Investor Glossary


Investment Research for Online Investors


1035 Exchange
....refers to the provision of the tax code which allows investors to transfer accumulated funds in one life insurance policy, endowment or annuity policy to another without incurring a tax liability. Guidelines must be met to take advantage of the 1035 exchange provision. A 1035 exchange may take advantage of improved benefits or features offered by the replacement asset.

Back End Load
...is a sales charge collected when withdrawing funds from an investment.  It is also know as a deferred sales charge or redemption fee.  A back-end load is often charged on a mutual fund or annuity to discourage investors from making withdrawls.  Back end fees may be pro-rated to zero over a period of years, to encourage investors to stay in the investment longer.  Some investors may prefer a back end fee rather than one deducted from the principal when the investment is made.

Chapter 7
.....is a section of the US bankruptcy code under which a company or an individual can liquidate. Once a Chapter 7 filing is made, the US Bankruptcy Court appoints a trustee. The trustee takes an inventory of all non-exempt assets and liquidates them. The proceeds are then used to repay eligible creditors of the Chapter 7party. Chapter 7 creditors are ranked according to the credit risk they took - the lower the risk, the higher the likelihood of being repaid. In accordance with the absolute priority rule, under a Chapter 7 bankruptcy, shareholders are paid after creditors. With a Chapter 7 bankruptcy, a company will need to stop all business activities and turn over its assets. Once the Chapter 7 bankruptcy proceeding is completed, the individual or the company will be relieved of all debts and will be able to start anew. In 2005, Chapter 7 was significantly changed with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act which made it much more difficult to be eligible to file bankruptcy under Chapter 7.

Covered Call
....is a call option which is sold by an investor and which is covered (backed) by a corresponding number of shares of the underlying security. A covered call may also be covered by deposited cash equal to the exercise price of the covered call. Since a covered call is backed in advance by stock or cash, it represents a known and limited risk should the holder of the call choose to exercise the option. A naked call is selling a call without the underlying shares. A covered call defines and limits risk, a naked call represents potentially unlimited risk. Properly done, selling covered call options is a limited-risk way of creating cash flow within a portfolio.

Covered Put
....is a put option which is sold by an investor and which is covered (backed) by a corresponding number of short shares of the underlying security. A covered put may also be covered by deposited cash equal to the exercise price of the covered put. Since a covered put is backed in advance by stock or cash, it represents a known and limited risk should the holder of the put choose to exercise the option. A naked put is selling a put without the underlying shares. A covered put defines and limits risk, a naked put represents potentially unlimited risk. Properly done, selling covered put options is a limited-risk way of creating cash flow within a portfolio.

Credit Default Swap (CDS)
.....is a credit derivative. A creditdefault swap is similar to an insurance contract in that it transfers credit risk associated with a transaction or investment product from the purchaser of such CDS to the seller of the CDS. Under the terms of a CDS contract, the seller agrees to bear the credit risk of a counter party or an investment product in exchange for premium payments by the buyer. In the event a credit event is triggered (i.e. bankruptcy, payment default), the seller of the CDS will have to compensate the buyer in accordance with the terms of the contract. For example, during a cash settlement, the seller will pay the buyer of the CDS the difference between the market value and the par value of the investment product. Credit default swaps are not regulated so there is added risks that the seller will not perform if a credit event is triggered.

CSO
.....Chief Security Officer is responsible for securing the companies data and information, both physical and digital.  Mainly found in technology companies, their role has increased in recent years due to hackers, viruses and worms.  Their responsibilities are to stop theft and unauthorized access.

Derivative
....or derivative security, is an asset whose price is based on the value of an underlying asset. A derivative can come in several forms such as options, futures, and swaps. An option contract gives the owner the right, but not the obligation, to buy or sell the underlying stock at a predetermined price. A futures contract commits a party either to buy or sell the underlying commodity in the future at a certain price. A swap agreement that commits the counter parties to exchange cash flows according to a pre-arranged formula. For example, an interest rate swap will specify cash flows to be paid as a function of some interest rate.

EBITA
....or “earnings before interest taxes depreciation and amortization” is a commonly used measure of cash flow. EBITDA can be calculated “top down” by adding back DDA or depreciation and amortization deducted as sales costs to operating income before interest and taxes. EBITDA can also be calculated “bottom up” by adding interest and DDA back to pre tax income. For example, to find EBITDA, if the income statement shows $2 million of pre tax income and DDA is $12 million and interest expense $6 million, then EBITDA is $20 million. EBDITA became a standard tool for measure cash flow leverage for LBOs in the 1980's.  Enterprise value/EBITDA provides a valuation of a company’s debt and equity times its cash flows.

EMA Analysis
....compares the short term (5,13), intermediate term (20) and long term (50) EMA's. The respective EMA's will give bullish signals when trading above trailing EMA's and below the current price and vice versa.  EMA alerts include crossovers (i.e the 5 day EMA crosses above/below the 20 day EMA) and EMA convergences (5 day EMA equivalent to 13 day EMA)

FASB
.....Financial Accounting Standards Board establishes accounting and reporting standards for the private sector in the U.S.  FASB sets rules that accountants use to record and report operational results for corporations.  Companies look to the FASB for direction on how to treat accounting questions.

Glass-Steagall Act
....was a landmark Federal banking and securities law passed in 1933.  It was aimed at restoring confidence in the banking system.  Glass-Steagall established the Federal Deposit Insurance Corporation, which ensures bank customer's deposits.  Glass-Steagall prohibited commercial banks from engaging in investment bank activities.  Banks could not accept customer deposits and underwrite securities.  Commercial banks could receive no more than 10% of their income from securities markets.  Financial institutions were given one year to decide if they would be commercial banks or investment banks.  In 1999 the segregation of commercial and investment bank activities was repealed by the Gramm-Leach-Bliley Act.

Gold Bullion
....refers to a bulk quantity of gold.  Gold Bullion is traded in the form of ingots, bars, or coins. Unlike money, gold bullion is valued by its purity and its mass. Gold bullion must be at least 99.5% pure. Gold bullion offers a way to invest directly in gold. Gold bullion is a tangible investment which can be stored.  Investing in gold bullion can provide a hedge against inflation, and a way to diversify your portfolio.  You can also invest in gold include using certificates, derivatives, gold stocks, or gold ETFs, but only gold bullion puts the yellow stuff in your possession.

Inverted Hammer
....is a bullish reversal Japanese Candlestick pattern. In a downtrend, the security opens lower, then trades higher, but closes near where it opened. The candlestick has a long upper shadow/wick and a small real body at the lower end of the session

LIBOR
....London Inter bank Offered Rate. The British Bankers’ Association calculates LIBOR in an open manner each business day. LIBOR rates are released around 11am London time. LIBOR rates are set for various multiple short-term periods in a number of currencies. For example, each day LIBOR rates are released, there is a 1 week Japanese Yen LIBOR rate, a 1 month US dollar LIBOR rate, and 6 month Euro LIBOR rate. LIBOR is the primary benchmark for interest rates around the world. Interest rate contracts traded on many exchanges around the world, such as the Chicago Board of Trade, settle based on LIBOR. LIBOR affects consumers, too, as LIBOR is often used as a benchmark for ARMs and other credit products.

MACD
....Moving Average Convergence Divergence is a trend following momentum indicator that shows the relationship between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on top of the MACD

Margin Call
...a call from your broker to put more money in your account.  When buying stocks on margin, if your holdings go down in price, you may violate the reserve requirements and get a Margin Call.

Mark-to-market
.....the market price for any item at any given time. The problem here is that to determine a fair price, there has to be a market for it. When a market does not exist due to lack of demand, supply, or fear, prices do not reflect the long-term reality, but rather a short-term occurrence that may or may not last.  If a house down the street sold for 20% less than appraised value, your bank would call you and force you to reduce the value of your home and pay down your loan.  This would occur even if you were current on your payments.

Naked Short Selling
....selling shares without borrowing them first, from another stock owner, and having the ability to deliver by settlement date.

Option Contract
....or simply called an option, is an exchange-traded derivative instrument that gives the option holder the right, but not the obligation, to trade the underlying asset for a specific price. Electing to make the trade is known as exercising the option contract. If the option is a call option, the option holder can buy the underlying asset for the strike price. If the option is a put, the holder is entitled to sell the underlying upon exercise. An option contract always has an expiration date.  The counter party to the option holder for an option contract is known as the option writer.

Short Sale
.....selling the stock of a company in anticipation of the price going down so you can buy it back at a lower price. Short sellers “borrow” the shares from another investor and sell them, reaping the proceeds at what they believe is a “high” price. If the price falls, as they expect, they can buy the shares back at a lower price (which is known as “covering” their short sale) and replace the block of stock that they borrowed.  Their profit is the difference between the proceeds from the initial short sale higher price and what they then had to spend to cover their short sale (as well as brokerage commissions).

Stop Loss
....is used to specify a price at which a trader sells a stock position to limit losses on a trade.  Stop-losses are used to protect long positions, but can also be used for short sales.  Stop-losses do not guarantee the price of execution.  If the price gaps down past your stop loss, it becomes a market order.  You can use a "stop limit" that is the same as a stop loss, but will not execute in the case of a gap down past your limit price.  You may be passed by and not exit if your limit price is not touched. 
  A trailing stop is a stop loss that automatically moves up with a rise in share price but does not decrease with a drop in price.  We recommend a 20% trailing stop loss.

Stress Tests
.....a series of scenarios the U.S. Treasury is applying to the nation's largest 19 banks to gauge their ability to withstand difficulties, without additional capital infusion.

We are adding definitions to this page every day, if there is a definition you would like to see added, leave a note at feedback@galtstock.com