A shares are shares in the renminbi currency purchased and traded on the Shanghai and Shenzhen stock exchanges (Chinese: A股). They can only be bought by residents of mainland China and QFIIs.
In Singapore an accredited investor is an individual with personal net assets in excess of S$2 million and income of not less than S$300,000 over the previous twelve months. Accredited investors may have access to investments not available to retail investors. These may include investing in startups, venture capital funds and hedge funds.
Custody Banks in Singapore that handle Central Provident Fund or CPF members’ investments under the CPFIS Scheme. Appointed by the CPF Board.
The difference between the expected performance and the actual returns of a mutual fund (adjusted for risk / beta). A positive alpha means the fund has outperformed expectations despite risk and negative alpha means it has underperformed.
Periodic returns re-scaled to represent a return over one year. This allows investors to measure and compare the returns of different assets that have been held for different lengths of time.
A series of equal payments made at fixed intervals of time. Regular deposits to a savings account, monthly payments for insurance premiums, mortgages and pension payments are all examples of annuities.
The practice of exploiting price differences between two or more markets to earn profits. In its purest sense, arbitrage is risk-free.
Association of South East Asian Nations; an economic and political organization that counts ten Southeast Asian countries as members, including Singapore, Malaysia, Thailand, Myanmar, Philippines, Vietnam, Laos, Cambodia, Brunei and Indonesia.
Asian Bond Fund
Launched in 2003, the Asian Bond Fund allows members of the Executives Meeting of East Asia and Pacific Central Banks (EMEAP) group to invest in bonds issued by the Asian sovereign members of the group.
A strategy that involves spreading out investments among different asset classes to reduce risk. One asset allocation approach would be for investments to be held in fixed ratios of stocks, bonds and property and rebalanced at the end of each year or month.
Asset Pooling Funds
Pools of funds from individual investors to invest in securities can be managed by professional asset managers. This allows individual investors to benefit from economies of scale that come from lower trading costs per dollar invested. There is also the added benefit of professional diversification. Mutual funds are a great example.
Automated Debt Auction Processing Systems (ADAPS) (Philippines)
An electronic system used by the Philippine government to sell securities to approved dealers within the country.
Automatic/Autopilot Adjustment Mechanism (AAM) (Hong Kong)
Similar to A shares in that the stocks are listed on the Shanghai and Shenzhen Stock Exchanges. B shares are listed in foreign currencies and can be bought by foreigners.
A financial statement that describes the capital of a business at a certain point of time. It is a snapshot of the business’ financial status, with a breakdown of all assets and liabilities that make up the company’s capital structure.
A fund that combines securities to reduce risk. Usually the balance is maintained between less risky, income-generating assets like bonds and more risky assets like stocks.
One-hundredth of one percentage point (used chiefly in expressing differences of interest rates), or 0.01%.
When prices in a market fall they reduce investor confidence, bringing about more selling, which deepens the rout. This condition is called a bear market. A drop of 20% or more is considered a bear market.
The collection of risks a mutual fund faces which may lead to variations from the benchmark return. Any factor that may cause the performance of a fund to deviate from the benchmark can be counted as benchmark risk.
The shares of a heavyweight, large-cap corporation that has established its reputation for quality, reliability and the ability to operate profitably in good times and bad.
A debt instrument. The investor loans money to an entity (usually a corporation or government) and receives set interest payments at regular intervals for a fixed period.
A fund that invests in a pool of income-generating bonds. The primary underlying security is debt. These funds pay distributions on a periodic basis and realize capital appreciation on changes in the values of the bond.
Book Value per Share
A measure of shareholders’ equity divided by the total number of shares in a company. Book value is a great measure for investors to determine the level of equity that remains in the business after debt has been paid off. Book value is a popular measure of stock valuation and is a preferred way to measure business performance for legendary investor Warren Buffett.
Another term for stock exchange. Based on the Van der Burse house in Bruges, Belgium, where merchants would gather to trade.
A term used in technical analysis. Breakouts happen when prices move beyond a certain level that was identified as support or resistance earlier. A resistance breakout (when the price moves higher than before) is said to indicate a trend of rising prices. A support breakout (when prices move lower than average) is thought to be a sign of prices that are likely to head lower.
Rising prices and higher valuations encourage investors to be more optimistic and buy more stocks. This condition is called bull market. A rise of 20% or more is considered a bull market.
Share repurchases by the issuing company. Companies usually buy their own shares on the open market when the management believes the stock is undervalued. It is a more flexible way to return money to shareholders than dividends.
Cagamas Berhad (Malaysia)
The Malaysian national mortgage corporation and the primary issuer of asset-backed securities in the country.
Cagamas Instruments (Malaysia)
The four types of debt securities issued by Cagamas Berhad in Malaysia – Floating Rate Bonds, Fixed Rate Bonds, Cagamas Notes, and Sanadat Mudharabah Cagamas.
Sometimes simply called a “call.” Allows a buyer to purchase assets at a set price in the future. The price is determined at the onset and is called the “strike” price. The buyer is under no obligation to buy the underlying asset, but the seller of the option is obligated to sell if the option is exercised.
A variation of the classic price-to-earnings ratio. The Cyclically Adjusted Price-to-Earnings (CAPE) ratio is calculated as the price-to-average-earnings over the previous ten years. Adjusting for inflation and cyclicality over the past decade allows this ratio to smooth out the extreme ups and downs a business may face.
Controls on residents of a certain country that restrict or dictate the transactions relating to flow of capital and payment of taxes.
Profits realized from the sale of an asset or investment.
Capital Gains Distribution
Mutual funds realize capital gains when they sell investments or assets. These gains are sometimes distributed to the investors who hold units of the fund; treated as regular income and subject to government income taxes.
Losses realized from the sale of an asset or investment.
Cash Flow Statement
A financial statement that breaks down how much cash the company made and how much it spent in a certain period. Cash sources are usually listed as operating, investing and financing. This statement is one of the big three financial statements (along with the income statement and balance sheet) and helps investors understand how much cash the company produces. Analysts use the statement to dig deep into how the company actually performs. Cash flows are vital for the valuation process.
CD (Certificate of Deposit)
Provided to individuals depositing cash into a bank account for a predetermined length of time at a fixed rate of interest.
Ceiling Interest Rate (Vietnam)
The maximum interest rate of issued bonds as decided by the Ministry of Finance.
Central Provident Fund
A social security savings fund for Singapore citizens that promises to pay for their retirement. It is a compulsory comprehensive savings plan.
Chaebol (South Korea)
A large, family-controlled business conglomerate structure unique to South Korea.
China Concepts Stocks
Stocks of Chinese companies with significant mainland China-based operations that choose to gain access to foreign capital by listing overseas. Called China concepts stocks since the business holds a majority of assets or revenues in China but has decided to find funding from abroad.
China Securities Regulatory Commission
The main securities regulator in China. The agency has a ministry-level rank.
A mutual fund that has a limited number of issued shares. Since no new shares are issued, the price of each share fluctuates and may often be different from the “net asset value” (NAV). Buying closed-end fund shares at a discount to NAV is far preferable to buying them at a premium.
A security that can be converted into another type of security. Usually these are in the form of a convertible bond, bonds that can be converted into shares at a later date.
The price of an asset before any dividends, splits or bonuses. Used to calculate the tax liability or investment gains on an asset.
The rate of interest received by the bondholder. A 1,000 SGD bond that pays 50 SGD annually can be said to have a coupon rate of 5%.
Writing a call option while owning the underlying stock. The instrument allows the owner of a stock to offset potential losses if the stock price falls or increase annual returns if the price appreciates.
Selling a covered call means the writer will collect a premium payment and keep the stock if the option is never exercised. If the option is exercised, the writer will realize a capital gain and collect the option premium.
Cumulative Total Return
The daily closing price of mutual funds. They calculate their returns on a time-weighted basis, which eliminates the distortions of new inflows and outflows from the fund.
When investment firms or brokerages use their own asset inventory to fill client orders. Investment assets can be bought by dealers who store these assets with the intention of selling them at a later date, preferably (for the broker) at a higher price.
Shares of companies that do well in both good times and bad. Their sales and performance remain unaffected by the changes in the overall economic cycle. They also tend to offer higher-than-average dividend yields. Hospitals and pharmaceutical sector companies could be counted as defensive.
A gradual decrease in the value of an asset over time, mostly due to wear and tear. For accounting and tax purposes, the cost of a fixed asset is broken up and spread out over its useful life.
It is the reduction of a country’s currency value against foreign currencies. The most recent example of this was the devaluation of the yuan by China.
Direct US Government Obligations
Securities issued and paid for directly by the US government such as Treasury Bonds, T-Bills, Savings Bonds and others. These are usually exempt from income taxes.
A strategy to reduce overall risk by spreading investments over a variety of sectors and asset classes.
Net profits of a company that are distributed to individual investors.
A method of accumulating assets by buying a fixed-dollar amount of the asset at regular intervals. More shares are purchased when prices sink and fewer shares are bought when prices rise. On average, the overall cost is much lower than buying shares randomly with lump sums.
Domestic Mutual Fund
Mutual funds based and invested within a certain country.
Earning Per Share (EPS)
The amount of net income produced per share of a company. For example, if S$10 million was the net income for the current quarter and the company has one million shares outstanding, the EPS is S$10.
Net income (earnings) before interest, taxes, depreciation and amortization. EBITDA is used as a measure of profitability that can be compared between companies, since it eliminates the distortions caused by different financing and accounting decisions in different industries. Since Generally Accepted Accounting Principles (GAAP) do not define EBITDA, it is easily manipulated and should not be solely relied on to value a company.
Endowment Insurance Policy
Insurance policies that become payable at the death of the insured or within a specified time during the person’s life. A large cash value is built up in a relatively short time and this is why the premium payments for such a scheme may be high. Endowments combine savings with insurance, and such policies may be used to provide for college education, mortgage payments, or retirement.
Exchange-traded funds are pooled funds that are listed on local exchanges. ETFs are traded like stocks, but allow for diversification “at the click of a button.” They also have higher volumes and lower fees than mutual fund shares.
The period of time between the record date (which is when the number of shareholders eligible for a dividend is recorded), and the date of the next payment of a dividend. Taken literally, this means the stock is now trading without the dividend. An investor who buys a share that has become ex-dividend is not entitled to receive the next dividend.
Facility Agent (FA) / Lead Arranger (LA) (Malaysia)
An entity licensed and approved by the Bank Negara Malaysia for transacting on the Fully Automated System for Issuing Tendering (FAST). These are usually commercial banks, discount houses, merchant banks and other institutions.
Sometimes called the Fed, it is the central bank of the United States. Founded in 1913, its role and responsibilities have expanded as the US economy has evolved. The Fed is responsible for the nation’s money supply, financial stability and setting rates of interest for borrowing.
Upfront fee usually paid to financial intermediaries such as fund managers and financial planners upfront. These are sales commissions.
Full Delivery Shares (Taiwan)
A rating given to shares listed on the Taiwan stock exchange whose book value per share drops below the required minimum level of five New Taiwan dollars. Investors pay for these shares in full as margin trades are not allowed. These shares have limited liquidity and represent ownership in companies that are struggling financially.
Global Mutual Fund
Mutual fund that invests in US markets along with Asian and European markets. Since these funds invest in US securities they are truly global, unlike foreign funds.
Chinese company stocks that are listed on the Hong Kong Stock Exchange. Most of these companies are also listed on mainland China exchanges as A shares, and there are arbitrage opportunities between the two listings.
Fund that focuses on generating and distributing income rather than capital appreciation. Such funds tend to buy and hold preferred stock, money market instruments and debt obligations.
A financial statement that presents a summary of a company’s performance over a given period. It is one of the three most important financial statements (along with the balance sheet and cash flow statement). The income statement shows a firm’s revenues, and the expenses incurred to achieve those revenues.
A type of ETF or mutual fund that tracks, or follows, an index, or market. Rules set out which asset class or number of shares can constitute an index fund. Index ETFs are traded on the stock market like common shares and closely mirror the performance of a certain index, such as the FTSE Straits Times Index (STI), which serves as the benchmark for the Singapore stock market.
An index fund is a primary instrument in passive investing.
The ratio between the volatility of returns of a portfolio, and the excess of returns over a set benchmark. This demonstrates the manager’s ability to generate excess returns relative to a set benchmark. The IR will show whether the manager is capable of beating the index by a wide margin or not.
The purchase of company shares by someone who works for the company and may have access to nonpublic information. These usually include share purchases by CEOs, CFOs and company management. Studies have shown that following insider buying activity closely is a good way to beat market returns.
The value of an asset based on fundamental analysis. Different investors use different methods to figure out intrinsic value. If markets are less than efficient, there should be opportunities to buy assets that have market prices below their intrinsic value and earn higher returns.
Intrinsic value is also sometimes used to describe how “in the money” an option is. The difference between the strike price and the current market price is called “intrinsic value” in this context.
Any person or group that makes investment recommendations for a fee or directly manages client accounts through asset allocation.
Investment-Linked Insurance Products (ILP)
Mutual funds that come with added insurance coverage. When the units are redeemed the insurance coverage will cease.
IPO (Initial Public Offering)
The first time a company issues shares to the general public. Private companies that have never issued shares to the public before may consider listing on a local stock exchange to gain access to capital that can help them expand the business. Companies require the help of investment banks for this process.
Term used to describe companies that have larger than average market capitalizations. This could mean different ranges in different countries and in Singapore the top 30 companies listed on the exchange are part of the FTSE STI index. Internationally, companies with a market capitalization larger than US$10 billion are generally considered large cap.
Borrowed capital. It is typically used to increase equity returns on the company’s investments. Companies with a lot of borrowed capital are called highly leveraged. Firms that finance assets with leverage are expected to be more risky over the long term.
The potential for greater profits and higher returns is offered by adding leverage to the capital structure of a firm.
Leverage can also refer to private investments and is most commonly applied to trading shares on margin and buying a house on mortgage.
Term used to describe how easily an asset can be bought or sold. If the assets can be quickly converted to cash, they are called liquid. If they cannot be converted into cash easily, they are called illiquid.
Credit offered by brokers to traders that use their platform to invest. Investors that have access to margin can access borrowed funds and amplify their gains or losses through leverage.
For example, you have S$2,000 and want to buy stock X which is priced at S$10. Normally, you would only be able to buy 200 shares, but if your broker offers you margin at 50%, you can borrow an additional S$2,000 and buy 400 shares altogether. If the price rises to S$20, you can sell all the shares and collect S$8,000. After paying the S$2,000 back to the broker (along with the interest), your total gain would be 200% (S$6,000 / S$2,000). Without leverage or margin, your gain would have been limited to 100% ($4,000 / S$2,000).
A measure of the size or value of a company, or market capitalization. Market cap is derived by multiplying the price of each share by the total number of shares outstanding. This could be thought of as the price an investor would have to pay to buy the whole company outright.
Large-cap companies are household names and are often the biggest companies in a particular market. Mid-cap companies are in the middle range of market capitalizations. Small-cap are the smallest companies listed on the stock exchange. The smaller companies have the lowest market caps and the highest risk. Their shares are often illiquid, sparsely traded and not covered by analysts. According to FTSE STI, mid cap companies comprise 18% of the total market cap of the Singapore market, while small caps represent 12%. The rest is represented by large or mega cap companies.
Monetary Authority of Singapore (MAS)
The central bank and primary supervisor of financial activity in Singapore. Banks, insurers, traders and securities are all regulated by the MAS.
Money Market Fund
A mutual fund that invests in short term government debt such as highly liquid securities and government bills. Money market interest earned is counted as income.
Mortgage Backed Security
A financial instrument which uses a pool of mortgages as the underlying asset; residential mortgages packaged together and sold to investors. Investors are paid from the interest and principal repayments made by ordinary households on their mortgage.
A loan made by investors to a municipal government. The municipal government uses the funds to maintain services, build roads and operate the district. These are widely considered to be some of the safest investments available. They are used by investors looking for tax-free cash flow. Singapore Savings Bonds, issued by the Government of Singapore, are an example of this.
Investment vehicles that pool money from investors and expose them to a portfolio of financial securities. These portfolios, or funds, are professionally managed and can include stocks, bonds and real estate investments. The three main types of mutual funds are closed-ended, open-ended and unit investment trusts.
Chinese companies who have listed their stocks in New York, mostly on the NASDAQ or NYSE.
Selling a call option on a stock not owned by the investor. An investor may sell a naked call when the future stock price is expected to be flat or lower than the current stock price.
Selling a naked call means the writer (or seller) of the call is obligated to buy the underlying share at the market price if the buyer chooses to exercise the option. If at settlement, the price of the asset is lower, the option will not be exercised and the seller will collect the premium as profit. If the price is higher, the seller may have to buy the asset on the open market and realize a loss. This allows for speculation without the need for any initial capital investment.
A put option on a stock not owned by the investor. Similar to a naked call, the writer or seller of the option can count the premium as a profit if the price rises higher than the strike price of the stock. If the price is below the strike price, the investor may have to buy the stock. Capital risk is minimized while extra income is collected if this strategy is executed with care.
Net Asset Value (NAV)
The price per share of a mutual fund or an ETF. It is calculated by subtracting liabilities and dividing the total value of the shares outstanding by the number of shares outstanding.
The set price at which mutual funds first offer their shares for sale to the public; similar to an Initial Public Offering. The offering price represents the NAV and any additional charges that may go along with it.
A mutual fund or ETF that issues as many shares as needed to meet demand from investors. Mutual funds are most commonly open-ended, and always trade at their Net Asset Value (NAV), unlike closed-ended funds.
A fixed amount that is paid to enter into an option contract. Each contract may represent 100 shares in the underlying asset. So, if the option premium is S$1.50 per option, the seller in this case will receive S$150 per contract bought.
There are essentially three things that determine the premium paid for a contract – the time to expiration, the potential for profit and the likely volatility. If the price has increased volatility (moves up and down a lot) the chances for profit are higher and the premium is generally raised.
A fund distribution comprised of net investment income and net short-term capital gains.
Over-the-Counter Market (OTC).
Market that connects securities dealers using telephone or computer systems, rather than an official exchange. OTC markets are usually for smaller companies that do not meet the listing requirements of the regional stock exchange or for personalized bond or equity contracts.
A trading strategy that seeks to profit from the rise in price of one asset and the fall in price of another. The key is to “pair” a long position in the asset with another short position that is somehow related.
Say, for example, you believe the next year will be great for Company X and bad for Company Y. You buy Company X stock and sell short Company Y. This is a pair trade. Professionals use this sort of strategy to benefit from deep analysis into certain sectors and industries.
The main holding company that holds a majority stake in a subsidiary company.
An insurance policy that allows the holder to participate in the profits of the life insurance company. Usually offered by a mutual life insurance company.
A contract that outlines the insurance deal struck between an insurance company and an individual.
A private loan made by an insurance company that uses the cash value of a life insurance policy as collateral.
The combined total of all assets held by an individual or a mutual fund.
A special type of stock that pays a dividend at a predetermined rate indefinitely. When company assets are liquidated, preferred stock has preference over common stock.
A ratio derived by dividing a company’s share price by its earnings per share. For example, a company that trades at S$100 and earns S$25 per share has a P/E ratio of 4.
Note that this metric is very useful in comparing companies, but markets are forward looking and sometimes value some companies higher than others for their growth potential. The P/E ratio for tech companies is usually a lot higher than commodity companies, since the potential for earnings growth is much higher (and more stable) in the future.
Essentially the price-to-earnings ratio with adjustments for future growth expectations. Price-to-earnings-growth addresses the need for a forward-looking metric to compare companies.
The values of companies compared with the metric are benchmarked at a ratio of 1.0. Companies with PEG ratios below 1.0 are considered undervalued by the market, while those above 1.0 are considered overvalued.
So, if company X has a P/E ratio of 70 and a PEG ratio of 0.40, it may be a better investment than Company Y, which has a P/E ratio of 15 and PEG ratio of 2.5.
A ratio derived by dividing the stock price by the revenue (or sales) per share. This ratio is used to value companies and compare how their prices stack up against how much they earn. For example, a company that produces S$9 in sales and has a share price of S$36 has a P/S ratio of 4.
This metric is handy when comparing companies in the same industry.
Usually when companies operated by the government are sold to a group of private individuals or to the general public via a stock issue. The term privatization is used on a national level when a company held by the government (indirectly by the taxpayers) is opened up for private sector investment. The U.K. privatized the Royal Mail service in 2013 by selling shares to the public for the first time in its history.
Public Offering Price (POP)
The price at which mutual fund shares are initially offered to the general public.
Chinese companies listed on the Hong Kong Stock Exchange and incorporated in the Cayman Islands, British Virgin Islands and Bermuda with operations in mainland China, operated privately by Chinese owners.
A stock listed in Hong Kong that is both blue and red chip. Blue chip companies are listed on the Hang Seng Index, while red chip companies are China-affiliated companies incorporated in Hong Kong.
A financial contract that allows the buyer to sell an asset at a fixed price within a specified time. The contract gives the buyer the right (not the obligation) to sell at a predetermined ‘strike’ price.
Investors who buy put options expect the price of the underlying asset to fall soon. So, an investor who believes the price for company X will fall by this time next year will buy a put option. If the strike price is S$100, the investor will be able to exercise the option at any price below S$100 and realize the difference as a profit.
Qualified Domestic Institutional Investor (QDII)
A domestic Chinese investor qualified by the Chinese government to invest in securities listed outside mainland China. Due to tight capital controls in China, the government allows only investors with certain qualifications to do so. The most popular schemes allow large banks and financial firms to buy securities from outside China.
Qualified Foreign Institutional Investor (QFII)
A foreign investor qualified by the Chinese government to invest in stocks listed in mainland China. It allows foreign investors access to stock exchanges in Shenzhen and Shanghai. Investors can buy A shares, but the amount of money invested is still under tight capital control. The program was launched in 2002 by the Chinese government.
A recent and historically unconventional form of monetary policy. Developed countries saw the need for such monetary policy after the financial crisis of 2008. Central banks decided to increase private spending and maintain inflation by printing new money and using it to buy government bonds.
Yield that has been adjusted for the effects of inflation on the borrower’s holdings. It is the nominal yield less the rate of inflation in the same period and represents the actual increase in buying power.
A collective investment scheme recognised and guaranteed by MAS in Singapore.
A cut-off date for companies to record the shareholders who are eligible for dividends or bonus issues. Shareholders who buy shares after the record date do not receive distributed dividends.
Stocks for companies listed in Hong Kong, incorporated outside mainland China and are typically Chinese. Most are controlled by the People’s Republic of China, but are listed offshore for financial reasons.
The option to redeem money or withdraw from an investment scheme.
The price at which an open-ended investment scheme can be redeemed.
Regional Mutual Funds
Funds focused on certain geographic areas. Far East Asia or China mutual funds are examples.
Regular Savings Plan
Plans that encourage regular fixed amounts of cash to be invested in a certain scheme offered for investment. This sort of scheme takes advantage of the dollar averaging effect on the cost of the investment.
The option to reinvest cash obtained from investing. For example, reinvesting dividends into the stock of the company offering them.
REIT (Real Estate Investment Trust)
Generally, companies that own and operate a portfolio of income-producing properties with money collected from investors. Investing in real estate is popular in many countries. Most people need to save up and pay heavy monthly payments to buy even a single property. Real Estate Investment Trusts attempt to democratize this asset.
REITs trade like common stocks on exchanges and are sometimes required to pay dividends on the income from the properties. This allows ordinary investors to achieve the capital appreciation that comes with owning property while centralizing the need for taxes, maintenance and finding renters.
Investors are offered exposure to the real estate market at the click of a button, diversifying their portfolio easily.
Renminbi Qualified Foreign Institutional Investor (RQFII)
A scheme launched in 2011 allowing foreign investors to invest in renminbi denominated funds listed by Chinese financial firms in Hong Kong. A RQFII is a qualified investor for such funds.
The repurchase or repo rate is the rate of interest at which the central bank of a country lends money to commercial banks in the event of a shortfall in funds.
A scheme offered exclusively to accredited and institutional investors and regulated by the MAS as defined in the SFA.
Chinese companies listed on the stock exchange in Singapore. Businesses usually operate in mainland China, but are incorporated in Bermuda, British Virgin Islands or the Cayman Islands.
A measure of risk per unit. The Sharpe ratio is used to gauge performance that is risk adjusted. The higher the ratio, the better the performance historically despite the risk.
When a shorted stock’s price starts to rise rapidly. Investors who believe a certain stock price will go down sell the stock short (borrow the stock and sell it, intending to buy at a lower price later). When the stock price rises quickly, short sellers are forced to buy the stock to cover their positions moving the price even higher.
Since the potential losses from a short sale are unlimited, short squeezes are dramatic events for traders.
Shanghai Stock Exchange Composite Index. The main composite index in China and a barometer of Chinese stock market performance.
One of three public enterprises in Singapore that are directly involved in economic development. It was instituted by the government to perform special functions for the benefit of the economy.
Stock options are financial contracts that allow investors to trade an underlying asset at set prices. So an investor could choose to buy (call) or sell (put) or even hedge (protective put) an asset.
The contract is not an obligation, but a right. The seller of the option, however, is required to either buy or sell the underlying asset at the fixed price when the holder decides to exercise his or her option.
When companies increase the number of outstanding shares by “splitting” them. Stock splits are very common and easy to understand. For example, if a company has 100 million shares outstanding, it may announce a 2-for-1 split and have 200 million shares. Each shareholder sees the number of shares held in the account double in such a scenario.
It’s important to understand that only the number of shares changes. The value of the company and the market cap are not affected at all.
The price set by a trader at which their broker can automatically sell their position to lock in profits and avoid big losses. A trader may choose to place a stop loss in advance and when the price falls to that mark, the computer sells the shares without any prompts.
Hard stops are set prices below the current market price, although some traders may also choose trailing stops (automatically adjust stop-loss as the price appreciates).
The set price at which an option can be exercised. If you buy a call option that allows you to buy an underlying share at S$5, the strike price is S$5.
The price difference between the strike price and the market price of the underlying asset can determine how much profit can be made by exercising the option, or if it’s worth exercising it at all.
The minimum amount of money assured by an insurance company for a particular policy.
Systematic Investment Plan (SIP)
A plan to invest a set amount of money at regular intervals to free the investor from speculation on the daily NAV of funds. This dollar cost averaging brings the average cost of investment in the scheme down. Offered most commonly by mutual funds.
The set time for an investor to reach their financial objectives or goals. Could also represent the amount of time an investor is willing to hold certain assets.
A statistical concept, tracking error is the margin by which the performance of a fund deviates from the performance of the benchmark it is measured against. The higher the error, the higher the chances of active management affecting fund returns.
A type of stop-loss order that automatically adjusts the stop-loss as the share price appreciates. Trading on public markets is volatile and risky. Some investors choose to lock in their profits by placing a ‘stop-loss’ with their traders.
Trailing stops are similar. Not only can they automatically execute but can also automatically readjust. A trailing stop can be placed a set distance from the most recent high. So an investor may choose to place a trading stop of 10%, and the stop-loss will be triggered when the price falls 10% from the highest point it reached in the trading day.
The strategy is highly effective in capping losses and preserving capital.
In most countries, an annuity that allows for tax-deferred investment into a retirement fund with the amount paid out determined by the overall performance of the fund.
A statistical measure applied to stock markets. It is a measure of stock price movements. The index is used as a mean and the amount of variance the price of an individual company has around the index is called its beta. A higher beta means higher volatility, which means the stock price moves up and down a lot and more violently.
The term is used when pricing options as well. Higher volatility means there is a statistically greater chance the option will be ‘in the money’ and will eventually be exercised. This means the premium for options with higher volatility is greater.
A measure of liquidity, it is the number of shares traded over a certain period. This could be applied to the market as a whole or to a particular index. So, if no one trades a stock all day and only one investor buys 50 shares, the volume for that share is 50.
American economist, born August 13, 1946. She is currently the Chair of the Board of Governors of the Federal Reserve System. Bloomberg called her the “Most Influential Person On The Planet” in 2015 and she ranked seventh on the Forbes Most Powerful People list in 2015.