Investopedia
Terms
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- Peter Lynch
- Lynch graduated from Boston College in 1965 with a degree in finance. He served two years in the military before attending and graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968.
- Liquidity
- 1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.
- Fundamental Analysis
- A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies).
- Asset Allocation
- An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
- Prospect Theory
- A theory that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former.
- Fair Value
- 1. The estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies.
- Standard & Poor's 500 Index (S&P 500)
- An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
- Index
- A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.
- Economics
- A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers.
- Risk
- The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.
- 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 such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
- Speculation
- The process of selecting investments with higher risk in order to profit from an anticipated price movement
- Technical Analysis
- A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity
- Mental Accounting
- An economic concept established by economist Richard Thaler, which contends that individuals divide their current and future assets into separate, non-transferable portions. The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
- Black Monday
- The title given to one of the most notorious days in recent financial history. On October 19, 1987, the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline. By the end of the month, most of the major exchanges had dropped more than 20%.
- Volatility
- Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
- Fixed-Income Security
- An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance.
- Capital Appreciation
- A rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.
- Outperform
- An analyst recommendation meaning a stock is expected to do slightly better than the market return.
- Weekend Effect
- term used to describe the phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday.
- Behavioral Finance
- field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.
- Bond
- A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
- January Effect
- A general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.
- Retirement Planning
- one of the most important life events many of us will ever experience. From both a personal and financial perspective, realizing a comfortable retirement is an incredibly extensive process that takes sensible planning and years of persistence. Even once it is reached, managing your retirement is an ongoing responsibility that carries well into one's golden years.
- Random Walk Theory
- The theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.
- Investing
- The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit. Investing also can include the amount of time you put into the study of a prospective company, especially since time is money.
- Black Thursday
- The name given to Thursday, October 24, 1929, when the New York Stock Exchange plummeted, leading to the Great Depression of the 1930s.
- compounding
- The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
- Capital
- Capital is an extremely vague term and its specific definition depends on the context in which it is used. In general, it refers to financial resources available for use.
- Efficient Market Hypothesis (EMH)
- An investment theory that states that it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
- Regret Theory
- A theory that says people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. Fear of regret can play a large role in dissuading or motivating someone to do something.
- Correction
- A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index. Corrections are generally temporary price declines, interrupting an uptrend in the market or asset.
- Warren Buffett
- Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire Hathaway and arguably the greatest investor of all time. His wealth fluctuates with the performance of the market but as of 2008 his net worth was estimated at $62 billion, making him the richest man in the world.
- Undervalued
- A stock or other security that is trading below its true value.
- Dow Jones Industrial Average
- The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
- Stock
- A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
- Prospectus
- A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.
- Income Statement
- A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.
- Index Fund
- A type of mutual fund with a portfolio constructed to match or track the components of a market index such as the S&P 500 Index. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
- Pension Plan
- A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement.
- Interest
- The amount of ownership a stockholder has in a company, usually expressed as a percentage
- Bull Market
- A financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities
- Black Scholes Model
- A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.
- Balance Sheet
- A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
- A model
- A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
- Arbitrage
- The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces.
- Market Efficiency
- The degree to which stock prices reflect all available, relevant information.
- RRSPs:
- This tutorial is your one-stop RRSP shop. Here we explore the ins and outs of RRSP planning and investing. Specifically, we look at what an RRSP is, what its advantages are, how you can set one up and how you can get the most out of your RRSP account.
- A social science
- The science that describes the management of money, banking, credit, investments, and assets.
- Risk Tolerance
- The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.