We use jargon….hopefully this Glossary of Terms helps
There are many investment and economic dictionaries and sources. We’re happy to recommend some but the Investopedia Dictionary is a good place to start. Place your mouse over one of the letters below to find an entry.
Aardvark - burrowing nocturnal mammal indigenous to sub-Saharan Africa. Comfortingly first in any glossary or dictionary.
Market moving impact: none
AAA - the highest bond rating a company, government or any other borrowing institution can have. The primary rating agencies are S&P, Moodys, Fitch, and AM Best (for insurance companies). There are others overseas. The US Government lost its AAA rating in 2011. The only two companies in the S&P 500 that retain a AAA rating are Johnson and Johnson and Microsoft.
After-Hours Trading – Stock trading that starts after the U.S. stock exchange closes at 1600 hours Eastern Time. The trading session can run as late as 8 PM, but volume is very thin.
Alpha – That part of an investment return not generated by the index. The magical “value add” that managers seek. Very difficult to find.
Alternative Investments – Any investment outside traditional equity or bond investments. Can include commodities, futures, private equity, venture capital, real estate and anything lese dreamed up by creative marketing types. More of a marketing gimmick as many has not provided the returns or diversification they promised.
Annualized – Statistics adjusted to provide an annual figure. Annualized figures provide a more accurate way to compare the performance of various stocks and funds.
Asset Allocation – Probably the most important decision and investor can make. Asset allocation is the process of selecting the breakdown of bonds and equities in a portfolio. Beyond that, it selects U.S. and International equities, small cap, mid cap and emerging market. Bond allocation selects between government, corporate, mortgage, high yield and many other bonds. Generally, equities add return and risk and bonds add income and stability to a portfolio. There are many categories of allocation and you should ask what your adviser uses.
Lifestyle, Target Date, Balanced are all examples of Asset Allocation funds.
Balanced Fund – A type of mutual fund that focuses on both growth and income. The portfolio consists of stocks and bonds from various industries and geographical locations.
Balance of Trade – The difference between a country’s exports and imports. If exports exceed imports, it’s a trade surplus. Imports exceed exports? Trade deficit.
BEA – Bureaus of Economic Analysis. The statistical arm of the U.S. Commerce Department. They produce GDP, Personal Income, consumer spending, savings and trade reports. Another excellent site. More here.
Bear Market – A market on the decline (think bear = hibernation).
Bear Flattener - When short term rates go up as down as a result of pessimistic selling of short term bonds. Long term rates stay level so the curve become flatter (see also Bull Flattener)
Benchmark – A standard used to compare and measure the performance of a financial asset. Market indices such as the S&P 500 are often used as benchmarks. Always ask your financial advisor “What's your benchmark?”
Beta - A measure of the volatility of an individual stock in comparison to the risk of the entire market. If a stock has a beta of 1.5 it is 50% more volatile than the market (think oil and gas stocks). Similarly, if a stock has a beta of 0.5, it will be 50% less volatile than the market (think consumer staples). You may hear the expression “they’re just buying beta” which tends to mean a portfolio manager is trying to replicate the market.
BLS – Bureau of Labor Services. The statistical part of the U.S. Department of Labor. They publish the unemployment report, inflation, productivity and pay (and a lot of others). Incredibly useful site. Survives government shutdowns. More here.
Budget Balance – The difference between government spending and revenue. A budget deficit occurs when the government spends more than what they’re getting from taxes. The budget surplus is when they earn more than they spend (extremely rare).
Bull Flattener - When long term rates go down as a result of optimistic buying of long bonds. Short term rates stay level so the curve become flatter (see also Bear Flattener)
Bull Market – A market on the rise (think bull = angry, strong).
Census Bureau – U.S. Census Bureau and part of the Department of Commerce. It provides several economic important reports such as trade, retail sales, construction spending, and manufacturing orders. For a full list see here. Unlike the BLS, it is subject to government shutdowns.
Cost Basis – Not all statements have these but you should know where to get them. The cost basis on mutual funds, ETFs and even stocks will change constantly if you have elected to have dividends or capital gains reinvested. You should also ask your broker or financial institution what basis calculation they use. They should ask you at the time of any sale of securities.
CPI – Consumer Price Inflation. The best known measure of inflation from the BLS. It covers just about every good and every service offered in the economy. It’s made up of different items, which reflect how important they are to consumers. So housing is the biggest, although the BEA calls it “shelter” at 33% of the CPI. They also try to make an equivalent rent from owning a home. So if you pay a mortgage and interest rates go up, the shelter component of the CPI will rise.
Most investors/economists look at the CPI excluding food and gas because the price of both can be seasonal and volatile. This has led some people to say that the CPI always shows low inflation provided you don't eat or travel. And they sort of have point. More here.
Market moving impact: high
CUSIP – Committee on Uniform Securities Identification Procedures. CUSIP most often refers to the ‘CUSIP number’ assigned to US Treasuries and corporate bonds. This number acts as the ticker for both.
Dallas Fed Survey - One of several Federal Reserve regional surveys, the Dallas Fed Manufacturing Survey tracks factory activity in Texas on a monthly basis. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month. It’s a balance index which means in typically takes the difference between those companies reporting a rise in activity (say 30%) and those reporting a decline (say 15%). This gives a score of 15. Responses are aggregated into balance indexes where positive values generally indicate growth while negative values generally indicate contraction. About 100 manufacturers regularly participate in the survey. Frequency: monthly. More here.
Market moving impact: low
Death/Birth – not human births and deaths but a statistical way to adjust for firms that go out of business netted against new companies. If a company closes with 100 job losses and a new company hires them all, the net job loss is zero. But because of lags in reporting, this may be reported as a gain or loss of 100 jobs. The various economic agencies use different models to adjust for these changes. Here's the BLS on how they do it.
Derivative – A security whose price is derived from underlying assets. Examples of derivatives include options, swaps, and futures contracts.
Dividend – The slice of a company’s profits paid to shareholders.
Durable Goods Orders - As the name implies, these are goods ordered and which are manufactured in the U.S. These include computers, autos, machinery and metal products. A major component is aircraft and particularly non-defense aircraft, which is basically Boeing. These are notoriously volatile because an airline places orders for multiple aircraft once or twice a year, not every month. So many analysts, ourselves included, tend to strip out aircraft and defense to have an understanding of the underlying growth.
There is usually an advanced report around the beginning of the month for two-month prior (so a report dated April will be for the month of February) and a final report about three weeks later. Frequency: monthly. More here.
Market moving impact: high
ECB – European Central Bank. The central bank responsible for determining interest rates and other monetary policies for the EU countries. Their primary goal is to keep the Euro strong and healthy.
Emerging Market – This used to define a country in the process of becoming a developed economy. Emerging market economies often had low to mid per capita income e.g. China, Brazil and Indonesia. Nowadays Emerging Markets is an extremely unhelpful definition because when the world’s second largest economy considered Emerging, something is wrong.
Nowadays, Emerging Markets mostly means the stock market is not well developed or liquid.
Employment Costs - The total costs to an employer for paying employees. In December 2018, this was about $36 an hour for all employees and ranged from $16 for private sector service workers to $60 for managerial-level government workers. For the average worker, the cost was around $25 in wages and another $11 in benefits. The costliest benefits were health insurance (26% of benefits), vacation (22%) and mandated costs like social security and workers compensation (23%).
While wages and hourly earnings get a lot of attention in the investment world, it’s worth looking at total costs and benefits. The faster they rise, the more the margin compression for corporations. Frequency: monthly. More here.
Market moving impact: medium
ETF - Exchange Traded Fund. A basket of investments that track an index of stock, bonds or commodities. So, an S&P 500 ETF like SPY will own every stock in the index, in the same proportion as the index. You can trade an ETF like a stock…all day every day. The tax treatment is very similar to a stock. When you sell, a capital gain or loss is realized. If you receive a dividend, it’s taxed at ordinary income. ETFs are usually a good idea if you want a cheap, easy and tax efficient investment. More here.
Things you should know about ETFs: See our article here.
FOMC - Federal Open Markets Committee. There are other Fed committees but this is the big one. It sets interest rates, primarily through the Fed Funds rate. It meets eight times a year. It’s made up of the seven permanent governors (although there are only five as of March 2019), the head of the New York Fed and the four or the twelve regional governors. The other eight regional governors attend but do not vote. The regional governors rotate their membership so get to vote every three years; hence, you hear about the FOMC being hawkish or dovish depending on who’s voting that year.
FOMC meeting can move markets very quickly and decisively. Analysts scrutinize the press statement immediately after the meeting and the minutes, published a month later, for every nuance of detail. More here.
Market moving impact: very high
FRN – Floating Rate Note, Treasury. Two-year notes issued by the U.S. Treasury. The coupon rates are not fixed but adjust, or float, every week. The rate is determined by the latest 3-month T-Bill auctions, which are held weekly. Unlike normal bonds, there is minimal reinvestment risk because the rate adjusts so frequently. We would tend to use them in rising rate environments. More here.
Futures – A contract between two parties to buy/sell an asset for a specific price at a specific date in the future.
GDP - Gross Domestic Product measures the entire output and income in an economy. GNP (Gross National Product) is almost the same thing but it adds in income from abroad. So if a company holds, and earns interest on, a lot of overseas cash that will be counted in GNP but not GDP. There’s not a lot of difference most of the time but in countries like Luxembourg and Ireland, where a lot of foreign companies (e.g. most of the U.S. tech companies) hold their cash, then GNP will be lower than GDP because the income earned is counted back in the home country (in this case the U.S.). In Ireland’s case, GNP is 10% lower than GDP. Starbucks and Amazon count the income back home.
Gross Domestic Income (GDI) is another way of measuring the economy and it is normally the same as GDP.
In the investment world, we look at GDP in the U.S and most other countries too. Occasionally, we’ll look at GDI because it can be more accurate over the long term and it's fun to see the two diverge. Frequency: quarterly.
Market moving impact: very high
Growth investing – Investing in stocks and funds experiencing earnings growth and are forecasted for continued growth in the future.
Hedge Funds - Pooled investment vehicles that charge outrageous expenses. The funds claim to do something other investments can not do. Examples include long/short, macro, activists, event driven and relative value. Usually illiquid. A few work but many, many do not. Usually not worth the risk. Do not invest in then without consulting an expert. Never invest in them if they’re run by a family member.
Housing Starts - New construction of single and multi-family homes. The data is a seasonally adjusted annual rate number, so tries to adjust for the fact that construction is more of a warm than cold weather activity. It’s also annualized which means if you build 10 in one month it’s a an annualized rate of 120.
As of March 2019, it’s around 1.2m. Just before the crash, it was as high as 2.2m and plunged to 0.5m in two years. The multi-family number is around 25% of the total and we watch it because i) they take longer to build and ii) give some idea about the own/rent direction. The same report also covers “permits issued”, “authorized but not started” and “constructed.” In theory these should just lag each other but in practice, permits and building are delayed or cancelled.
Starts are a major market mover. If developers are building, people are buying and it’s a good measure of economic activity and confidence. Frequency: monthly. More here.
Market moving impact: high
h/t – hat tip. We’ll acknowledge if someone thought of something first and we’re just copying it across. More of a recent protocol, especially in internet exchanges, to acknowledge another source.
Inflation - See CPI above
ISM-Manufacturing (also called PMI) - ISM (Institute for Supply Manufacturing) publish a business survey monthly. It measures orders, production, inventories and employment, and additional measures, for manufacturing businesses. It’s measured as a diffusion index, which is (roughly) the difference between responses positive and negative responses. It's a qualitative survey so captures how managers feel about business conditions.
ISM then makes a few more adjustments, bundles all the categories together and comes out with a composite index, which they call the PMI (Purchasing Managers’ Index). A number above 42.9 on the PMI means the economy is expanding. Frequency: monthly. More here.
Market moving impact: high
ISM - Non-Manufacturing (also Services PMI). Similar to ISM-Manufacturing except it covers 60 sectors of non-manufacturing firms. That would include healthcare, retailing, food services, transport etc. Published monthly.
Market moving impact: medium
Jobless Claims - Weekly report on initial claims, meaning those workers who are making unemployment claims. It’s one of the best real time indicators of the state of the market and is not a sample or an estimate. It’s the actual number so it’s seldom revised. Most analysts smooth out the number with a four-week moving average as sometimes big layoffs or government shutdowns or hurricanes can distort the number.
In recent year, the gig economy may have distorted claims to a lower level because many workers are not covered by unemployment insurance and so will not bother to file a claim. The current claims levels (as of April 2019) are very low by historical standards.
Market moving impact: medium to high
Large cap – Market cap above $10 billion.
Liquidity – Liquidity measures how easily an asset can be exchanged to cash.
Loads – The commission you pay when investing in a mutual fund. This leads to two types of mutual funds: load funds or no-load funds. In no-load funds, there is no commission at the time of investment, although there may be other costs incurred. You should never have to buy a load mutual fund these days.
Market Cap – The market value of a company’s outstanding shares (i.e. shares held by shareholders). Often used as a way to measure the size of the company.
Maturity – The ‘expiration date’ of a bond or note. The treasury or bond can be redeemed for its face value after the maturity date.
Mid-cap – Market cap between $2 billion and $10 billion.
Morningstar rating – A rating given to mutual funds by Morningstar Inc. The ratings range from 1 to 5 stars, with 5 stars being the best. We don't pay much attention to them.
Munis – Municipal bonds which are generally free from income tax to the buyer. Munis are issued by state, county and local governments to fund their projects. Less liquid than most other assets.
Mutual Fund Share Classes – There are many! Check the five letter ticker on your statement. The last letter is always an "X". What you don't want to see are any “B” or “C” or “R” class shares. They're expensive and probably pay the broker a trail or 12b-1 fee. How can you tell? Well, one clue is that a B, C or R will be the penultimate letter in the ticker just before the “X.” What you do want to see is “A” or “I” in the ticker and, preferably, with “LW” or Load-Waived at the end (e.g. AGTHX.LW).
If in doubt call and ask your advisor “Am I invested in the cheapest available share class?”
NAV – Net Asset Value per share. The share price of a mutual fund.
NBER – National Bureau of Economic Research. The folks that tell us whether or not we are in a recession. More here
NFIB – National Federation of Independent Business. An association for small businesses. NFIB releases the Business Optimism Index, which basically highlights small businesses’ confidence.
On-The-Run Treasuries - The most recently issued U.S. Treasury bonds or notes of a particular maturity. On-the-run issues are the most liquid of all Treasury issues and typically trade at a slight premium and therefore yield a little less than their off-the-run counterparts.
Off-The-Run Treasuries - Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity and only available in the secondary market. Off-the-run Treasuries are usually cheaper than on-the-run because they are usually less liquid or traded
PCE - Personal Consumption Expenditure. An inflation measure favored by the Fed. It is broader than the better known CPI measure and tries to exclude things like gas and food prices which move more frequently. The Fed’s target is around 2% but for many years, PCE has run well below that level.
Market moving impact: medium to high
P/E - Price Earnings ratio. It’s the price of the stock divided by the earnings per share of the company. It’s also probably the single most important valuation tool in investment. The S&P traded on a P/E of around 16 in the spring of 2019. It’s been as high as 30 in the late 1990s and as low as 5 in the early 1980s. What is “normal” is a subject of much debate and depends on interest rates, inflation, market confidence, company prospects and many other things which would take up too much space to include.
P/S - Price to Sales ratio. If a company has no earnings (see SNAP, Lyft etc), then it helps to value a company as a ratio of its sales per share. The S&P 500 trades at around 2.5x sales as of spring 2019 and has been as high as 3.5 in the tech boom and 1.1 in the Great Recession.
Quadruple Witching Hour - the third Friday in March, June, September and December when 1) stock index futures 2) stock index options 3) stock options and 4) single stock futures expire. Expect a lot of arbitration price movements on those days.
Quick Ratio - measures a company’s ability to pay debts quickly. Specifically it’s:
Cash + Marketable Securities + accounts receivables / Current liabilities
A number over 1.0 means the company can quickly pay its current debts. Below 1.0, it can’t. It’s not a full proof metric but if you see a lot of low quick ratios companies performing, it may indicate stocks are overbought.
Rebalancing – Readjusting the weightings of assets in a portfolio. It is often done at the end of quarters to maintain the original level of asset allocation.
Retail Inventories – published monthly. It tracks inventories of retail firms of all sizes. Some 50% of companies surveyed do not respond so the report is often subject to revision and estimates. The survey covers companies with one or more establishments that sell merchandise and related services to final consumers.
Market moving impact: low
Risk Parity – Using risk to determine asset allocation in a portfolio. A more advanced technique involving a lot of math. The aim of a risk parity strategy is to earn optimal returns at the targeted risk level.
Risk-free rate – The ‘hypothetical’ rate of return of an investment with zero risk (p.s. it doesn’t actually exist). The interest rate on the 3-month US Treasury bill is often used as the risk-free rate for US investors.
S&P 600 – Standard and Poor’s market index for small cap stocks. Companies in the S&P 600 have a market cap of $450 million to $2.1 billion.
SA – Seasonally Adjusted. Which just takes data like unemployment, which can jump in, say, January after seasonal hiring. It just smooths out the data. We’ll use it on the graphs.
SAAR - Seasonally Adjusted Annual Rate. This takes data, applies a seasonal adjustment and then applies an annual rate (so ~12x if it’s monthly data). A good example is Existing Home Sales. Many new homes are bought just before the beginning of the school year. The SAAR adjusts for a spike in sales and then calculates an annual rate.
Share classes – Different types of company stock. They are often referred to with varying letters, such as Class A and Class B. Different share classes come with different rights and privileges (e.g. voting rights). In a mutual fund, different share classes denotes different expenses.
Small cap – Market cap between $300 million and $2 billion.
Staging in – Paying in scheduled installments. Staging is an alternative to investing in one installment. It is often done when there is a large amount of cash available to invest.
Tickers – U.S. listed ETF and stock tickers are straightforward. They're usually two to three letters. A lucky few have one. If they have “ADR” after them, they're foreign stocks listed in the USA and will usually end in "F" or "Y", so NSRGY for Nestle in the US. If the ticker has three or less letters, it means the stock is listed on the NYSE. If it has four, it’s listed on NASDAQ. (Note 2). If the ticker ends in a “Q” it means the company is bankrupt so, unless you’re into protracted legal dealings, don’t buy it.
Some tickers have cute names too but they don’t carry the same concerns that we have for ETFs. So, SAM is Boston Beer (from Sam Adams beer), TAP is Coors, Mammoth Energy is TUSK and Nordstrom is JWN, the initials of the founder John W Nordstrom. FIZZ is the National Beverage Corp. The list goes on.
Mutual fund tickers can be tougher. They will have five letters and an “X” at the end (e.g. POAGX). If they're a money market fund, they will have two Xs (e.g. AJLXX). The first letter usually shares the first letter of the fund company’s name. So, Vanguard funds start with a V, Fidelity funds with a F, and so on.
Option tickers are a different animal. The company ticker may not be the same as the regular ticker. Additional letters indicate the strike price and the month of the option.
Total Return - or TR, is the return of, say, an index, like the S&P500 or Dow Jones, PLUS the dividends. It’s more accurate than just the headline or price index and is the one to which you should compare performance.
Tracking error – The risk of a portfolio. The tracking error is used to measure an investment’s consistency by comparing it to a benchmark.
Treasury Securities – U.S. Treasuries are the ultimate safe investment. Other countries may have higher credit ratings, but none beat the depth, breadth and liquidity of U.S. Treasuries. They come in multiple variations from 4 weeks to 30 years. What's the difference between bills, notes and bonds?
Cash Management Bills (CMBs) are securities maturing from 6 days to 50 days and are to help the Treasury manage its cash needs, say around tax time.
Bills are securities maturing from 4 weeks to one year.
Notes are securities maturing from 2 years to 10 years.
Bonds are securities maturing in 30 years.
The Treasury also issues Floating Rate Notes (FRNs) with 2-year maturities and Treasury Inflation Protected Notes (TIPS) with 5, 10 and 30-year maturities.
From our perspective, Treasuries work because we don't have to worry about call risk, default, credit, spread widening and liquidity. More here.
U-3 Unemployment - The headline rate and measures “total unemployed, as a percent of the civilian labor force”
U-6 Unemployment - Total unemployed (or U-3), plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, plus all persons marginally attached to the labor force as a percent of the civilian labor force. This is a good indicator of slack in the labor force. There are also U-1, U-2, U-4 and U-5 unemployment numbers but U-3 and U-6 are the most important. More here
Value stock – A stock that is undervalued compared to its fundamentals (dividends, earnings, P/B ratio, P/E ratio).
Volatility – Measures how much an investment’s value fluctuates. It is commonly used to assess risk.
Volume – Number of trades completed. It can be used to describe both an individual security and an entire market.
Wholesale Inventories - published monthly. It tracks inventories of wholesale firms of all sizes. As with retail inventories, some 50% of companies surveyed do not respond so the report is often subject to revision and estimates. The report covers wholesale merchants who sell goods on their own account and include such businesses as wholesale merchants or jobbers, industrial distributors, exporters, and importers.
Market moving impact: low
Witching Hour - See Quadruple Witching Hour. A day when some or all of the stock and index options and futures expire. Happen several times a year.
XLK – One of a series of 11 ETFs from State Street that track the major S&P 500 industry sectors. XLK tracks the tech sector, XLE the Energy Sector and so on. Here’s a full list. If you're ETF has a three letter ticker staring with “X” it’s probably one of these. Used by traders and investors to gain exposure to select industry.
Yankee Bond - A bond issued by a foreign entity, such as a bank or company, but is issued and traded in the United States and denominated in U.S. dollars. Yankee bonds are governed by the Securities Act of 1933, which requires the bonds to be registered with the Securities and Exchange Commission (SEC) prior to being offered for sale.
Yield – For equities this is simply the latest quarterly dividend multiplied by four, divided by the share price. It’s a current yield and probably won't be the same as you have actually received in the prior twelve months.
For bonds, it’s more complicated. The yield is the annual coupon on the bond but if it’s a premium bond things can get tricky. First check if the price you paid for the bond was more than $100. If it is, you have a “premium” bond. Now you have a choice. For example, a bond that you paid $11,000 for will redeem in 10 years at par so you can either amortize the premium of $100 a year or you can pay income tax along the way and take a capital loss.
Zero-coupon bond – a bond that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Very popular in the 1980s until their tax treatment was changed. Useful for matching a future liability e.g. college tuition. A zero coupon bond’s duration is the same as its maturity.