Financial Terms

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Definition of Investor

Investor Image 1


The owner of a financial asset.

Related Terms:

Institutional investors

Organizations that invest, including insurance companies, depository institutions,
pension funds, investment companies, mutual funds, and endowment funds.

Investor fallout

In the mortgage pipeline, risk that occurs when the originator commits loan terms to the
borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

Investor relations

The process by which the corporation communicates with its investors.

Investor's equity

The balance of a margin account. Related: buying on margin, initial margin requirement.

Retail investors, individual investors

Small investors who commit capital for their personal account.

Accrual bond

A bond on which interest accrues, but is not paid to the investor during the time of accrual.
The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Additional paid-in capital

Any payment received from investors for stock that exceeds
the par value of the stock.

Investor Image 2


A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A
positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market
return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%.
An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the
change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that
diverges from its beta, representing a measure of the manager's performance.


This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this
is the quoted offer at which an investor can buy shares of stock; also called the offer price.

Asset-based financing

Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Back office

Brokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.


1) When bond yields and prices fall, the market is said to back-up.
2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.

BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.


Regarding a futures contract, the difference between the cash price and the futures price observed in the
market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to
determine capital gains or losses for tax purposes when the stock is sold.


An investor who believes a stock or the overall market will decline. A bear market is a prolonged period
of falling stock prices, usually by 20% or more. Related: bull.

Benchmark interest rate

Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").

Investor Image 3

Beta risk

Risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

big bath

A street-smart term that refers to the practice by many businesses
of recording very large lump-sum write-offs of certain assets or
recording large amounts for pending liabilities triggered by business
restructurings, massive employee layoffs, disposals of major segments of
the business, and other major traumas in the life of a business. Businesses
have been known to use these occasions to record every conceivable
asset write-off and/or liability write-up that they can think of in
order to clear the decks for the future. In this way a business avoids
recording expenses in the future, and its profits in the coming years will
be higher. The term is derisive, but investors generally seem very forgiving
regarding the abuses of this accounting device. But you never
know—investors may cast a more wary eye on this practice in the future.


Bonds are debt and are issued for a period of more than one year. The U.S. government, local
governments, water districts, companies and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the
loan at a specified time. Interest-bearing bonds pay interest periodically.


A long-term debt instrument in which the issuer (borrower) is
obligated to pay the investor (lender) a specified amount of
money, usually at specific intervals, and to repay the principal
amount of the loan at maturity. The periodic payments are based
on the rate of interest agreed upon at the time the instrument is

Bond indenture

The contract that sets forth the promises of a corporate bond issuer and the rights of


An investor who thinks the market will rise. Related: bear.

Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.

Bullish, bearish

Words used to describe investor attitudes. Bullish refers to an optimistic outlook while
bearish means a pessimistic outlook.

Buy on margin

A transaction in which an investor borrows to buy additional shares, using the shares
themselves as collateral.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Investor Image 4

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.

Capital market

The market in which investors buy and sell shares of companies, normally associated with a Stock Exchange.

CARs (cumulative abnormal returns)

a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.

Cash Flow

In investments, NET INCOME plus DEPRECIATION and other noncash charges. In this sense, it is synonymous with CASH EARNINGS. investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends.

Cash offer

A public equity issue that is sold to all interested investors.


Underwriters, actual or potential, often seek out and "circle" investor interest in a new issue before
final pricing. The customer circled basically made a commitment to purchase the issue if it comes at an
agreed-upon price. In the latter case, if the price is other than that stipulated, the customer supposedly has first
offer at the actual price.

Clientele effect

The grouping of investors who have a preference that the firm follow a particular financing
policy, such as the amount of leverage it uses.


Interest-rate option that guarantees that the rate on a floating-rate
loan will not exceed a certain upper level nor fall below a lower level. It is
designed to protect an investor against wide fluctuations in interest rates.

Collateral trust bonds

A bond in which the issuer (often a holding company) grants investors a lien on
stocks, notes, bonds, or other financial asset as security. Compare mortgage bond.


A commodity is food, metal, or another physical substance that investors buy or sell, usually via
futures contracts.

Common stock

These are 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.

company cost of capital

Expected rate of return demanded by investors in a company, determined by the average risk of the company’s assets and operations.

Confidence indicator

A measure of investors' faith in the economy and the securities market. A low or
deteriorating level of confidence is considered by many technical analysts as a bearish sign.

Confidentiality Agreement

A legal document whereby the one party, usually the prospective investor, pledges to keep strictly confidential, and return on request, any and all information provided by the entrepreneur seeking funding.


A legal entity, organized under state laws, whose investors purchase
shares of stock as evidence of ownership in it. A corporation is a legal entity, which
eliminates much of the liability for the corporation’s actions from its investors.

Cost of Capital

The minimum rate of return a company must earn in order to meet
the rate of return required by the investors (providers of capital) of
the company

Cost of Common Stock

The rate of return required by the investors in the common stock of
the company. A component of the cost of capital.

Cost of Preferred Stock

The rate of return required by the investors in the preferred stock of
a company. A component of the cost of capital.

Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.

Custodial fees Fees

charged by an institution that holds securities in safekeeping for an investor.

Deal Breaker

A deal breaker is a significant issue relating to the proposed financing between the prospective investor and the entrepreneur that needs to be resolved in order to close the deal.

Default premium

A differential in promised yield that compensates the investor for the risk inherent in
purchasing a corporate bond that entails some risk of default.

Direct paper

Commercial paper sold directly by the issuer to investors.

Direct placement

Selling a new issue not by offering it for sale publicly, but by placing it with one of several
institutional investors.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.


Investing so that all your eggs are not in the same basket. By spreading your investments over different kinds of investments, you cushion your portfolio against sudden swings in any one area. Segregated equity funds have become a popular and secure way for average investors to get the benefits of greater diversification.


A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.


The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit
company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.

Efficient diversification

The organizing principle of modern portfolio theory, which maintains that any riskaverse
investor will search for the highest expected return for any level of portfolio risk.

Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider

Equity Buy-Back

Refers to the investors percentage ownership of a company that can be re-acquired by the company, usually at a pre-determined amount.

Equity investment

Through equity investment, investors gain part ownership of the corporation. The primary type of equity investment is corporate stock.

Equity Method

Accounting method for an equity security in cases where the investor has sufficient
voting interest to have significant influence over the operating and financial policies of an


A bond that is (1) underwritten by an international syndicate, (2) offered at issuance
simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single

Euroequity issues

Securities sold in the Euromarket. That is, securities initially sold to investors
simultaneously in several national markets by an international syndicate. Euromarket.
Related: external market

Exit Options

A variety of options available to an investor to recover their invested capital and the return on their investment.

Expected Return

The total amount of money (return) an investor anticipates to receive from an investment.

Extendable notes

Note the maturity of which can be extended by mutual agreement of the issuer and

External market

Also referred to as the international market, the offshore market, or, more popularly, the
Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal

extraordinary gains and losses

No pun intended, but these types of gains
and losses are extraordinarily important to understand. These are nonrecurring,
onetime, unusual, nonoperating gains or losses that are
recorded by a business during the period. The amount of each of these
gains or losses, net of the income tax effect, is reported separately in the
income statement. Net income is reported before and after these gains
and losses. These gains and losses should not be recorded very often, but
in fact many businesses record them every other year or so, causing
much consternation to investors. In addition to evaluating the regular
stream of sales and expenses that produce operating profit, investors
also have to factor into their profit performance analysis the perturbations
of these irregular gains and losses reported by a business.

Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.

Feasible portfolio

A portfolio that an investor can construct given the assets available.

financial intermediary

Firm that raises money from many small investors and provides financing to businesses or other
organizations by investing in their securities.

Financial leverage clientele

A group of investors who have a preference for investing in firms that adhere to
a particular financial leverage policy.

Fisher effect

A theory that nominal interest rates in two or more countries should be equal to the required real
rate of return to investors plus compensation for the expected amount of inflation in each country.

Flight to quality

The tendency of investors to move towards safer, government bonds during periods of high
economic uncertainty.

Flip-flop note

Note that allows investors to switch between two different types of debt.

Floating supply

The amount of securities believed to be available for immediate purchase, that is, in the
hands of dealers and investors wanting to sell.

Forward sale

A method for hedging price risk which involves an agreement between a lender and an investor
to sell particular kinds of loans at a specified price and future time.

Fourth market

Direct trading in exchange-listed securities between investors without the use of a broker.

Fund family

Set of funds with different investment objectives offered by one management company. In many
cases, investors may move their assets from one fund to another within the family at little or no cost.

General cash offer

A public offering made to investors at large.

general cash offer

Sale of securities open to all investors by an already-public company.

High-Risk Small Business

Firm viewed as being particularly subject to risk from an investors perspective.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Homogenous expectations assumption

An assumption of Markowitz portfolio construction that investors
have the same expectations with respect to the inputs that are used to derive efficient portfolios: asset returns,
variances, and covariances.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Initial margin requirement

When buying securities on margin, the proportion of the total market value of
the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of
governors of the Federal Reserve the responsibility to set initial margin requirements, but individual
brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by
the exchange.

Initial public offering (IPO)

A company's first sale of stock to the public. Securities offered in an IPO are
often, but not always, those of young, small companies seeking outside equity capital and a public market for
their stock. investors purchasing stock in IPOs generally must be prepared to accept very large risks for the
possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting
fees which represent a load to buyers.


The gradual domination of financial markets by institutional investors, as opposed to
individual investors. This process has occurred throughout the industrialized world.


The cost of funds loaned to an entity. It can also refer to the equity ownership
of an investor in a business entity.

International diversification

The attempt to reduce risk by investing in the more than one nation. By
diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce
the variability of their returns.


As a discipline, the study of financial securities, such as stocks and bonds, from the investor's
viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Junk bond

A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.


This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).

Market conversion price

Also called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.







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