Active investing – a term to describe an investment strategy in which the investment manager is actively involved in the buying and selling of securities. The goal of active investing is to deliver higher returns than the benchmark index.
Alpha – A term used to describe an investment strategy’s ability to beat the market. Active managers use alpha as a way to measure their performance relative to a benchmarked index. Alpha is determined by the excess return on one’s investment relative to the returns of an index. For example, if an active manager has delivered 6% returns and the index delivered 4%, then the active manager’s alpha is positive and listed as +2.0. On the reverse, if an active manager delivered 2% and the index delivered 4%, then alpha is negative and expressed as -2.0.
Asset management firm – An entity that sells investment strategies to institutions and high-net worth individuals. Asset managers may offer a series of investment strategies based on asset classes, indices, risk appetite, industry, market capitalization (small-, mid-, large-cap), etc. Asset management firms typically make money based on the percentage of assets under management.
Basis points (BPS) – Unit of measurements for interest rates and other financial instruments, where one basis point is equal to one hundredth of a percent, or 0.01%.
1 basis point = 0.01%, or .0001
10 basis points = 0.1%, or .001
100 basis points = 1%, or 0.01
“The interest rates have increased by 30 basis points since May.”
“That firm charges 124 basis points to manage your account.”
Bear market – A period of time where share prices are generally falling, thus encouraging the selling of securities. This is in contrast to a bull market.
Beat the market (Outperform the market) – A term used to describe an active manager’s ability to deliver greater returns on investment than a benchmark index.
Bond – In the simplest of terms, a bond is a loan. The loan is between an investor and the borrower, and the borrower is usually a corporate or government entity. These entities need to raise funds to finance projects that in the future will generate revenue, of which the investors will be eventually repaid.
How do bond payments themselves work? What are the terms and conditions associated with bonds? Is it risky loaning to a corporate or government entity? Learn more.
Bull market – A period of time where share prices are generally rising, thus encouraging buying of securities. This is contrast to a bear market.
Breakaway advisors – Advisors who leave, or break away from, a wirehouse or larger investment organization. When they break away, the advisor takes clients and their assets with them, away from the larger organization. There are pros and cons to breaking away, and the one motivating factor for the breakaway advisor is the chance to earn more money than they would by staying at the existing organization.
Broker-dealer (B-D) – A person or entity that buys and sells securities on behalf of its customers (broker) or for its own account (dealer). Here is a list of the top broker-dealer firms.
Capital call – The act by which an investment firm, most notably private equity and venture capital firms, has a legal right to demand a portion of the money it was promised to an investor.
When the investment firm and the investors reach an agreement, not all of their money will be invested right away, as timing to an investment is an important factor.
So as part of the agreement, the investors are to have a certain amount of capital on hand, and the firm can call upon that capital as needed.
Clearing (Clearance) – The process of ensuring that securities bought and sold are accounted for, and to make sure deliveries are made to the correct parties. These activities are handled by clearing houses.
Clearing house – A financial institution formed to facilitate the exchange of payments, securities, or derivatives transactions. The clearing house stands as an intermediary between the buyer and seller, making sure both parties follow through on the transaction, based on an agreement of terms for purchase and sale.
Compound interest – Interest that is calculated on the initial principal, and added to that principal includes accumulated interest payments over a period of the loan.
See how compound interest is calculated and a visual representation of how compound interest works, learn more here.
Custodian – A financial institution that specializes in holding/safekeeping their clients’ securities. This arrangement helps minimize the risk of misappropriation, misuse, theft, and or/loss of clients’ securities. Learn more.
Data warehouse – A large collection of data in one place, in which the data is gathered from a variety of sources and fed directly into the one location. By centralizing the data, the data warehouse aids in the reporting, analysis, and decision-making processes.
Depository Trust and Clearing Corporation – An American financial company that provides post-trade clearing and settlement services for financial markets. Learn what clearing and settlements are.
Distribution – the disbursement, or payment, of assets that is associated with a fund, account, or security of the investor. Distributions are a payment that can come in the form of interest, a dividend, or a return of principal.
Dividend – A sum of money paid out by a company to its shareholders on a regular basis, usually quarterly. The money paid out to shareholders comes from profits or reserves of the company.
Dividend reinvestment – Also known as a dividend reinvestment program or dividend reinvestment plan (DRIP). A dividend reinvestment is the act of a shareholder taking the money paid out from a dividend and using that money to invest back into the underlying security, rather than the shareholder pocket the cash dividend.
Should you take the cash or reinvest your dividends? Learn more.
Dividend yield – a financial ratio that shows how much a company pays out in dividends each year, in relation to its stock price. The ratio is the dividends paid out over a over price (dividend/price).
Dividend yield = annual dividends per share divided by the price per share.
See example calculations and what dividend yields mean to investors. Learn more.
Equity – The degree of ownership in an asset, where equity is calculated by subtracting all debts associated with the value of the asset. Equity represents a shareholder’s stake in the asset.
Equities come in the form of public and private.
Exchange Traded Fund (ETF) – An investment fund traded on a stock exchange. The fund may consist of different securities (stocks, bonds, commodities, etc.), similar to a mutual fund.
What makes an ETF different from a mutual fund, aside from the ETF being a tradable security, is that investors who purchase shares of an ETF do not own the underlying assets (the actual securities that make up the fund), but they can receive dividends from stocks that make up the index. Learn more about how ETFs work.
Family office – A private entity established to manage the wealth management affairs of an ultra-high net-worth (UNHW) family. These families typically have a net worth around $100 million, and a staff of investment, compliance, technology and operational professionals is hired to help run the family office. In addition to growing and preserving family wealth, the family office handles succession planning and the transfer of money across generations. They also handle tax and legal matters, as well as donations to charitable organizations.
Fiduciary – A term to describe an individual or entity that holds a legal and ethical obligation to take care of their clients’ money or assets. Simply put, a fiduciary would take care of their clients’ finances as if they were their own. Investment advisors can be recognized as a certified fiduciary by fulfilling a set of requirements. The State of California, for example, has resources that show how to become a fiduciary.
Financial Industry Regulatory Authority (FINRA) – An independent, self-regulating nongovernmental organization that oversees broker-dealers in the United States. Learn more about how FINRA protects investors.
Fixed income – an income, or a receiving of payment where the amount received is set, or fixed. The amount of the income or payment that is received does not change, and
Fixed income is most commonly associated with pensions and regularly set payments from government like Social Security. Fixed income can also come from one’s investments in bonds.
The amount that comes along with fixed income does not vary, and it does not take inflation into account.
FTE – Full-Time Equivalent. The term FTE is commonly used to denote the number of hours associated with an employee, and FTE is also used in connection with the number of hours associated with workloads and determining the appropriate headcount to complete the tasks.
An FTE represents an employee working a 40-hour workweek (or 8 hours a day, or 2,080 hours a year). One FTE as a number represents 1.0.
If there is a task that requires one 40-hour/week employee (1.0 FTE) and one part-time (20-hour/week) employee (0.5 FTE), then the number of FTEs associated with the project is 1.5.
Hedge fund – A limited partnership of investors who pool their money together, sometimes using borrowed money. Hedge fund investment strategies vary, with the ultimate goal of maximizing their return on investment. Hedge fund investing tends to be characterized as high-reward and high-risk. Hedge fund investing is less regulated by the SEC because the investors have already been accredited.
Interest – A fee or charge that a borrower must pay for the privilege of borrowing money.
Interest rate – The amount charged on top of the principal for a loan. The interest rate can be expressed as a percentage of the loan (simple interest) or in compound interest.
Investment management firm – An entity that manages investments on behalf of individuals and/or institutions. The terms “investment management” and “investment manager” are broad, encompassing both wealth management and asset management elements.
Long Position (Long) – An investment strategy in which the investor buys an asset (typically stocks, commodities, and currencies), with the hope and expectation that the asset purchased will rise in value. At that point, the asset can be sold at a profit.
In simple terms, a long position is most similar to a “buy low, sell high” strategy. This strategy is the opposite of a short position.
Multi-family office (MFO) – Similar to a family office, the multi-family office is set up to handle the wealth management needs of multiple families, and a team of professionals is hired to handle their investing, compliance, technology and operations. There are benefits to a multi-family office, and there different ways a MFO can be established.
Mutual fund – A professionally managed investment fund that pools money from multiple investors and invests the money in stocks, bonds, and money market interests.
Pooled investments (pooled funds) – A type of investment or fund in which the money from multiple investors is compiled, or pooled, into one larger fund. One of the benefits of a pooled investment is it allows each individual access to bigger investments that they wouldn’t have been able to do if they were to invest by themselves.
Passive investing – An investment strategy that follows a stock market index. With passive investing, investments are made in companies that make up the index. This type of investing follows a buy-and-hold pattern, denoting a long-term investment strategy. Passive investors do not profit from short-term fluctuations the way active managers do.
Position(s) – the amount of a security, commodity, or currency that is owned by an individual, a dealer, or entity.
A: “How many positions are you holding in Google?”
B: “100. At $1,500 per share, the total value of my positions is $15,000.”
Principal – The amount borrowed that one has to pay back. The principal is the value of the amount that is borrowed.
Private equity – A form of equity that involves shares of ownership in a company, in which that ownership cannot be traded like public equity. The owners of private equity (PE) are typically financial institutions (pension fund managers) or high-net worth individuals, and these owners, as high-profile investors in the company, will have a say in how the companies they invested in are run, in order to maximize investor profits.
Private equity (PE) firm – An entity that is involved in the buying and selling of companies that are not publicly traded. Private equity firms provide financial backing to companies, of which they may hold partial or outright ownership. To finance such investments, private equity firms raise money from individual and institutional investors, who then have a stake in the company the PE firm invested in.
To make the company more valuable and profitable, the private equity firm will have a role in making changes to company leadership, staffing, products/services, and operational procedures. Private equity firms and their investors make money in three ways: 1) the company they invested goes public and sells shares to outside investors 2) selling the company and receiving payment in the form of cash or shares in another company 3) cash flow generated from the company.
Public equity – A form of equity that involves companies raising money by selling shares of their company to the public, on publicly traded platforms like the New York Stock Exchange, where investors can buy and sell their shares to other investors.
Registered Investment Advisor (RIA) – A person or entity that is authorized to advise an individual and/or institution on their investments and manage their portfolios.
Robotic Process Automation (RPA) – The automation of manual and routine tasks with the use of programmed bots. These bots are not physical devices, but rather they are programmed software built in the computer system. Learn more how RPA works in investment management.
Securities – Tradable financial assets. Stocks and bonds are examples of securities. Securities are usually listed in two main types: debt securities (banknotes, bonds, debentures) and equity securities (common stocks).
Securities and Exchange Commission (SEC) – An agency of the United States Federal Government that regulates all transactions of securities in the public markets. The SEC aims to protect investors by mandating investment firms disclose various information about the company and their investments to the investors. Learn more about how the SEC works.
Settlement – The delivery of securities from one party to another; the process wherein a buyer makes a payment and receives the securities from the seller. The seller then receives cash in exchange for the sold securities.
Shares – Units of ownership in a stock , corporation, or other financial asset. Profits and dividends are distributed to the owners of these shares (shareholders) in proportion to the amount of ownership they have in the stock, entity, or asset.
Shares outstanding – the number of shares of stock that a company has issued to shareholders and company insiders. Investors, when determining whether or not to buy a stock, use shares outstanding to calculate market capitalization and earnings per share (EPS).
Shares outstanding only represents stock that has been sold or issued; shares outstanding does not include stocks that have not been sold. See floating stock.
Sharia finance – Also known as Islamic banking or Islamic finance; financial and banking activity that is in accordance with Islamic principles and the Islamic legal system of sharia law. Sharia finance includes guidelines around investing, profit and loss sharing, and the charing of interest. Learn more.
Short position (short; shorting; short selling) – An investment strategy in which the investor purchases an asset with the hope or expectation the purchased asset will decrease in value.
At first, shorting may sound counterintuitive, but it can be profitable when the strategy works as intended.
Here’s how shorting works:
Investors borrow shares of a stock from a financial institution. The investor sells those borrowed shares, with the hope that the stock will drop in value. If the stock value has fallen, then the investor will buy back those shares and return those shares back to the financial institution.
Here is an example of how shorting works:
An investor borrows 100 shares of a stock, each share worth $100. The investor immediately sells those shares and earns $10,000.
The investor expects the stock price to fall, and in our example, the stock price does fall. Now the stock is worth $60 per share. The investor decides now is a good time to purchase 100 shares of that stock previously sold. The investor purchases, and now the investor has $6,000 of stock ($60 per share with 100 shares shares purchased).
The investor returns the shares of the purchased stock back to the financial institution, and the investor still has $4,000 left over from the initial sell. That $4,000, minus fees the institution collects for lending the shares, is profit for the investor as a result of short selling.
Simple interest – The amount owed on a loan, where the amount owed is determined by multiplying the principal by the daily interest rate by the principal by the number of periods of payment for the duration of the loan.
Simple interest calculation = Principal x interest rate x number of periods
Trust – A three-way relationship where an individual (trustor) grants a second party (the trustee) legal authority and title to hold the trustor’s assets for the benefit of third party (beneficiaries), who will be the recipient of the trustor’s assets.
Think of a wealthy individual who wants to pass on assets to his or her children. The wealthy person will enlist the services of a trust company to ensure assets are managed and distributed to the recipients responsibly. An irresponsible recipient or feuding siblings could misuse the assets, so to minimize risk and conflict, the trust company is legally entitled to hold the assets and distribute according to the wishes of the wealthy individual.
Trust company – An entity that acts as a trustee. See definition of a trustee.
Trust fund – A fund consisting of assets, set up by the trustor and held by a trustee on behalf of the beneficiaries.
Trustee – The person or entity that has been authorized by the trustor and legally designated to manage the trustor’s assets for the benefit of the recipients.
Trustor – An individual whose assets will be distributed to recipients in the form of a trust. What is a trust? See above definition.
Usury – The act of lending money at unreasonably high interest rates. These kinds of loans are illegal.
Venture capital firm – An entity, or a type of private equity firm, that invests in early-stage startup companies or small businesses that have demonstrated high growth or have a potential for high growth. In return, venture capital firms receive equity, or a stake of an ownership in the company. To finance their investments, venture capital firms raise money from high-net worth individuals and institutional investors. Learn more about how venture capitalists make money.
Wealth management firm – An entity that provides a range of financial services to individual investors, including retirement planning, tax and estate planning. Wealth managers customize investment strategies and portfolios according to the clients’ unique needs. Wealth management firms make money by charging fees on the services they provide.
Wirehouse – A full-service broker-dealer. The size of a wirehouse may vary from a small regional firm to a large institution with national and global reach. How did wirehouses get their name, and how have these firms changed over time? Learn more.