Glossary of terms in Financial Markets
- Accrued Interest
Accrured Interest paid by the buyer of a bond to the seller and represents the interest that has accumulated between the last payment date and the time of purchase.
- After-hours market
The after-hours market or after-hours trading refers to trading after the official closing of the stock market. This is usually carried out between individual banks via electronic trading systems.
- All-time high
The all-time high is the highest price or level a security, index, commodity, future or currency has reached in its history.
- All-time low
The all-time low is the lowest price or level a security, index, commodity, future or currency has reached in its history.
- American Depository Receipt (ADR)
American Depository Receipt (ADR) or American Depository Shares (ADS) are share certificates and deposit certificates issued, traded and denominated in US dollars by US custodian banks derived from shares in non-US companies deposited with them. ADR are typically issed in a ratio of 1:1 for 100 foreign shares. They make trading in non-US companies simpler, cheaper and quicker. For companies not domiciled in the US, ADR have the advantage that the company does not need to undergo the full admission procedures of the United States Securities and Exchange Commission (SEC) in order to obtain a stock market listing.
- American-style option
In an American-style option, the option right may be exercised at any time during the entire term of the option. With a call option the investor may buy the share at the exercise price, while iwth a put option the investor may sell the share at any time at the exercise price.
- Annual general meeting
An annual general meeting (AGM) is a meeting of the shareholders and the highest decision-making body of a stock corporation. A stock corporation has a duty to provide information to its shareholder. It must carry out this duty at least once a year at the annual general meeting. The most important powers of the annual general meeting include appointing the supervisory board, deciding on profit allocation and discharging the supervisory board and executing board.
Arbitrage means exploiting price differences for the same securities on different markets on the same trading day. Arbitrage leads to convergence of prices. Computer trading and the virtually simultaneous publishing of news have made arbitrage more difficult than in the past.
- Asian Option
The Asian option or average rate option is an exotic option whose value does not depend only on the underlying at the end of the term but also on the average price of the underlying over a defined period.
This indicates an offer to sell.
- Asset allocation
Asset allocation is the distribution of assets between different asset classes such as shares, bonds, currencies or commodities in order to reduce the risk associated with investing.
- Asset-backed securities
Asset-backed securites are securities whose value is collateralised by underlying assets (e.g. loan receivables).
- Asset class
An asset class is an investment segment (e.g. equities, commodities) on the capital market.
- Asset management
A service in which an asset manager invests the assets of investors at his own discretion while observing agreed investment guidelines. The aim of asset management is to achieve the best possible return.
- At best order
Unlimited seller order or instruction to a broker or bank to sell a security at the best (i.e. highest) possible price that can be achieved at the time of the order. No minimum limit is specified for the sale.
- At the market
A purchase or sale "at the market" means a purchase or sale to be executed immediately at the best possible price. The corresponding order with the bank or broker is called a "market order".
- At the money
A warrant is described as "at the money" when the current price of the underlying is close to the strike price.
Backwardation is a term used on the commodity markets. It refers to a price structure in which the price of a current futures contract is higher than the price of a futures contract with a more distant delivery date.
The capital market regulator of Germany. "Federal Financial Supervisory Authority (Bundesanstalt fur Finanzdienstleistungsaufsicht".
The balance is the difference between the debit and credit entries in an account. If debit amounts exceed credit amounts, the account is said to have a debit balance. The opposite case is known as a credit balance.
- Bar chart
The bar chart is a graphical representation of the price development in which the fluctuations of the prices of each day is represented by a vertical bar. It displays lows, highs, opening prices and closing prices. This helpful information enables investors to clearly see the level of volatility and identify changes in the supply and demand situation.
For barrier products, the barrier is a predetermined price level that may not be reached or breached. If this barrier is breached, a barrier event takes place. For example, the holder of a bonus certificate may lose its claim to payment of the bonus amount.
- Barrier warrant
Barrier warrants are exotic options whose option right is either activated or lapses if the underlying is greater or less than predetermined barriers.
Investment products are not always based on a single underlying but can participate in a basket with various different underlyings such as equities, indices or commodities. The composition of the basket is determined by the issuer before launching the product. A static or passive basket is one whose components and weighting are not changed during the term of the product. An active basket is one in which the issuer may change the weighting of the individual components or vary the composition of securities in the basket.
The bear symbolises falling prices on the stock markets. One explanation for the expression is the downward swipe of a bear's paws as it lashes out. Investors who expect falling prices are named "bears".
- Bear call spread
A bear call spread is an option strategy with limited risks but also limited opportunities for profit. This strategy is used if a trader expects prices to fall moderately. It is formed by purchasing a cheaper call option with a higher exercise price and selling a more expensive call option with the same maturity and a lower exercise price (in the money). Selling the call option involves the risk that the investor will suffer a loss in the event of a sharp increase in prices. However, the investor reduces the risk of loss by purchasing a call option at a higher strike price and lower option premium. If prices fall as expected, the investor achieves a profit as no option is exercised. The investor sells the option for more money than it costs to puchase it.
An investor with bearish expectations generally anticipates that prices will fall.
- Bear market
A period of sustained price declines.
- Bear trap
Technical analysts describe a bear trap as a false sell signal. The price falls briefly below a signal level before quickly rising in the opposite direction.
The bid price, or bid, is the name for the price at which the investor is willing to buy a security. The bid price is always below the ask price.
- Bid-ask spread
The bid-ask spread is the difference between the buying and selling price of a security. The bid-ask spread is one of the key indicators of quality when choosing a trading platform. The narrower it is, the lower the implicit costs for investors when buying and selling securities. For bonds, the spread is also a measure of the premium or discount on a reference interest rate (e.g. EURIBOR), the size of which depends on the creditworthiness and market position of the respective debtor.
- Binomial model
A valuation model for options or American warrants designed by John Carrington Cox, Stephen Alan Ross and Mark Edward Rubinstein (1979). It is one of the three valuation models used to determine the theoritical value of an option. The others are the Black-Scholes model and the analytical approximation method.
- Black-Scholes model
Valuation model that calculates the theoritical fair value of a European option (i.e. one that can only be exercised at a specified time) on the basis of equities. It was developed by Fischer Black and Myron Samuel Scholes in 1973.
- Blind pool
In closed-end funds, a blind pool means that the projects/objects the fund will invest in are not specified. The investor does not know at the time of investing what assets the fund will acquire using the money he provides.
- Blue chips
Blue chips refers to the shares of major internationally known companies with a large share of the stock exchange's overall turnover and whose prices are also included in the calculation of common indices.
In order to raise capital issuers such as companies, financial institutions, countries or federal states issue securities on the bond market called notes or bonds. The buyer of such a debt security is the creditor and the issuer the debtor obliged to pay interest payments and redeem the bond at its nominal value. Bonds are distinguished from one another by different maturities, currencies and the type of interest payments to be provided by the debtor.
- Bonus amount
Amount paid for bonus certificates if the barrier is not breached during the observation period and the price of the underlying on the valuation date is below the bonus level.
- Bonus certificates
Bonus certificates pay a bonus amount at maturity provided that the underlying has not reached or breached the predefined barrier. The investor does not receive any potential dividend payments.
- Bonus level
Price threshold is above the barrier. The bonus amount is paid if the price of the underlying is less than the bonus level on the valuation date and the barriers have not been breached at any point during the term of the certificates/the observation period. If the price of the underlying is greater than the bonus level on the valuation date, the investor participates in increases in the value of the underlying (up to any agreed cap).
A broker is a general term for trading participants who conduct transactions on the stock exchange. In the narrower sense it refers to traders who conduct proprietary and client trading on behalf of a company admited to the stock exchange.
- Brokerage fees
Brokerage fee is a commission which the broker receives for its service. The amount of the brokerage fee is set out in the relevant exchange rules.
Optimists are described on the stock exchange as bulls. The bull is associated with rising prices because it attacks by thrusting its horns upwards. The opposite is the bear which swipes its paws downwards symbolising falling prices.
An investor with bullish expectations generally anticipates that prices will rise.
- Bull market
A bull market describes a long phase of rising prices on the stock exchange.
- Bull trap
In technical analysis a bull trap is a false signal. The price rises briefly above a signal before quickly falling in the opposite direction.
A Bund is an interest-bearing security issued by the Federal Republic of Germany in the form of a government bond. The German Federal Government uses these and other securities to finnace its budget deficit. Like all interest-bearing securities, their prices is listed as a percentage of nominal value.
- Bund futures
The Euro-Bund Future (often known simply as the Bund Future) is a standardised futures contract on a typical German Bund. The basis of the contract is a fictitious Bund with a coupon of 6 percent drawn from a basket of deliverable Bunds. The residual term of the deliverable bond is between 8.5 and 10.5 years. The contract has a value of 100,000 euros. The holder of a Bund Future contract has the right to buy or sell a Bund allocated to this contract at a specified time. Four maturities are traded each year, ending in March, June, September or December.
- CAC 40
The CAC 40 (CAC = Cotation Assistee en Continu; French for: continous listing) is the benchmark index of the 40 leading French stock corporations traded on the Paris Stock Exchange.
A call is the right to purchase a certain amount of shares, bonds, indices, commodities or currencies under prearranged conditions during the term from a contractual partner known as the option writer. There is no obligation to exercise the option right. If a call is not exercised, it simply expires without value. For the buyer of such as option right, the risk of loss on their initial capital investment is limited.
- Call writer
The seller of a call option.
Predetermined amount up to which the investor participates in price developments of the underlying.
In economics, capital is one of three factors of production in addition to land and labour. In business terms, capital is the sum of equity and debt capital, with which a company operates.
- Capital gains
Capital gains are the profits realised on capital assets or utilisation of capital. There is a statutory distinction between revenue earned on use of funds and capital gains realised on a sale or redemption. Such revenue includes dividends, gains from shareholder loans and silent partnerships, income from life insurance policies as well as profit on the sale of shares or other capital claims. Should the cost or fees be higher than the gains, the difference is referred to as negative capital gain.
- Capital gains tax
Capital gains tax is a special form of income tax. It is a form of withholding tax deducted from the investment income by the institution managing the account.
- Capital increase
Capital increase is a measure to raise a company's share capital. An effective capital increase may take one or two forms. A rights issue can be implemented in which existing shareholders receive a subscription right on a capital increase with which they can acquire additional new shares.
The second form of capital increase excludes the subscription right. Normal capital increase in contrast are undertaken with internal funds. The company issues free shares or bonus shares. In this case, a company receives no new funds because the shareholders are not required to contribute any cash.
- Capital market
The capital market is that part of the financial market that serves to raise capital for the medium and long term. Companies, public authorities and governments can finance investments and other expenses via the capital market. (The capital market is also the securities market, on which equity securities such as equities, and fixed-income securities such as bonds are traded.)
- Capital protection amount
Fixed minimum payable payout amount, which corresponds to the capital amount employed to acquire the capital-protected certificate upon issue (without taking into account front-end load and other fees). As a rule, the capital protection amount corresponds to the nominal value or the nominal amount.
- Capital-protection certificates
With capital-protection certificates, the issuer guarantees the investor repayment at maturity in the amount of the nominal value. There is also an opportunity of an attractive return depending on the performance of one or more underlyings.
- Capital reduction
A decrease in capital stock is known as capital reduction. The aim is to eliminate balance sheet loss (nominal capital reduction) or to distribute surplus capital to shareholders (effective capital reduction). A capital reduction is usually accomplished by buying back a company's own shares.
- Capped warrants
Capped warrants are warrants with a limited maximum profit. The investor only participates in price developments up to a certain market price set out in the warrant's terms and conditions. The maximum payment is limited to the difference between the strike and the cap.
- Cash market
Cash market or spot market is a market segment of a stock exchange in which the settlement of a transaction - i.e. delivery, taking delivery, and payment - must take place within a short time after the transaction has been concluded.
- Cash settlement
Cash settlement is the payment of money as opposed to securities. For covered warrants it is no longer typical for paymnets to be in the form of shares. Instead, the bank pays the warrant holder the difference between the strike price and the current market price. Cash settlement is also used to fulfill contractual obligations under options or futures contracts if physical delivery of the underlying is not planned.
- Cash settlement price
The cash settlement price is determined once a day, usually at midday. In practice, the term is used synonymously with that of a single cash price. Primarily stocks which are not admitted to continuous trading due to their liquidity restraints are traded at the cash settlement price.
A certificate certifies an investor's participation in the performance of other securities and financial products. The holder of the certificate participates, for example, directly in the performance of a specified index (index certificate) or a specially compiled equity baset (basket certificate).
- Certificate test
Certificate tests are intended to provide investors and investment advisers with long-term information about the suitability of a certificate on the basis of objectively measurable criteria. The quality of the certificate is assessed through the four components of cost, trading (liquidity), creditworthiness and provision of information of the issuer.
A chart is a graphical depiction of price movements over a certain period. Changes in prices can be illustrated over various intervals such as years, months, weeks, days, hours, minutes, seconds or "ticks". The tick charts show each individual price determination. The vertical Y axis shows the price movements on either a linear or logarithmic scale. The price development can be displayed as a line graph, bar chart or candlestick chart.
- Chart analysis
Chart analysis is another method of predicting prices, alongside fundamental analysis. Analysts use charts of past price and turnover development for a particular capital market product in order to generate a forecast of its future development. Technical analysis assumes that price developments reflect opinions, news and fundamental data, and is therefore considerably more accurate than fundamental analysis.
A chartist is an analyst who uses charts as the basis for analysing securities.
- Chart pattern
Chart patterns based on past developments are used to forecast a share's future price movements. Frequently occuring patterns include e.g. head and shoulder, triangle, double top and double bottom, one and two day reversal, flags, pennants and cup and handle.
Unlimited order to purchase securities at the lowest price. The purchase takes place on the best terms available on the purchase date.
- Classical warrants
Classical warrants are issued by companies in conjunction with warrant-linked bonds. They entitle the holder to subscribe to primary shares of the same issuer. The issuing company covers the obligations to deliver the primary shares arising from the equity warrants with contingent capital. Exercising the warrant and thus the utilisation of the contingent capital increases the number of outstanding shares and thus the stock corporation's capital. The naked warrant represents a new form of equity warrant.
- Clean Price
The clean price is the current price of a bond minus any interest that has accrued.
Clearing means the netting and settlement of the claims, liabilities and delivery obligations of market participants in on-exchange and off-exchange transactions. This task is normally carried out by centralised institutions called clearing houses.
- Clearing house
A clearing house is responsible for clearing and settlement and normally also acts as central custodian of securities. The clearing process includes transmitting, matching and confirming trades. The data necessary for netting and settlement are also collected e.g. payment method, place and time of delivery. For futures, contracts the clearing house specifies the amount of collateral (margin) to be paid. The clearing house also functions as a counterparty to trades, thereby guaranteeing the proper execution of trades as well as the settlement of the net debt.
The term closing can have several meanings. It describes the legal conclusion and entry into force of a contract on the financial market. It can also mean the specific transaction agreed in the contract. On the stock exchange, however, the term closing most commonly refers to the closing prices at the end of an exchange trading day. Finally, it may also mean the closing out (i.e. nullyfying) of an open position on the derivatives market.
- Closing transaction
A closing transaction refers to the elimination of an existing position through a sale or by entering into precisely the opposite position.
- Collective custody
Collective custody is a form of securities account in which securities can be kept cost effectively, simply and safely. All the securities are held centrally at a central securities depository.
Commission is the bank fee for executing securities orders. It generally amounts to a small percentage of the total price for equities and warrants. Brokers also receive commission and fees for their services.
- Commission trading
Executing a transaction in commodities or securities by a commission agent in his own name but for the account of another is known as principal. Examples are the exchange transactions of banks acting on behalf of their clients.
Commodities is an umbrella term for goods and raw materials traded on derivative exchanges. They include precious and industrial metals, such as gold, silver and zinc, and so called soft commodities: agricultural products such as coffee and sugar. Commodities are traded as futures and are bought and sold in contracts.
- Commodity option
A commodity option securitises the right to acquire (call) or deliver (put) a specified amount and quantity of a commodity on a specified date and at a specified fixed price.
Compliance in financial markets mean observing rules of conduct, laws and guidelines. It includes observing rules for investor protection, prevention of insider trading, monitoring staff transactions and remuneration rules in securities trading. The aim of such regulations is to create and maintain trust in the capital markets and with regard to market participants.
- Compound Interest
Compound interest is the portion of the interest which is owed on interest which has accrued but not yet been paid out.
- Compound interest effect
The compound interest effect describes the increase in the sum invested and thus in the interest earned when a distribution is reinvested. This result in a greater increase in the value of the capital employed compared to regularly withdrawing income.
A counter or sideways movement in equity prices following a strong prior movement in price is reffered to as consolidation (from Latin: com = together and solidare = to make solid)
- Consortium bank
A consortium bank is a financial institution that is a member of a banking or underwriting syndicate to execute a specific bank transaction.
Contango is a term used in the commodities futures markets. It describes a situation in which the price of a futures contract is higher the longer its term. This type of term structure is caused among other things by storage costs that may be incurred by the deliverer before maturity of the contract. In the event of a contango situation, investors face roll losses if they "roll" an expiring futures into a future with a longer maturity. This is because they must pay more for futures contracts with longer maturities than for contracts with shorter maturities. The opposite of contango is backwadation.
- COSI (Collateral Secured Instruments)
It is a collateral mechanism first developed in Switzerland. It minimises the issuer risk involved in certificates by depositing selected collateral such as bonds, cash or shares in a SIX Swiss Exchange account at SIX SIS - the central securities depository in Switzerland. The entire value of investors capital in the structured products launched must always be backed by this colateral throughout the whole term of the product. SIX group continually monitors the required quality of collateral. It ensures that sufficient collateral is always available.
- Counter transactions
Counter transactions are securities transactions carried out directly at the bank counter. The buyer is physically handled the securities in return for a cash payment. He can then store them himself or keep them in a safety deposit box in a bank.
A coupon is the part of a security that entitles the holder to payment of a dividend (dividend coupon) or interest (simple coupon). Coupon may also describe the nominal interest rate of a bond. The expression dates from the time when shares and bonds were physically printed and included coupons that the investor could clip off on the respective dividend or interest due dates and submit to the bank for payment. Investors who had submitted all their coupons could apply for a new sheet of coupons.
- Covered warrant
Covered warrants securitise the right to physically acquire shares, currencies or commodities. In the case of covered warrants, the bank holds the relevant quantity of the underlying, e.g. the respective number of company shares, in a depository account or on the trading book. These days, issuers have the right to execute cash settlement rather than delivery of the underlying shares. Issuers forego maintaining a covering pool and instead typically secure these positions with an counter-transaction on the derivatives market.
- Credit default swap
Credit defautl swap (CDS) are a means of hedging the risk of default. Investors pay an annual premium in order to protect themselves from default by a bond issuer.
- Credit-linked note
Credit-linked notes (CLN) are structured securities enabling investment in a debtor's creditworthiness by linking it to interest payments and principal repayments. If the debtor experiences no credit event occurs, the investor receives the interest payments and repayment of the nominal value upon maturity. If on the other hand, non-payment of obligations triggers a credit event, this default is transferred to the CLN holder. He may receive interest payments and principal repayments considerably less than the nominal value.
- Credit ratings
A rating is an assessment of the likelihood that a debtor such as a bank, company or country will meet its obligations, e.g. to pay interest and repay its debt. Rating agencies use a systematic approach to assess credit ratings. The most well-known credit rating agencies are Standard & Poor's, Moody's and Fitch. They indicate creditworthiness using a code of letters. Credit ratings help investors to judge the creditworthiness of the respective issuer. As the certificates may be debt instruments, the rating is an important factor in the investment decision.
- Credit risk
The credit risk is the risk that a debtor's solvency situation could deteriorate. Deterioration of debtor creditworthiness results in a corresponding discount on the price of the relevant securities. The debtor's creditworthiness may deteriorate to such an extent during the term that it becomes insolvent or illiquid. In the event, interest and/or principal payments may not be made on time. Credit risk is the risk that a debtor may be unable to meet its obligations to the creditor.
- Credit spread
The credit spread is the yield premium received by investors holding bonds at risk of default compared to the yield they would receive if they held bonds with the best credit rating. The credit spread is the risk premium for taking on credit, spread and liquidity risk. They help investors to judge the creditworthiness of the respective issuer. As the certificates may be debt instruments, creditworthiness is an important factor in the investment decision. Credit spreads are expressed in basis points. These represent the insurance premium that the buyer of protection must pay for protection against default by the respective company. Such premiums may give more up-to-date and accurate information about an issuer's creditworthiness than some credit ratings.
Creditworthiness, also known as credit quality, refers to the debtor's ability to meet his payment obligations. Issuer creditworthiness is of particular importance to the certificate investor. If the issuer becomes insolvent it means that it cannot repay the investor the capital owed as planned. In the worst case scenario, this can result in total loss of capital invested for the investor. International rating agencies such as Moody's, Standard & Poor's (S&P) and Fitch assess creditworthiness using a defined rating system.
- Currency option
A currency option is the contractual option between two parties to buy or sell a specified currency at a pre-agreed exchange rate on a specified date. However, as physical delivery of the currency does not take place, with currency options the issuer pays out the exchange rate gain as a cash settlement.
DAX is the abbreviation for the German stock index (Deutscher Aktienindex). The index was launched on December 30, 1987. It comprises the 30 largest and most actively traded German shares listed on the Frankfurt Stock Exchange. The DAX was jointly developed by the Association of German Stock Exchanges (Arbeitsgemeinschaft der Deutschen Wertpapierborsen), the Frankfurt Stock Exchange and the Borsen-Zeitung newspaper. It was launched on July 1, 1988. It continues the Borsen-Zeitung index, whose history dates back to 1959.
The DAX is a performance index in which dividends and changes in share capital are also taken into account. It is calculated solely on the basis of prices in the XETRA electronic trading system and is a real-time index.
The companies included in the calculation must have been admitted to the variable market segment of official trading on the Frankfurt Stock Exchange for at least three years. Further selection criteria for companies to be included include high trading volume, market capitalisation, availability of early open prices, representativeness of sector. The DAX is a kind of barometer for the Frankfurt Stock Exchange. It shows whether the stock market in Germany is doing well or badly overall.
- DAX Price Index
The German stock price index uses the same weightings as the DAX. However, it is calculated without adjustments for dividends and bonuses.
- Day Order
A day order is an order which is limited to a single trading day. If the order is not executed on this day, it expires automatically.
- Day trader
A day trader is an investor or trader who closes out the positions they have taken on the same day or balances them through corresponding counter trades to use a financial instrument's price volatility over the course of a single day in order to make a profit.
- Day trading
Day trading (or intraday trading) is a trading method in which investors buy and sell financial instruments on the same day. The positions are usually closed out at the end of the trading day. Trades can be made in equities, commodities, certificates, leveraged products such as warrants, options, futures, contracts for differences and even currencies. Although day trading was previously largely engaged by professional investors and speculators, in recent years the increase in electronic trading has meant a rise in day trading among private investors and also in high-frequency trading.
DDV is the abbreviation of the German Derivatives Association (Deutscher Derivate Verband).
First updated on 01.11.2018