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INVESTMENT TERMS

• FEDERAL HOME LOAN MORTGAGE CORPORATION: (FHLMC or


Freddie Mac.)

Government-chartered corporation which buys


qualified mortgage loans from the financial
institutions that originate them, securitizes the
loans, and distributes the securities through the
dealer community. The securities are not backed by
the U.S. Government. The market value of these
securities prior to maturity is not guaranteed and
will fluctuate.

• OVER BOUGHT /OVERSOLD INDICATOR

A technical analysis tool that attempts to define


when prices have moved too far and fast in either
direction. This is usually calculated based on a
moving average of the difference between the
number of advancing and declining issues over a
certain period of time. If the market is considered
overbought, the technical analyst will sell, and if the
market is considered oversold, he/she will buy.

• TIME VALUE OF MONEY


The idea that a dollar now is worth more than a
dollar in the future, even after adjusting for
inflation, because a dollar now can earn interest or
other appreciation until the time the dollar in the
future would be received. This theory has its base in
the calculation for present value.

• EQUITY (1)

Ownership interest in a corporation in the form of


common stock or preferred stock. It also refers to
total assets minus total liabilities, in which case it is
also referred to as shareholder's equity or net worth
or book value. In real estate, it is the difference
between what a property is worth and what the
owner owes against that property (i.e. the difference
between the house value and the remaining
mortgage or loan payments on a house). In the
context of a futures trading account, it is the value
of the securities in the account, assuming that the
account is liquidated at the going price. In the
context of a brokerage account, it is the net value of
the account, i.e. the value of securities in the
account less any margin requirements.

• MARKET VOLATILITY INDEX (VIX)


An index designed to track market volatility as an
independent entity. The Market Volatility Index is
calculated based on option activity and is used as an
indicator of investor sentiment, with high values
implying pessimism and low values implying
optimism. There are three volatility indexes in the
Chicago Board Options Exchange which track the
three main stock indexes: the VIX is the most widely
used, tracking the S&P 500, but there also is the
VXN which tracks the Nasdaq and the VXD which
tracks the Dow Jones Industrial Average.

• CUSIP (Committee on Uniform Securities Identification


Procedures)
The committee which supplies a unique nine-
character identification, called a CUSIP number, for
each class of security approved for trading in the
U.S., to facilitate clearing and settlement. These
numbers are used when any buy and sell orders are
recorded.

• DOW

The most widely used indicator of the overall


condition of the stock market, a price-weighted
average of 30 actively traded blue chip stocks,
primarily industrials. The 30 stocks are chosen by
the editors of the Wall Street Journal (which is
published by Dow Jones & Company), a practice that
dates back to the beginning of the century. The Dow
was officially started by Charles Dow in 1896, at
which time it consisted of only 11 stocks. The Dow is
computed using a price-weighted indexing system,
rather than the more common market cap-weighted
indexing system. Simply put, the editors at WSJ add
up the prices of all the stocks and then divide by the
number of stocks in the index. (In actuality, the
divisor is much higher today in order to account for
stock splits that have occurred in the past). also
called Dow Jones Industrial Average (DJIA).

• VENDOR FINANCING

A loan from one company to another which is used


to buy goods from the company providing the loan.
In this way, the vendor increases sales, earns
interest, and may sometimes also acquire an interest
in the customer. This increases the risk profile of a
company if it is carried out on a large scale, since
many companies do not have the skill to conduct
credit analysis. Large, creditworthy buyers are
unlikely to make use of this arrangement, since they
will be able to borrow money at lower rates from
other sources.

• ASKING PRICE
The lowest price for which any investor or dealer has
declared that he/she will sell a given security or
commodity. For over-the-counter stocks, the asking
price is the best quoted price at which a Market
Maker is willing to sell a stock. For mutual funds, the
asking price is the net asset value plus any sales
charges. also called asked price or offering price or
ask.

• BASIS SWAP
A specific type of interest rate swap, where the
interest rates exchanged are based on different
money markets or currencies.

• MARGINAL COST OF CAPITAL GDR

The cost associated with raising one additional


dollar of capital. The marginal cost will vary
according to the type of capital used. For example,
raising funds through the use of unsecured or
subordinated debt, or through debt that requires
higher interest rates to offset risk, will be more
expensive than debt that is backed by collateral,
such as a secured bond.

• DIVIDEND PER SHARE (DPS).

The amount of dividend that a stockholder will


receive for each share of stock held. It can be
calculated by taking the total amount of dividends
paid and dividing it by the total shares outstanding.
If a company issues a $1 million dividend and has 10
million shares, the dividend per share is 10 cents ($1
million divided by 10 million shares).
• TOTAL RETURN SWAP

A type of swap where one party pays another based


on a set rate in return for payments based on the
return of a given asset. This asset is often a loan or a
bond. This situation is beneficial if a party wants to
benefit from an asset, but doesn't want to purchase
that asset. Total return swaps are often used by
hedge funds.

• ALTERNATIVE MINIMUM TAX (AMT).

An IRS system created to ensure that high-income


individuals, corporations, trusts, and estates pay at
least some minimum amount of tax, regardless of
deductions, credits or exemptions. It functions by
adding certain tax-preference items back into
adjusted gross income. While it was once only
important for a limited number of high-income
individuals who made extensive use of tax shelters
and deductions, more and more people are being
affected by it. The AMT was introduced in 1969, and
was originally intended only to affect 155 U.S.
households, but by 2010 it is projected that up to
20% of households may be affected by AMT. The
AMT is often triggered when there are large numbers
of personal exemptions on state and local taxes
paid, large numbers of miscellaneous itemized
deductions or medical expenses, or by Incentive
Stock Option (ISO) plans. The AMT has become one
of the most controversial tax mechanisms in
existence.

• HIPAA (Health Insurance Portability And Accountability Act)

A law mandating that anyone belonging to a group


health insurance plan must be allowed to purchase
health insurance within an interval of time beginning
when the previous coverage is lost. The law protects
employees, especially those with long term health
conditions who may be reluctant to leave jobs
because they are afraid pre-existing condition
clauses will limit coverage of any such conditions
under a new insurance plan, from losing health
insurance due a change in employment status. The
law also creates standards dealing with the privacy
of health information, which helps prevent improper
use of one's medical record.

• BLOCK TRADE

A large amount of securities being traded, typically


at least 10,000 shares of stock or $200,000 in
bonds. Normally, only institutional investors
undertake such large trades. Block trades can affect
the market price of the security, depending on the
liquidity of the market.

• CONTINGENT ORDER

An order which is to be executed only if another


order is executed first. An example of a contingent
order would be to sell one specific security if another
specific security has been bought. Brokers often do
not like to work with these orders, given the
uncertainty and extra work involved.