American Depository Receipt: A security issued by a US bank to represent a particular number of shares in a foreign company. ADRs allow foreign businesses to trade in US financial markets as if they were American securities. The purchase is made in US dollars and any dividends payable will be in US. ADRs can trade on exchanges such as the NASDAQ, NYSE or even Over The Counter (OTC). ADRs have allowed North Americans to invest in foreign companies since 1927.
American Style Option: This type of option can be exercised by the holder at any point prior to expiration. Equalizing strike price and expiration date, the value of an American style option will always be more than a European style.
Animal Spirits: A term derived from psychology and behavioral economics. It essentially means the emotions investors feel when they make decisions. On a mass scale these feelings can drive markets in the short term.
Arbitrage: The process of purchasing an asset on one market or exchange and selling it in another at the same time. Arbitrage opportunities are present as a result of inefficient markets. Because most of the time these are risk free investments the window of opportunity does not last long. With the expansion of being able to trade securities globally pure arbitrage plays have diminished over the years. An example would be buying a stock on one exchange and then selling it on another exchange for a higher amounts.
Bear Market: The technical definition of a Bear Market is a market decline of 20% or more over a given period of time. During Bear Markets investors are pessimistic about the future. Typically Bear Markets are correlated with recessions. The term Bear Market comes from how bears attack their prey, by knocking them down first.
Behavioural Finance: The study of how investor behaviour is influenced by emotional biases and cognitive limitations. The goal of behavioural finance is to assist investors overcome these biases and limitations in the hopes of making better financial decisions. Once a blind spot has been identified, it may be possible to compensate the bias or correct the cognitive error in order to improve decision making.
Bellwether: The term comes from the leading sheep of a flock wearing a bell around its neck. The idea is the rest of the sheep follow the leader. In financial terms it denotes a stock or bond that would be an indicator for the overall market. For example Nike may be considered a bellwether for the overall retail sector, and by extension, consumer spending. Bellwether’s performances can be used to predict or confirm market trends.
Bull Market: A period of time in which indices or individual securities are rising. On the contrary to a Bear Market, the technical definition is an increase of 20% on a given index or group of assets over an unspecified time frame. Similar to a Bear Market, a Bull Market can last months or potentially years.
Canadian Securities Administrators: A group comprising of Canada’s provincial and territorial securities regulators whose set to increase the quality and coordination of regulation in Canada’s capital markets. It aims to unify policies which affect Canadian capital market and its stakeholders. CSA also looks to deliver regulatory programs across Canada, such as the review of Know Your Client obligations, conflicts of interest, and documents disclosures.
CapEx: Short for capital expenditure. Cash used by a business to purchase long term physical assets such as real estate, equipment, or furniture. These purchases can be intended to scale productivity or maintain existing operations. CapEx is recorded on a company’s balance sheet rather than their income statement because it is used to purchase assets and not meant for daily expenses.
Closed End Fund: Collective investment securities that issue a set number of shares and do not issue or redeem shares to meet investor demand. These securities usually traded on a stock exchange and therefore supply and demand determines price. Due to the closed end fund structure, closed end funds have more flexibility to use leverage in seeking to enhance return potential and often offer higher levels of current income. Investment trusts are examples of closed-end funds.
Compounded Annual Growth Rate: CAGR is growth on top of growth. In a nutshell it removes volatility from average growth rate. Because it removes volatility it will show a much smoother rate of return. From an investment perspective CAGR calculates growth not only from the principle but any interest earned and reinvested in the principle. For that reason CAGR will always be higher than simple interest rate. Common measure uses include EBITDA, CapEx, and profit.
Debt-Equity Ratio: The debt-to-equity ratio measures a company’s total debt relative to the amount originally invested by shareholders and the earnings that have been retained over time. It is used to measure the extent to which a business is financing its operations with debt rather than its own funds.
Diluted Shares: These are the cumulative number shares a company would potentially have if all convertible securities were exercised and transferred to common shares. Examples include options, convertible debt. warrants, and rights. This is important to look out for because dilutive securities can have a negative impact of Earners Per Share.
Disinflation: The slowing down of the rate of inflation. This term is not to be confused with deflation. Prices are still increasing during this time however at a lower rate than before. Disinflation refers to the speed at which prices move.
Dow Jones Industrial Average: The DJIA is an index representing the 30 largest stocks in the United States that trade on the NASDAQ or NYSE. Founded by Charles Dow and Edward Jones in 1896 it is one of the longest running indices in existence. Rather than being a market cap weighted index, the Dow is a price weighted index. This means the value of a company is not relevant in computing the weight of each business but instead focuses on the price of the company’s’ shares.
EBITDA: Earnings Before Interest, Taxes, Deprecation, and Amortization. This is a measure of a firm’s core profitability excluding one off items or factors outside the firm’s control. EBITDA may be used to help with business valuation or to get an understanding of cash flow. In this framework EBITDA can be used to compare profitability between companies. The formula for EBITDA is Net Income + Taxes + Interest Expense + Depreciation & Amortization.
Economic Moat A certain competitor advantage one business has over it’s peers. Typically these are long term advantages that hinder another competitor’s ability to gain market share. Moats can range in size from narrow to large depending on how robust the advantage is. Some examples include high switching costs, brand value, low operating costs, or scale. Typically the longer a moat last the more a competing company will try to emulate the advantage.
Fiscal Policy: An overarching term for how governments can affect economic decisions. The two components are public spending and taxation which is government income. Spending can include government programs, building infrastructure, or income assistance. Taxation is fairly self explanatory and can be directed toward individuals or companies. Generally spending will exceed tax revenue when government is trying to stimulate the economy and vice versa when it is trying to slow growth.
Front End Load: A type of commission charged on a mutual fund at the time of purchase. These are not continuous fees as with a Management Expense Ratio, but are charged every time the fund is purchased. They are typically a percentage of the value of the purchase ranging 3-5%.
G7 Nation: The G7 stands for Group of 7. It’s a coalition organization of the 7 largest industrialized economies in the world. Members include Canada, U.S., France, Japan, U.K., Italy, and Germany. The leaders of the member countries meet occasionally to discuss economic and political issues. The G7 used to have 8 members, as it included Russia. But in 2014, Russia was removed from the group for its annexation of the Ukrainian territory of Crimea.
G10 Nation: The same idea as the G7 but with more members. Ironically there are 11 constituents including as G7 participants with the addition of Sweden, the Netherlands, Belgium, and Switzerland. The G7 was core was created in 1962 with members participating at different levels. When Switzerland signed in 1964 that solidified the G10.
Gross Domestic Product: Total market value of finished goods and services produced in a country over a certain time period, usually a year but occasionally defined quarterly. GDP can be calculated using three methods: the expenditure approach, the income approach, or the output approach. The most common measure is the expenditure approach calculated as C + I + G +NX = GDP. C is consumer spending, I is investment, G is government spending, and NX is net exports.
Hedge Fund: There is no unified definition of a hedge fund. It can be thought of as a pool of capital from various investors with an extremely flexible investment policy. Unlike mutual funds, hedge funds don’t have restrictions on derivatives. Typically a benefit of hedge fund is they aim to produce absolute returns meaning they always generate a positive return. Most times mutual funds are evaluated on relative returns against a bench mark meaning even if a mutual fund loses but takes a smaller loss than a bench mark, that is considered acceptable. Hedge funds are often considered a risky alternative investment and typically require a high minimum investment or net worth from participants
Human Capital: These are the hard and soft skills a person has. Hard skills can be thought of as any physical skill such as being able to build a table or changing your car oil. Soft skills use your brain. Things like computer coding, financial analysis, or coaching. Improving your human capital is essential to improving productivity. The more advanced a person’s human capital is, the more valuable they are economically.
Hyperinflation: A period of time when inflation is at extraordinary readings. Essentially money gets devalued so fast that nobody wants it. There is no hard line on what constitutes hyperinflation because it must be compared to a country’s base level. Inflation does coincide with economics collapse and can be caused by various economic actions such as high commodity prices, increase in government spending, or an increase in the supply of money. In 2021 Yemen’s inflation rate was 63% but came down in 2022 to 19%.