Glossary

Commodity Market Futures & Options Terms & Definitions  

A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X - Y - Z








Asset allocation
The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risks and rewards. It is based on individual specific situations, goals and how the possible future of the investments could turn out.
One rule is to never buy or keep an investment that causes too much worry or causes one to lose sleep. It also is generally unwise to buy a higher risk investment with money intended for a college education or similar goal when the money will be needed soon.



Backwardation
A fancy term for the current cash price of something to be higher than a future price. This happened a number of times with oil in late 2004 and early 2005. The opposite is contango



Balance of payments deficit
See trade deficit



Bank credit
Credit available from a bank.
In a money measure sense though, it means the borrowing capacity made available to an individual or company by the banking system, in the form of credit or a loan. The total bank credit the individual or company has is the sum of the borrowing capacity each lender provides to that individual or company .



Bear
Someone who thinks an investment will be going down, as in "I'm bearish on stock X".



Ben S. Bernanke
Chairman of the President's Council of Economic Advisers as of early 2005 and one of the possibilities to replace Alan Greenspan in 2006 when he retires as Chairman of the Federal Reserve. Here are some of his words from a speech given in November 2002, given in the context of trying to settle down fears of a depression and of the general economic future:
“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

And from another speech on November 8th, 2002 at a birthday party for the economist Milton Friedman he said this: “...let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton: regarding the Great Depression, you’re right; we did it. We’re very sorry. But thanks to you, we won’t do it again.” (source)



B.I.S.
Abbreviation for the Bank of International Settlements.
An international bank that helps move money between central banks of member countries. Its a banker's bank in a way. It primary stated purposes are to promote cooperation among central banks and provide additional facilities for international financial operations.



Black Swan
In financial areas, an unexpected, rare and usually negative event. It's also large Australian swan having black plumage and a red bill.



Bond
A certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date.
The pricing and true yield of bonds is one of the most frequently confusing and misunderstood areas of investing.



Boskin Commission Report
A report by a U.S. Senate appointed group in 1996 containing accepted recommendations to lower the CPI rate of change, with the avowed intention to more accurately reflect reality.
The government view, a middle view and a less favorable view.



Bubble
In investing, something that goes MUCH further up than is justified by normal history or existing facts. The term is used because, like a bubble, the prices will reach a point at which they pop and collapse violently.
(Technical definition for the very math inclined - prices more than two standard deviations away from the historic trend. One standard deviation can be very very roughly thought of as ±15%).

“A bubble may be defined loosely as a sharp rise in the price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers – generally speculators interested in profits from trading in the asset rather than its use or earnings capacity.”
Charles Kindleberger (Professor Emeritus at MIT, and author of “Manias, Panics, and Crashes”), The New Palgrave, A Dictionary of Economics



Bull
Someone who thinks an investment will be going up, as in "I'm bullish on stock X".



Business cycle
A somewhat predictable pattern or cycle with periods of alternating economic growth (recovery) and decline (recession). Some of its elements are changing employment, industrial productivity, capacity utilization and interest rates.
Its also called the economic cycle and its length averages about 4 years.



Call
An option contract that gives the holder the right to buy a certain quantity of an underlying security (usually 100 shares), at a specified price (strike price) up to a specified date (expiration date).



Capacity utilization
The percentage of the available production capacity which is actually used, over some period of time.



CD
Certificate of Deposit. A short or medium length interest bearing financial instrument, normally bought through a commercial bank.



Central bank
A country's "government" bank. In the U.S., its the Federal Reserve Bank.



Chart painting
Methods of market manipulation that present false signals for technical analysis based traders. See the FAQ for an historical quote. We think one of the better books on manipulation is "How to Make the Stock Market Make Money for You" by Ted Warren.



Commercial paper
A short-term unsecured promise to pay issued by a finance company or a relatively large business. They're popular investments for money market mutual funds. Used interchangeably with the term paper.



Contango
A fancy term for the current cash price of something to be lower than a future price. This is the normal condition of prices. The opposite is backwardation



Contrary opinion theory
Broadly, buying when others are pessimistic and selling when they're optimistic. But using it effectively is obviously not that simple. One way that many successful investors use to determine when to apply it is to do the opposite of what is on the news. If a story has hit 'page one' or is on magazine covers then its much more frequently a time to sell, at least on the short term, than a time to buy.



Conundrum
An insoluble or difficult problem; a dilemma: "the conundrum, thus far unanswered, of achieving full employment without inflation" (Arthur M. Schlesinger, Jr.).



COT - Commitments of Traders Futures Market Reports
The Commitments of Traders charts can be very useful as an investing aid. They show the directions in which three different types of investors (Commercials, Large Speculators and Small Speculators) believe the price will be in the futures market, and can help in determining if one wants to buy or sell or stand aside.

Commercials or hedgers are people or companies that deal with the actual commodities as part of doing business. Their trades are intended to hedge against the risks they run in that business. An example is farmers in the corn or wheat or cattle markets, another is bankers in the interest rate markets.

Large Speculators are investing professionals who trade in large enough volume that they must report their positions to a government agency called the CFTC (Commodity Futures Trading Commission). Frequently, they are investment funds.

Small Speculators are generally the individual small public investors or traders.
More data here from Software North.



Corralito
Literally, a small corral.
It was what the Argentinian government called the imposition of financial controls in order to prevent bank runs and try to get the economy and culture stabilized after the large currency crisis in 2001. It involved closing banks, preventing access to ATMs or bank accounts, moving money out of the country, and other actions.



Coupon Pass
The purchase of treasury notes or bonds by the Federal Reserve. This adds money to the system/economy and can be inflationary.



CPI
Consumer Price Index - An indicator that is supposed to accurately measure the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. It is published monthly by the US Bureau of Labor Statistics, and is also sometimes incorrectly called or promoted as a cost-of-living index.
See our Frequently Asked Questions page.



Current account deficit
See trade deficit



Currency
In the U.S., physical paper dollar bills or coins.



Currency crisis
A sudden and usually large decrease in the value of the currency of a country, accompanied by an inability to get any or all of one's money out of any bank or financial institution.
It can also happen during a deflation or depression, like the bank runs in the early 1930's in the U.S., as well as in an inflationary environment with an excessively free spending government such as what happened in Argentina with their 'corralito' in late 2001 (we do not intend this as a political statement about what happened in Argentina since there are many reasons for it beyond excessive government spending).



Custodial account
When applied to the Federal Reserve, a group of accounts that contain money from foreign central banks.

The general definition is an account set up for the benefit of a minor (person under 18 or 21 in the U.S.) at a bank or other financial institution.



Cycle
A periodically repeating sequence of events. Examples are the 22 year sunspot cycle, or the approximate 4 year US business cycle.



Debt to GDP
A ratio of total debt (government, business and individual loans of all types) owed divided by the total GDP in an economy.
Just like almost anything, too much is not good. An historically high ratio frequently means that debt is being used inappropriately and the economy is fragile.



Deficit
See trade deficit



Deflation
Less money created than there are goods available to buy with it.
Most prices generally go down during a deflation. The best recent large example is the worldwide depression of the 1930s. Lack of demand and fear also play a part in exiting a deflation.



Delta
(ignore this unless you're into or curious about options - it's very much for investing nerds)
The change in price of an option for every one-point move in the price of the underlying instrument. A higher delta means the price changes faster on an option than on the underlying instrument.



Demand deposits
A fancy way of basically saying checking accounts. A demand deposit is generally one which you can demand and then receive the money immediately and without any penalty, as opposed to waiting for it to mature like a CD.



Depression
A period of drastic decline in an economy, characterized by decreasing business activity, falling prices, and unemployment. They used to be called panics or crises before 1930.
Economists disagree on the difference between a recession and a depression but in general a depression lasts much longer than a recession. Another way to tell the difference is to look at the changes in GDP. A depression is any economic downturn where real GDP declines by more than 10 percent.



Derivative
A financial instrument whose value is based on something actual, in other words its value is derived from that underlying "real" thing.
In plain english though, they're "investments" only in the broadest of definitions since not only is the leverage truly huge with them, but also they're uncontrolled and untested in any kind of economic shock. Their supposed purpose is as a hedge.
Examples are options contracts, futures contracts, or literally any agreed upon pricing index or item (the movement over time of the Consumer Price Index, freight rates, weather or whatever).
The approximate world wide total of derivatives as of March 2005 is $500 trillion, and leverage averages about 16:1. There is $280 trillion dollars in futures contracts & similar, $220 trillion in unregulated financial contracts. For comparison, the grand total GDP of the entire world is $50-60 trillion dollars.
More definitions are available here or here.

An excellent article and warning, along with additional data, is The Derivative Conundrum by Jim Sinclair.



Discount Rate
The interest rate at which the Federal Reserve lends non temporary money to commercial banks.



Disposable Personal Income
Personal income minus tax payments and government fees. The income also includes welfare and other government payments. Basically, the income amount available for saving and spending.




Dollar Index
The value of the dollar when expressed as a combination of other currencies, and composed of - Euro 57.6%, Japan/yen 13.6%, Britain/pound 11.9%, Canada/dollar 9.1%, Sweden/krona 4.2% & Switzerland/franc 3.6%.
By far the most complete definition is here, but its also not a simple one.



Durable goods
Any product that can be used for a years, like refrigerators, stoves, TVs, furniture and bathroom fixtures.



Economics
The social science that deals with the production, distribution, and consumption of goods and services. The original meaning of the word was the art of managing one's own household, from the Greek: oikos (house) + nomine (to deal out).



Entry and exit points
The price at which an investment is bought and sold.



Equity
See stock



Exchange Stabilization Fund
A branch of the U.S. Government whose general purpose is to manage the value of the dollar in international markets. They also have the legal right to trade in any U.S. security, per Jim Sinclair.

A little known fund run by the U.S. Treasury and its Secretary whose purpose is to help implement financial policy, and includes doing dollar intervention in international currency markets. More data is available here. As of mid 2004, the official balance in the fund was about $42 billion.
ESF Wikipedia entry



ETF
Exchange Traded Fund. A fund not unlike a mutual fund that tracks an index, a group of stocks, or some commodities, but can be traded like a stock.
Because ETFs are traded on normal stock exchanges, they can be bought and sold at any time during the day unlike most mutual funds. Their price will fluctuate from moment to moment, just like any other stock's price, and they may be bought as well as sold much like a stock.



Euro
The name of the currency shared by many European countries such as Germany, France & Italy.



Eurodollar
An American dollar held by a foreign institution outside the U.S., usually a bank in Europe but also applies to oil payments to the Middle East, often as a result of payments made to overseas companies for merchandise.



Expiration
(ignore this unless you're into or curious about options or futures- it's very much for investing nerds)

The date on which an option or futures contract expires. With an option, it becomes worthless if not sold or tendered. A futures contract becomes due for delivery of the underlying commodity.



Fannie Mae
Fannie Mae is a business that sort of has financial backing from the US Congress. It lends money for the purchase of new and existing housing.
It's also a financial intermediary (an enterprise whose assets and liabilities consist almost exclusively of financial instruments).



Federal Open Market Committee
The committee that established monetary policy for the Federal Reserve System. More data is available here.



Fed Funds Rate
The rate at which banks can do temporary borrowing to meet their legal reserve requirements.



Federal Government size growth
Date   Gov't size
Prior to 1930   12%
1947   22%
2004   43%
Source



Federal Reserve System or Banks
A system of federal banks that are not actually part of the government, charged with regulating the US money supply, mainly by buying and selling US Treasury bonds and bills (these are called open market operations), and setting two interest rates, the Discount Rate and the Fed Funds Rate.



*Political comments follow:*
President Woodrow Wilson, who signed the Federal Reserve Act in 1913 was quoted as saying in 1916, “I have unwittingly ruined my country. The growth of the nation, and therefore all of our activities, are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world” (source - “National Economy and the Banking System," Senate Documents Co. 3, No. 23, 76th Congress, 1st session, 1939.) Note that Wilson was a definite proponent of large, centralized government.
"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children wake up homeless."
-- Thomas Jefferson



Fiat currency
Money printed by a government as legal tender which is not redeemable in anything, such as silver or gold.



Fibonacci ratios
  1. Percentage relationships (23.6%, 38.2%, 50%, 61,8%, 76.4%) that describe likely points, when based on previous high and low prices, at which a trend will reverse or pause. See example here, and do note that the Fibonacci tool at stockcharts.com does not show or support the 23.6% or 76.4% percentages.
  2. A math related number sequence which goes like this: It starts with the number 1 and then adds that number to itself to get the next number. It then takes those two numbers and adds them together to get the next number in sequence. Each number next in sequence is the sum of the prior two numbers in the sequence, ad infinitum. Thus the sequence looks like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc..




Fractional reserve banking
The practice of banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, and then potentially loaning out the remainder.
This practice allows the banking system to actually "create" money, since if they only have to retain 10% of a deposit the other 90% can be loaned out, and then 90% of that 90% (81% of the original) can be loaned out when its deposited in another bank account by the borrower. And then 90% of that 81% can be loaned out, creating more money... and so on as deposits are made in other banks of the borrowed amount. In effect, one dollar deposited can allow a bank to create at least eight dollars of money (.90 + .81 + .73 + .66 + .59... adds up to over eight).

Diagram it out on paper if you're having trouble, it is a pretty squirrely process to understand. More data and a fuller explanation is available here.

Now you also know why banking can be so profitable. From an original $1,000 deposit and overly simplying it, they can loan out at least another $8,000. If the interest rate is 6%, that means the income per year on that $8,000 is $480 (6% of $8,000 is $480)... not a bad deal getting a $480 income per year on a $1,000 "investment".

Two last points... as of 2005, the actual fraction is much lower than 10%. Depending on which deposits are counted, the fraction is between 1% to about 6.5%. Also, most banks do not loan up to their maximum reserves - that and other factors mean that they do not create anywhere near $8 for every $1 of deposits as the example above implies.



FRED database
FRED stands for Federal Reserve Economic Data, and is a database of financial and economic facts at the Federal Reserve bank, available here. There's also a massive quarterly Statistical Release called the Z1 available here



Fundamental analysis
Analyzing an investment via supply and demand factors alone. Some examples are financial statments of a company, increasing or decreasing sales trends of a company, news, a good or poor economy overall, etc.



Futures
Contracts to buy or sell a commodity, or various indexes at a specific price and on a specific delivery date. Leverage is available but does not have to be used. One profits from price movements and exits the contract well before the contract delivery date.
It's *extremely* difficulty to get 1000 pounds of pork bellies delivered to your front yard, to hopefully put one piece of false data to rest.



G-7
The group of the seven largest industrialized countries: U.S., Japan, Great Britain, France, Germany, Italy, and Canada. G-7 meetings involve discussions of economic policy issues and sometimes market moving statements by senior finance folk from the seven nations.



Gamma
(ignore this unless you're into or curious about options - it's very much for investing nerds)
A measurement of how fast delta changes, given a unit change in the underlying instrument (stock or whatever) price. If a gamma is high, the delta will also likely be high.



GDP
Gross Domestic Product - the total value of all goods and services produced in a given country. It consists of total consumer, investment and government spending, plus exports and minus imports, and including earnings from foreign sources.

Note that a switch was made in November 1991 from using GNP (Gross National Product) to GDP. The major difference is that GNP does not include earnings from foreign sources and GDP does. That factor can make the growth rate over 1% higher all by itself.

See hedonics



Greeks
The name for the class of items that are used to measure various things about options. They're called that since Gamma, Theta, Delta & Vega etc. are actually names of letters in the Greek alphabet.



Alan Greenspan
The Chairman of the Federal Reserve System and the most powerful banker in the world. His term is up and he's expected to retire in early 2006.

Alan Greenspan does not like to be reminded of his essay from 1966, when he wrote, "in the absence of the gold standard, there is no way to protect savings from confiscation through inflation."



Hedge
An investment made in order to reduce the risk of price movements, by taking an opposing position in a related investment, such as an option.



Hedge find
A very broad class of about 8,000 public and private funds that are not mutual funds and therefore are exempt from many of the rules and regulations governing mutual funds, so can invest in derivatives and other exotic financial instruments.
They usually are quite highly leveraged and are therefore risky. They also almost always having very high minimum investment requirements of at least $250,000 and frequently over $1,000,000.



Hedonics
Literally it means relating to pleasure. But in an economic sense in US statistics, it involves adding or subtracting values to important government statistics like CPI or GDP that cause them to be false or incorrect.
One general example is in the computer area. If you bought a $2000 computer 3 years ago, and then replaced it with another $2000 computer today that is twice as fast, its counted as roughly a $4000 computer in the GDP since its twice as fast.
According to Pimco’s Bill Gross, the US Bureau of Labor Statistics has expanded the use of hedonic adjustments and applies these adjustments to everything from computers, DVDs, automobiles, washers/dryers/refrigerators to college textbooks. Hedonics is used to adjust as much as 46% of the weight of CPI.

Another example is in housing. The government currently assumes that housing costs are 23.2% of the Consumer Price Index (source, PDF file). Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service. In June 2005, for example, just this factor alone caused CPI to be understated by over 4% - and do please note that this is an extreme case. It's not normally that large of a factor or effect.

"Using BLS statistics, health care costs are about 17.5% of consumption, but it is weighted much less in the CPI calculation. Healthcare is 4.6% of CPI; healthcare commodities are 1.5% of CPI. Healthcare is reportedly 15 to 17% of GDP. This presents a huge discrepancy in CPI weighting. If CPI healthcare costs were in tune with reality AND they had an accurate weighting, CPI would be substantially greater" Source

See the CPI rant page for more data.



Hyperinflation
A period of high and rapid inflation that leaves a country's currency worthless. By survey, we gather that a hyperinflation starts at a rate of about 15-25%, and is also defined by the rapid rate of increase of money in the country. Note that the official rate on U.S. inflation peaked in March of 1980 at about 18%.
Here is a view of the hyperinflation in Germany in the early 1920s, and here is a book on Amazon that goes into great economic and social depth on it.

A fuller definition if available at Wikipedia.org.



I.M.F.
Abbreviation for the International Monetary Fund.
An international organization set up near the end of World War II to help lower trade barriers between countries, to stabilize currencies, and to lend money to developing or troubled nations.



Inflation
More money than goods.
If more money is created than there are products manufactured on which to spend that money, prices go up. Its made lots more complex than that by various folk, but its the basic truth. Think of inflation as the value of money going down, not prices going up.
The institutions that are allowed to create money include the Federal Reserve (created in 1913, a private corporation and not part of the US government), commercial banks, etc. See here for more detail on how money is created or destroyed, its not a simple or intuitve process as you might imagine.

More precisely, inflation is an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, that increase in the quantity of money caused by government, the Federal Reserve Banks, other banks and financial institutions.

Strong demand and lack of fear also play a part in the continuation of inflation.



Investment
Buying or selling something from which an income or profit is expected in the ordinary course of trade or business.



IRA
Individual Retirement Account. A tax deferred or tax advantaged U.S. retirement account that allows individuals to put aside money every year.



IV or Implied Volatility
(ignore this unless you're into or curious about options - it's very much for investing nerds)
A theoretical value designed to represent the volatility of the stock (or whatever) underlying an option. as determined by the price of the option. In other words - someone's best guess on future volatility of the underlying instrument.

See here for more on options volatility.



Leading economic indicators
A set of numbers that tries to forecast the future condition of an economy.

In our opinion, it is quite useful to use in judging how other investors view the possible future and in judging approaching recessions. Recent numbers in a press release are available here.

Technical definition: its computation involves the use of ten items, namely: (1) Average weekly hours, manufacturing; (2) Average weekly initial claims for unemployment insurance; (3) Manufacturers' new orders, consumer goods and materials; (4) Vendor performance, slower deliveries diffusion index; (5) Manufacturers' new orders, non-defense capital goods; (6) Building permits, new private housing units; (7) Stock prices, 500 common stocks; (8) Money supply, M2; (9) Interest rate spread, 10-year Treasury bonds less federal funds and (10) Index of consumer expectation. See more detail if desired here and here.



Leverage
The ability to control large dollar amounts of a investment with a comparatively small amount of capital. It also can apply to using borrowed money.



Liquidity
A measure of how easy it is to convert an investment to cash, the most liquid and eaily spendable form of money.



Market sentiment
Things that attempt to measure whether investors think something will be going up or down.
Opinions of well respected and successful investors like Warren Buffet is one, and there are sentiment measures like this one that measures the bullish/bearish sentiment of the S&P 500 stock index, and this one that measures the Dow Jones Index. The basic rule is that when there are too many investors thinking the same thing, the market tends to go the other direction.
Also see Contrary opinion theory.



MACD
Moving Average Convergence Divergence - it graphs two different moving averages, like 26 and 12 period, on the same graph. It produces an oscillating line and can indicate or confirm trend changes by showing relative price changes between a longer and shorter period. See example here.



Macro
Large in scope or are covered. Examples: a macro analysis of many reports or macro economics.



Mania
An excessively intense desire or craze. Also, an irrational but irresistible belief or action.
An example is the a mania for dot com stocks in the late '90s.

A great book in the area is "Extraordinary Popular Delusions & the Madness of Crowds" (Amazon.com link) by Charles Mackay. Download a 700k zip file with text files inside here, originally from Project Gutenberg.



Manufacturing index
A monthly number issued by the ISM (Institute for Supply Management) that measures manufacturing activity in the U.S.



Manipulation
Shrewd or devious management, especially for one's own advantage.
Yes, all markets are manipulated to a greater or lesser and that has been going on for all of recorded history. The point is both to "get over it" and then find who is doing it and get on board, assuming you want to invest in whatever is being manipulated. Getting on board is just another way of saying follow the correct trend.



Margin
In stocks or bonds, using borrowed money to purchase them.
In the futures market, the minimum amount needed to be allowed to trade in a given market. It ranges from about 5% to 50% of the total value of the the futures contract.
Also see leverage.



Maturity
The date on which a financial instrument becomes due for payment or receipt.



Moving Average
Moving Average - an average of data for a certain number of time periods. It moves since its based on the last "x" periods.



Monetize
Printing money to pay off some type of government debt or obligation.



Money
A way or medium of exchange for goods and services.
A way to measure value.
Coins & currency
An idea backed by confidence.



Money market fund
A mutual fund that invests in short term instruments such as CDs, commercial paper or Treasury bills.



Money measures
The group of ways to measure total money is the U.S., including M1, MZM, M2 & M3 and others. They measure money by degree of liquidityThe definitions below are very general and are intended to produce a working understanding, not a precise economic definition.

Money Supply September 2004 (billions of dollars) (not seasonally adjusted)
M1
Currency 688.2
Demand Deposits 321.0
Other Checkable Deposits 319.5
M2
Savings deposits 3,472.5
Small-denomination time deposits 795.6
Retail money funds 729.5
M3
Institutional money funds 1,071.6
Large-denomination time deposits 1,018.2
Repurchase Agreements 537.3
Eurodollars 322.2
Sum 9,311.7




Money multiplier
Technically, GDP divided by M3.
But generally, its a economic concept to reflect that since a given dollar moves through an economy more than once per month or year or given period, that given dollar is multiplied so it looks and acts like more than one dollar in an economy.



Mutual fund
A fund operated by an investment company which raises money from shareholders and invests in a group of assets, per a stated set of objectives.



Non financial debt
An odd term used in Federal Reserve statistics that basically means debt in the non banking sector and includes items like household debt.



Open Interest
In the futures or options markets, the total number of contracts that are "open" or live. In COT terms, its the total of small speculators, large speculators and commercials or hedgers contracted positions.



Open Market Operation
The buying and selling of government securities, such as Treasury bonds, by the Federal Reserve Bank.
When the Federal Reserve bank buys U.S. Treasury bonds, they literally pay for it and create the money by just making an accounting entry on the books of the Federal Reserve.
Just to put it in perspective, the approximate total balance in the Open Market Accounts at the Federal Reserve Banks as of April 2005 is about $700 billion dollars. The grand total of the U.S. economy In April 2005 is about $12 trillion dollars so the balance in the Open Market accounts is about 6% of the entire economy. Source data is here.



Option
A way to buy or sell a given stock, commodity, currency, or other financial instruments with leverage and a limited risk. Very generally, one would buy a call when one expects the price to go up, and buy a put when one expects the price to go down.

In short, options are the right to buy or sell a particular commodity or stock at a certain price for a limited amount of time. The 'call' option gives the holder the right to buy the underlying security, while the 'put' option gives the holder the right to sell it. And the price at which the commodity or stock may be bought or sold is called the 'strike price'. The 'expiration date' refers to the date the underlying commodity or stock has to reach or exceed the strike price.

See here and/or here for a full explanation of a complicated investment product. Also see the greeks.



OTC
An abbreviation for Over The Counter, and most frequently means stock transactions that do not go through a normal exchange like the New York Stock Exchange (NYSE) or the Chicago Board of Trade (CBOT) but rather are traded in a less formal way. It can also apply to large private financial transactions.



Overbought
A condition when prices are considered too high by some, but does necessarily mean its time to be bearish. It merely is an indication that the item has risen too far too fast and might be due for a move down in price.



Oversold
A condition when prices are considered too low by some, but does necessarily mean its time to be bullish. It merely is an indication that the item has fallen too far too fast and might be due for a move up in price.



P/E ratio
Overly simplified, it's how many years it will take to pay for the stock from its profits or earnings. In other words, if a P/E ratio is 15 then it will take 15 years of earnings to pay for the stock.

Technically, its the sum of a corporation's long-term debt, stock and retained earnings) divided by its after-tax earnings over a 12-month period



Plunge Protection Team
More officially know as the "Working Group on Financial Markets", it is a group of four very senior government officials that was formed soon after the stock market crash in October of 1987 (about a 30% loss in one week), and whose apparent purpose was to avoid or prevent large drops or crashes in the future.



Here is the text of the enabling legislation under President Reagan:

"Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.
By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:
Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee;
(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
(3) the Chairman of the Securities and Exchange Commission, or his designee; and
(4) the Chairman of the Commodity Futures Trading Commission, or her designee.







Section 2. Purposes and Functions.
(a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.



Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."



Program trading
Trading or investing or speculating done by a computer program. The program is designed to process price data and apply buy or sell rules based on what the designers think is a winning strategy. As of 2005, over 50% of stock trades done on the New York Stock Exchange are done under the control of computer programs.



Proxy
Authority to act for another; an agent or substitute.
More normally, the written authority to act or speak for another party as in a stock proxy.



Put
An option contract that gives the holder the right to sell a certain quantity of an underlying security (usually 100 shares), at a specified price (strike price) up to a specified date (expiration date).



Recession
An extended decline in general business activity, sometimes defined as occuring after three consecutive quarters of falling GDP. The average length of a US recession since WWII is 9-12 months per the National Bureau of Economic Research.



REIT
An abbreviation for Real Estate Investment Trust. A corporation or trust that uses money from many investors to purchase and manage income property and/or mortgage loans. REITs are traded on major exchanges just like stocks.



Repo
Short for repurchase agreement, a usually very short term financial instrument. Its an important tool of central banks like the Federal Reserve to exert short term control of how much money is in the system, since commercial banks will buy repos from a central bank in order to meet short term money needs.
The technical definition is a contract giving the seller of a security (such as Treasury bills) the right or obligation to buy that security back after a stated period of time and at a stated price, and the buyer keeps the interest.



Reserve requirements
The requirement for commercial banks to always have a certain percentage of deposits held as actual safe/vault cash or on deposit at the Federal Reserve bank. It averages roughly 10% as of late 2004.



Resistance
Price points on a chart at which upward moves are likely to pause or reverse trend.



Revolving credit
An agreement by a bank to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. The best example is credit cards.
Non revolving credit is similar except that the full amount must be paid back and may not be borrowed again without a new agreement. A normal loan like a mortgage is a good example.



RSI
Relative Strength Index - a mathematical formula that produces an oscillating graph, and based on recent price action. It is plotted on a scale from 0 to 100, values above 70 being considered overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a possible trend reversal can occur.See example here.



Sentiment
An opinion about a specific matter. See Market sentiment



Secular
Long term, not temporary. Used of the stock market, as in secular bear market.



Seven deadly sins
Pride, envy, anger, sloth, avarice, gluttony and lust.
-- Pope Gregory the Great, Sixth Century A.D.



Social Security
"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power." -Alan Greenspan (Chairman of the Federal Reserve), appearing before the Senate Banking Committee on Feb. 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.



SPDR
An acronym for Standard & Poor's Depositary Receipt, pronounced spider. A security designed to track some portion of the S&P Index, consisting of a group of stocks. See ETF.



Speculation
Buying or selling something with the purpose of reaping a relatively quick profit by a sudden rise in the market price of something. Things are bought merely in order to be held till it can be sold again. Compare it to making an investment.



Stagflation
Inflation, combined with high relative unemployment and a relatively poor economy. The word was invented by Harry Browne in the '70s and literally means stagnation plus inflation.



Statistician
A person who can have one leg in a boiling pot of water and the other in a vat of ice water and tell you that on average he's comfortable. ;-)



Sterilize
In banking between central banks of different countries, doing open market operations to balance or counteract effects of the international flows of money between them, in order to minimize impact on the value of the country's currency.

That's way more than you wanted to know about international banking... but the process can hugely affect both forecasting and investing.



Stochastics
A momentum and oscillating indicator that measures the price relative to the high/low range over a set period of time. The indicator moves between 0 and 100, below 20 being considered oversold and above 80 being considered overbought. See example here.



Stock
An instrument or certificate that represents an ownership position in a corporation, and represents a claim on a proportional share in the corporation's assets and profits.



Stop or stop loss
A price point at which one wants to get out of a trade, either to prevent more loss or to take a profit.
Its also an order to buy or sell a certain quantity of a certain security or investment if a specific price is reached or passed.



Support
Price points on a chart at which downward moves are likely to pause or reverse trend.



SV or Statistical Volatility
(ignore this unless you're into or curious about options - it's very much for investing nerds)
The percentage change likely to occur in an option contract's price over a one-year period, in other words - someone's best guess on future price movement percentage change.

See here for more on options volatility.



Technical analysis
Analyzing an investment via price and volume data alone. See examples here.
See the glossary at stockcharts.com, a good one for a Technical Analysis definition, and their Chart School is decent too.



Theta
(ignore this unless you're into or curious about options - it's very much for investing nerds)
The ratio of the change in an option's price to the decrease in its time to expiration. Theta is also called time decay. A high theta means the price moves quite fast in the direction of the price of the underlying financial instrument when the expiration gets close.



Treasury International Capital or TIC
A set of reports from the U.S. Treasury that shows virtually all the flows of money into and out of the country, for any purpose.
The TIC data are indirectly the basis of the Federal Reserve Board's Flow of Funds accounts for financial positions and flows of the Rest of the World sector, so they are key in showing the position of the U.S. in the world financial area.
More data is available at the U.S. Treasury TIC pages here. The TIC FAQ is here.



Trade deficit
What its called when a country imports more than it exports.
When its very large as a proportion of the economy and continues to grow, its a signal of danger for the future economy.
Also called current account deficit and balance of payments deficit. Trade surplus is the opposite.



Trading range
A relatively narrow band of prices, within which an investment trades. Prices eventually will break out of the range.
One can have increased chances of success and profit via buying at the bottom and selling at the top of the range.



Treasuries
An abbreviation for interest bearing instruments issued by a government to finance its actions. In the U.S., there are Treasury Bills and Bonds.



Treasury Bill
An interest bearing instrument issued by the U.S. government, having a maturity or term of one year or less, and exempt from state and local taxes. The original amount invested can not decrease, unlike a bond, so they are considered very secure.



Trend
The general direction in which something moves.



Trend line
Straight lines drawn on a price chart that connect high prices during a down move or low prices during an up move. They both help to determine the strength of tne trend, and frequently can indicate a trend reversal when the line is broken. See example here.



Triple Witching day
The third Friday of March, June, September and December. Its the day on which stock index futures, stock index options, and stock options all expire every quarter and is a very volatile day, especially during the last hour.
Double witching day is when two out of the three expire on the same day,



Trust
A legal arrangement and contract in which an individual (the trustor) gives financial control of property to a person or institution (the trustee) for the benefit of the beneficiaries.



Types of investments
In no particular order, and probably not exhaustive but:
Cash, T-bills, money market funds, silver, gold, jewelry, diamonds, semi-precious gems, coins, stamps, stocks (preferred, common, REIT), bonds (corporate, treasury, state, municipal, tax or tax-free), options, futures, education, antiques, paintings, other art, commercial paper, equipment, real estate (home, vacation/2nd, condo, rental, raw land, commercial, agricultural), business (individual proprietor, LLC, partnership, corporate), barter goods, foreign currencies, foreign stocks, foreign bonds, other non precious metals like copper or lead or zinc, charitable donations.



Vega
(ignore this unless you're into or curious about options - it's very much for investing nerds)
The change in the price of an option that results from a 1% change in volatility. A higher vega for an option means the price moves move than 1% when the volatility of the underlying is higher than "normal".



Velocity of money
Simply, the speed that money of all types circulates through an economy. It measures how long a person, bank or company holds on to the money before spending it. An example - when money decreases in value during a noticeable inflation, people hold onto it for a shorter period than when there is little or no inflation.



Volatility
The relative rate at which the price of something moves up and down. If it moves up & down rapidly in a short period of time, the thing has high volatility.



Williams %R
Yet another momentum and oscillating indicator for measuring overbought and oversold levels. The scale is from 0 to -100. 0 to -20 are considered overbought, and -80 to -100 considered oversold. See example here.



World Bank
An international organization, senior to the B.I.S., whose purposes are to help stabilize banking reserves of all countries and keep the balance of trade between nations relatively stable over time.



Yield
The annual rate of return on an investment, expressed as a percentage.