Financial Terms and Definitions

High Frequency Trading

ashivapu — Mon, 11 Oct 2010 04:41:46 +0000

Computers that execute complicated algorithms to automically make thousands of trades per second with no human interaction.

Generally profits per trade don’t exceed a penny; however, due to the bulk amount of trades the overall profits can range into the millions.

At it’s current state, high frequency trading is an extremely secretive practice and is still being examined by the SEC.

High frequency trading was responsible for the “flash crash” that happened in May 10′.

After-Hours Trading (AHT)

Knock-out Option

ashivapu — Mon, 29 Mar 2010 15:33:04 +0000

An option that becomes worthless in the event that the underlying commodity or currency crosses a certain price level.

Double Auction Market

ashivapu — Thu, 04 Mar 2010 00:11:07 +0000

A system in which buyers enter competitive bidders and sellers enter competitive offers simultaneously, as opposed to the over-the-counter market, where trades are negotiated (NYSE and AMEX). Also called auction market.

A double auction market can also be carried out by open outcry, in which buyers and sellers call out prices that they are willing to buy and sell at, and a match is made if a buyer and seller call out the same price.

Double auction markets usually feature a large number of buyers and sellers, and thus participants tend to incur lower transaction costs than in the over-the-counter market.

Exotic Options

ashivapu — Thu, 18 Feb 2010 17:07:35 +0000

A category of options which includes complicated components and complex payoffs.

Its payoff or other key values often depend on outside factors which vary over time, such as exchange rate. Because of their complexity, exotic options are often traded over the counter rather than through an exchange.

Asian-style options are one type of exotic options. opposite of plain vanilla option.

Book To Market Ratio

ashivapu — Fri, 12 Feb 2010 22:32:52 +0000

A stock’s book value divided by its market value.

Book value is calculated from the company’s balance sheet, while market value is based on the price of its stock.

A ratio above 1 indicates a potentially undervalued stock, while a ratio below 1 indicates a potentially overvalued stock. Technology companies and other companies in industries which do not have a lot of physical assets tend to have low book to market ratios.

Conversion Price

ashivapu — Fri, 29 Jan 2010 22:45:13 +0000

The price at which a given convertible security can be converted to common stock.

The conversion price is specified when the security is issued. The number of shares to be received is the principal amount of the security divided by the conversion price (after the conversion price is adjusted for stock splits anddividends).

Cross-Hedging

ashivapu — Mon, 18 Jan 2010 01:36:58 +0000

Hedging one instrument’s risk with a different by taking a position in a related derivatives contract. This is done when there is no derivatives contract for the instrument being hedged, or a suitable derivatives contract exists but the market is highly illiquid.

The maturity of the derivatives contract must be at least as long as the maturity of the desired hedge, otherwise the investor will be left with an unhedged exposure for a period of time.

The success of cross-hedging depends completely on how strongly correlated the instrument being hedged is with the instrument which underlies the derivatives contract. Additionally, the credit quality of the derivative and the instrument being hedged needs to be similar and their markets need to be of similar liquidity, so that price changes are similar.

Call Option

Offering Circular

ashivapu — Fri, 15 Jan 2010 16:34:49 +0000

A legal document offering securities or mutual fund shares for sale, required by the Securities Act of 1933.

The document must explain the offer, including the terms, issuer, objectives (if mutual fund) or planned use of the money (if securities), historical financial statements, and other information that could help an individual decide whether the investment is appropriate for him/her. also called prospectus or circular.

Back-to-Back Loans

ashivapu — Fri, 08 Jan 2010 06:42:58 +0000

See Parallel Loan

No related posts.

Parallel Loan

ashivapu — Tue, 05 Jan 2010 06:43:41 +0000

A loan in which two companies in different countries borrow each other’s currency for a given period of time, in order reduce foreign exchange risk for both of them. Also referred to as back-to-back loans.