Preferred
Stock. Common Stock usually entitles owner to vote at shareholders meetings
and to receive dividends (i.e. cash flow is not guaranteed). Preferred stock
usually does not have voting rights, but offers high claim on assets and
earnings.
Bond: A debt
investment in which the investor loans money to an entity (government or
corporation) that borrows the funds for a defined period of time at a fixed
interest rate. The issuer (entity) issues a bond stating the interest rate
(coupon) that will be paid and when the loaned funds (bond principle) are to be
returned (bond maturity). Interest on bond is usually paid every 6 months. The
main categories of bond are corporate bonds, municipal bonds, and US
Treasuries. Bond maturities range from a 90-day Treasury bill to a 30-year
government bond. Credit quality and Duration are the main determinants of
a bond’s interest rate.
Discount Rate:
The interest rate that an institutional borrower is charged to borrow
short-term funds.
Yield: The income
return of an investment
Duration:
Sensitivity of the price (value of principle) of a fixed-income investment
(i.e. bonds) to a change in interest rates. Duration measures price sensitivity
to yield (the rate of change of price with respect to yield, or the percentage
change in price for a parallel shift in yields). This is also known as the
first derivative of the price of bond with respect to interest rates.
Convexity: The
second derivative of the price of bond with respect to interest rates.
Convexity measures the sensitivity of bond duration to changes in interest
rates. Generally, the higher the convexity, the more sensitive the bond price
is to a change in interest rates. Positive convexity is associated with long
duration (low interest rate and/or long bond).
Discounting: A
process of determining the present value of a payment or stream of payments
that is to be received in the future. For example, the succession of a coupon
payment found in a regular bond is discounted by a certain interest rate and
summed together with the discounted par value to determine the bond’s current
value.
Mutual Fund: An
investment vehicle that is made up of a pool of funds collected from many
investors for the purpose of investing in securities. Mutual funds are operated
by money managers, who attempt to produce capital gains and income for the
fund’s investors. Mutual fund units, or shares, are issued and can be purchased
or redeemed at the fund’s net asset value (NAV).
Index Fund: A
type of mutual fund with a portfolio constructed to match or track the
components of a market index.
Hedge Fund: An
aggressively managed portfolio of investments, using advanced investment
strategies (such as leveraged, short, long and derivatives) to generate high
returns. Hedge funds are generally unregulated by the government because it
caters to sophisticated investors.
Exchange-Traded Funds
(ETF): A security that tracks an index, a commodity or a basket of assets
(like an index fund), but trades like a stock on an exchange.
Call Option:
Right to buy stock at a certain agreed price.
Put Option: Right
to sell stock at a certain agreed price.
Delta: Change in
price of a derivative (i.e. Options) over change in price of underlying asset.
(First order approximation of price change)
Gamma: The rate
of change of Delta with respect to the underlying asset’s price. (Second order
approximation of price change)
Theta: The rate
of change between an option portfolio and time. This is also known as price
sensitivity.
Vega: The rate of
change between an option portfolio’s value and the underlying asset’s
volatility – in other words, sensitivity to volatility.
Rho: The rate of
change between an option portfolio’s value and the interest rate – in other
words, sensitivity to interest rate.
Beta: A measure
of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole.
Volatility:
Calculates the standard deviation or variance of returns from a security or
market index. In other words, it is how much the value of a security or index
could swing.
Tracking Error: A
divergence between the price behavior of a position or a portfolio and the
price behavior of the benchmark.
Alpha:
Compares the volatility (price risk) of a portfolio with its risk-adjusted
performance to a benchmark index.
Sharpe Ratio:
Tells whether a portfolio’s returns are due to smart investment decisions or a
result of excess risk. The higher the ratio, the better a portfolio’s
risk-adjusted performance has been.
Buy Side: Firms
that tend to buy large portions of securities for money-management purchases.
(i.e. BlackRock).
Sell Side: Sways
a lot more with market. (i.e. JPMorgan) The firms tend to offer investment
banking to help other companies, and to help issue stock and bonds.
