Basic terminology

Below, we have gathered some terms that can come in handy when you want to learn more about investments and money management.

AAA Several major credit rating agencies (such as Standard & Poor and Fitch Ratings) use AAA to indicate the highest level of credit quality for bonds.

If a bond has been deemed AAA by a credit rating agency, it means that the credit issuer sees the issuer of the bond as having a very high degree of creditworthiness.

Bonds rated AAA are typically added to an investment portfolio when the investor wants to decrease risk.

AAA rated bonds usually offer low yield compared to lower rated bonds with the same maturity date.

Acceleration Life Insurance This is a life insurance that will pay a portion of the death benefits in case of a specified illness or medical emergency. This payout for such an event is usually a lump sum consisting of somewhere between 25% and 50% of the policy’s face amount, but terms and conditions do vary from one policy to another so it is strongly recommended to check this before purchasing acceleration life insurance.

The main idea behind acceleration life insurance (instead of classic life insurance) is to provide financial resources for medical costs instead of just being a life insurance policy. The illness or emergency triggered payout will therefore normally be made directly to the insured, and not to the person named as beneficiary.

The remaining part of the death benefit is paid out when the insured dies and goes to the beneficiary.

American-style option An American-style option can be exercised on any day until it has expired.
BBC Global 30 This is a stock market index started by the BBC in September 2004. It is based on 30 of the world’s largest stock companies and is often hailed as a global barometer.

As of 2011, ten of the companies are based in the USA, four in the United Kingdom, four in Australia, three in Japan, two in Hong Kong, two in Germany, two in Switzerland, on in France, one in Sweden, and one in South Korea.

Bear Market A market where the prices of securities are falling. A bear market is characterized by investor pessimism.

There is no legal definition of bear market. In the United States, a downturn of at least 20% in multiple broad market indices over a minimum of two months is generally considered a bear market.

A short-term downturn (< 2 months) is not the same as bear market. A short-term downturn is known as a correction.

Bermuda-style option A Bermuda-style option can only be exercised on certain dates, as outlined in the option’s term sheet.
Bond In finance, a bond is a type of debt security.
BRIC BRIC is an acronym for Brazil, Russia, India, and China.

The acronym was coined by Goldman Sachs in 2001.

BRICS The BRIC countries + South Africa.
Bull market A market where the prices of securities are rising. A bull market is characterized by investor optimism.
Call stock option A call stock option gives the holder a right, but not an obligation, to purchase a predetermined amount of the underlying stock for a predetermined price (the strike price), within a predetermined time frame.

The price you pay when you purchase a call stock option is called premium.

Close-ended investment fund For a close-ended investment fund, creating new units/shares is more complicated than for an open-ended investment fund. You may have to find someone willing to sell existing units/shares if you want to invest in the fund. (With an open-ended investment fund, new units/shares are always created as soon as someone wants to invest in the fund.)
Convertible preference shares A convertible preference share gives the holder a right (but not an obligation) to convert the share into a certain number of shares of common stock. There is usually a predetermined date before which no such conversion may take place.

Convertible preference shares is the same thing as convertible shares of preferred stock.

Corporate bond A bond issued by a corporation.
CREST CREST = Certificateless Registry for Electronic Share Transfer

This is a UK-based registry where shares in certain stock companies are recorded.

Dow Jones Industrial Average (DIJA) This is a stock market index comprised of 30 large stock companies based in the United States.

The DIJA is also known as Dow Jones Industrial, Dow 30 or simply The Dow. It was first calculated in May 1896. The industrial part of the name is today largely historical, and many of the companies currently included in the index are not heavy industry companies.

DIJA is owned by S&P Dow Jones Indices.

DRIP DRIP = Dividend Re-Investment Program

If you sign up with a DRIP, the dividend payments you receive on your company shares will be automatically used to purchase more shares for you in the company.

Using a DRIP instead of doing the transaction manually

EAGLES EAGLES = Emerging And Growth-Leading Economies

The acronym was introduced by the bank BBVA in 2010. Back then, the ten economies considered eagles by BBVA were Russia, Mexico, Brazil, China, South Korea, Taiwan, Indonesia, India, Turkey, and Egypt.

Earning asset An earning asset is an income-producing asset.
European-style option A European-style option can only be exercised on the expiry date.
Foreign Exchange Option (FX Option) The FX Option is a financial instrument for the forex market.

The holder (owner) of the FX Option has a right (but no obligation) to exchange a predetermined amount of a certain currency for another specified currency for a predetermined exchange rate. This exchange rate is known as the strike price.

If it is a European-style FX Option, the holder of the FX Option can only exercise (use) it on the option’s expiry date. An American-style FX Option on the other hand can be exercised on any date until it expires.

Foreign Exchange Spot (FX Spot) The FX Spot is a financial instrument for forex trade. It is a contract between two counterparts, where one part buys a prespecified amount of a certain currency from the other part right now for a specified prize in another currency – the spot prize.

The settlement date (when the payment is made) is called the spot date. For most currency pairs, the spot date is two bank days after the contract date, but for spots between USD and any of the currencies EUR, RUB, TRY and CAD, the spot date is usually just one bank day after the contract date.

G7 The G7 countries are seven very big economies: USA, Canada, United Kingdom, Japan, France, Italy, and Germany.
Government bond A bond issued by a government.
MiFID MiFID = Markets in Financial Instruments Directive 2004/39/EC

This is a EU law applicable to the EU member states + Liechtenstein, Norway and Iceland. The main objective for this directive is to increase consumer protection within the investment services field.

MSCI World This is a stock market index of 1,643 stock companies from around the world. Maintained by MSCI Inc (formerly Morgan Stanley Capital International), the MSCI World is commonly utilized as a benchmark for global stock funds.

The MSCI is based on stock companies from 23 different countries. No companies in emerging or frontier economies are included. 15 of the 23 markets are in Europe, four in Asia, two in North America and two in Oceania.

Municipal bond A bond issued by municipality.

Municipality bonds are especially common in the USA, where they are issued by cities, school districts, etc.

NASDAQ Composite (IXIC) This is a stock market index comprised of selected securities listed on Nasdaq. Many of the companies are found within the information technology field.
Open-ended investment fund An open-ended investment fund is continuously open for new investments, with new shares/units being created each time a new investment into the fund is made.

The opposite of the open-ended investment fund is the close-ended investment fund.

Over-the-counter (OTC) Over-the-counter trades are trades that do no take place on an Exchange.
Preference shares This is the same as shares of preferred stock.
Public stock company A public stock company is a stock company that is listed at an exchange.
Put stock option A put stock option gives the holder a right, but not an obligation, to sell a predetermined amount of the underlying stock for a predetermined price (the strike price), within a predetermined time frame.

The price you pay when you purchase a put stock option is called premium.

Return An asset’s income and capital gains or losses for a certain period of time is called return.

Return is usually expressed as a percentage.

Shares of common stock This is the standard type of shares in a stock company. Many stock companies only have this type of share.

In many jurisdictions, a share of common stock must give the shareholder a company voting right.

Shares of preferred stock Shares of preferred stock gives the holder a right to receive dividends before any dividends are paid out to the holders of common stock.

In most jurisdictions, it is even legal for a company to make a dividend payment to the holders of shares of preferred stock without making any subsequent payment of dividends to the holders of shares of common stock.

Shares of preferred stock also gives the holder preferential treatment in case of company liquidation.

In most companies, shares of preferred stock do not give the holder company voting rights.

Preference shares is a synonym for shares of preferred stock.

SMS Loan SMS loans are a type of small loans that are popular in Scandinavia. They are becoming increasingly more popular in the US as well. You apply for a SMS loan by using your mobile. The money is deposited to your account in a matter of minutes.  These loans are very expensive.
Special dividends Special dividends are dividends paid outside the standard schedule for dividend payments.
Spot exchange rate The exchange rate used in an FX spot.
Standard & Poor’s 500 (S&P 500) This is a stock market index comprised of the 500 largest (in terms of market capitalization) listed on NYSE or Nasdaq.

This index, owned by S&P Dow Jones Indices, is commonly hailed as a bellwether for the U.S. economy.

Stock The capital stock of a corporation constitutes the equity stake of the corporation’s owners (share holders).

The stock is portioned into shares. In everyday language, the word stock and the word share is often used interchangeably.

As soon as you own at least one share in a company, you are one of the company’s owners.

Stock dividend A stock company can elect to pay its shareholders dividends. Dividend payments are usually in the form of cash, but can be anything of value, including financial instruments.

The payment of dividends must be approved by the shareholders.

In many jurisdictions, stock dividend payments receives favorable tax treatment.

Venture Capital Fund A venture capital fund is an investment fund that invests by providing private equity stakes for startups and small to medium-sized enterprises with strong growth potential.

A venture capital fund will typically make investments that are considered high risk.

Yankee bond A bond that is issued in the U.S. by a foreign bond issuer, and denominated in U.S. dollars.

A Yankee bond must be registered with the Securities and Exchange Commission before selling it is permitted.