Investopedia Terms

Question 1

Weighted Average Cost Of Capital - WACC

Answer 1

Weighted average cost of capital (WACC) is a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted.

All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation. A firm’s WACC increases as the beta and rate of return on equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk.

To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula:

Formula for Weighted Average Cost Of Capital (WACC)

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D = total market value of the firm’s financing (equity and debt)
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Explanation of Formula Elements
Cost of equity (Re) can be a bit tricky to calculate, since share capital does not technically have an explicit value. When companies pay debt, the amount they pay has a predetermined associated interest rate that debt depends on size and duration of the debt, though the value is relatively fixed. On the other hand, unlike debt, equity has no concrete price that the company must pay. Yet, that doesn’t mean there is no cost of equity. Since shareholders will expect to receive a certain return on their investment in a company, the equity holders’ required rate of return is a cost from the company’s perspective, since if the company fails to deliver this expected return, shareholders will simply sell off their shares, which leads to a decrease in share price and in the company’s value. The cost of equity, then, is essentially the amount that a company must spend in order to maintain a share price that will satisfy its investors.

Calculating cost of debt (Rd), on the other hand, is a relatively straightforward process. To determine the cost of debt, use the market rate that a company is currently paying on its debt. If the company is paying a rate other than the market rate, you can estimate an appropriate market rate and substitute it in your calculations instead.

There are tax deductions available on interest paid, which is often to companies’ benefit. Because of this, the net cost of companies’ debt is the amount of interest they are paying, minus the amount they have saved in taxes as a result of their tax-deductible interest payments. This is why the after-tax cost of debt is Rd (1 - corporate tax rate).

Question 2

Inverted Yield Curve

Answer 2

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Question 3

Debt Ratio

Answer 3

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.
The debt ratio is also referred to as the debt-to-assets ratio.

Question 4

Porter’s 5 Forces

Answer 4

Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry, and helps determine an industry’s weaknesses and strengths. Frequently used to identify an industry’s structure to determine corporate strategy, Porter’s model can be applied to any segment of the economy to search for profitability and attractiveness.

Question 5

Monetary Policy

Answer 5

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves).

Question 6

Cash Conversion Cycle - CCC

Answer 6

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties.

Question 7

Dividend Yield

Answer 7

A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock.

Question 8

Gross Profit Margin

Answer 8

Gross profit margin is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues. Also known as “gross margin.”

Question 9

Trailing Stop

Answer 9

A trailing stop is a stop order that can be set at a defined percentage away from a security’s current market price. An investor places a trailing stop for a long position below the security’s current market price; for a short position, they set it above the current price. A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor’s favor but closes the trade if the price changes direction by a specified percentage. A trailing stop can also specify a dollar amount instead of a percentage.

Question 10

Rollover

Answer 10

A rollover occurs when reinvesting funds from a mature security into a new issue of the same or a similar security; transferring the holdings of one retirement plan to another without suffering tax consequences; or moving a forex position to the following delivery date. The distribution from a retirement plan is reported on IRS Form 1099-R and may be limited to one per annum for each IRA. The forex rollover fee arising from the difference in interest rates between the two currencies underlying a transaction is paid to the broker.

Question 11

Pip

Answer 11

A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point; for most pairs, this is the equivalent of 1/100 of 1%, or one basis point. For example, the smallest move that the USD/CAD currency pair can make is $0.0001, or one basis point.

Question 12

Forex - FX

Answer 12

Forex (FX) is the market in which currencies are traded. The forex market is the largest, most liquid market in the world, with average traded values that can be trillions of dollars per day. It includes all of the currencies in the world.

The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market.

Question 13

Currency Pair

Answer 13

A currency pair is the quotation and pricing structure of the currencies traded in the forex market; the value of a currency is a rate and is determined by its comparison to another currency. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.

Question 14

Over-The-Counter - OTC

Answer 14

Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly known as the American Stock Exchange (AMEX). The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments, such as derivatives, which are traded through a dealer network.

Question 15

Hedge

Answer 15

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

Question 16

Duration

Answer 16

Duration is a measure of the sensitivity of the price – the value of principal – of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Bond prices are said to have an inverse relationship with interest rates. Therefore, rising interest rates indicate bond prices are likely to fall, while declining interest rates indicate bond prices are likely to rise.

Question 17

Operating Margin

Answer 17

Operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating profit by its net sales.

Question 18

Yield To Maturity - YTM

Answer 18

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled.

Question 19

Liquidity Ratios

Answer 19

Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio and operating cash flow ratio. Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term debts in an emergency. Bankruptcy analysts and mortgage originators use liquidity ratios to evaluate going concern issues, as liquidity measurement ratios indicate cash flow positioning.

Question 20

Receivables Turnover Ratio

Answer 20

The receivables turnover ratio is an accounting measure used to quantify a firm’s effectiveness in extending credit and in collecting debts on that credit. The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.

Question 21

Treasury Yield

Answer 21

Treasury yield is the return on investment, expressed as a percentage, on the U.S. government’s debt obligations. Looked at another way, the Treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time.

Question 22

Return on Assets

Answer 22

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings.

Question 23

Fibonacci Retracement

Answer 23

A Fibonacci retracement is a term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going higher). Fibonacci retracement levels use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the trend continues in the original direction. These levels are created by drawing a trendline between the high and low and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Question 24

Book Value

Answer 24

Book value of an asset is the value at which the asset is carried on a balance sheet and calculated by taking the cost of an asset minus the accumulated depreciation. Book value is also the net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.

Question 25

Cryptocurrency

Answer 25

A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Question 26

Financial Industry Regulatory Authority - FINRA

Answer 26

The Financial Industry Regulatory Authority (FINRA) resulted from the merger of the New York Stock Exchange’s regulatory committee and the National Association of Securities Dealers. FINRA, as a regulatory body, is tasked with governing all business dealings conducted between dealers, brokers and all public investors. The consolidation of these two regulators aims into FINRA aims to do away with overlapping regulation and inefficient costs. At its origin, FINRA was known as SIRA, the Securities Industry Regulatory Authority, but there were numerous complaints because the name carried a strong similarity to the Arabic term "Sirah," a term used for biographical texts about the life of Muhammad.

Question 27

Initial Public Offering - IPO

Answer 27

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.

Question 28

Cost of Goods Sold - COGS

Answer 28

Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.

Question 29

Profit & Loss Statement - P & L

Answer 29

A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company's ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both. The P&L statement is also referred to as "statement of profit and loss", "income statement," "statement of operations," "statement of financial results," and "income and expense statement."

Question 30

Monte Carlo Simulation

Answer 30

Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models.

Question 31

Price Elasticity of Demand

Answer 31

Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its price change.

Question 32

Sharpe Ratio

Answer 32

The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return, the performance associated with risk-taking activities can be isolated. One intuition of this calculation is that a portfolio engaging in “zero risk” investment, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

Question 33

Capital Expenditure - CAPEX

Answer 33

Capital expenditure, or CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. CapEx is often used to undertake new projects or investments by the firm. This type of financial outlay is also made by companies to maintain or increase the scope of their operations.

Question 34

Discounted Cash Flow - DCF

Answer 34

Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates. A present value estimate is then used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Question 35

Revenue

Answer 35

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.

Question 36

Net Profit Margin

Answer 36

Net profit margin is the ratio of net profits to revenues for a company or business segment . Typically expressed as a percentage, net profit margins show how much of each dollar collected by a company as revenue translates into profit. The equation to calculate net profit margin is: net margin = net profit / revenue.

Question 37

Financial Advisor

Answer 37

A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors, or advisers, can provide many different services, such as investment management, income tax preparation and estate planning. They must carry the Series 65 license to conduct business with the public; a wide variety of licenses are available for the services provided by a financial advisor.

Question 38

Cost of Capital

Answer 38

Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity. Another way to describe cost of capital is the cost of funds used for financing a business.

Question 39

Sensitivity Analysis

Answer 39

A sensitivity analysis is a technique used to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that depend on one or more input variables, such as the effect that changes in interest rates have on bond prices.

Question 40

Terminal Value - TV

Answer 40

Terminal value (TV) represents all future cash flows in an asset valuation model. This allows models to reflect returns that will occur so far in the future that they are nearly impossible to forecast. The Gordon growth model, discounted cash flow and residual earnings all use terminal values that can be calculated with perpetuity growth, while an alternative exit valuation approach employs relative valuation methods.

Question 41

Trade War

Answer 41

A negative side effect of protectionism that occurs when Country A raises tariffs on Country B's imports in retaliation for Country B raising tarrifs on Country A's imports. Trade wars may be instigated when one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers. Trade wars are also a result of a misunderstanding of the widespread benefits of free trade.

Question 42

Generally Accepted Accounting Principals - GAAP

Answer 42

Generally accepted accounting principles (GAAP) are a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information.

Question 43

Sell-Off

Answer 43

A sell-off is the rapid selling of securities such as stocks, bonds, ETFs, commodities or currencies. A sell-off may occur for many reasons, such as the sell-off of a company's stock after a disappointing earnings report, the departure of a important executive or the failure of an important product. Markets and stock indexes can also sell-off when interest rates rise or oil prices surge, causing increased fear about the energy costs that companies will face. Sell-offs can also be caused by political events, or terrorist acts.

Question 44

Individual Retirement Account - IRA

Answer 44

An individual retirement account is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs as of 2018: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs. Sometimes referred to as individual retirement arrangements, IRAs can consist of a range of financial products such as stocks, bonds, or mutual funds.

Question 45

Leverage

Answer 45

Leverage is the investment strategy of using borrowed money: specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment. Leverage can also refer to the amount of debt used to finance assets. When one refers to something (a company, a property or an investment) as "highly leveraged," it means that item has more debt than equity.

Question 46

Free Cash Flow - FCF

Answer 46

Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. FCF is important because it allows a company to pursue opportunities that enhance shareholder value.

Question 47

Systematic Risk

Answer 47

Systematic risk is the risk inherent to the entire market or market segment. Systematic risk, also known as “undiversifiable risk,” “volatility,” or “market risk,” affects the overall market, not just a particular stock or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the correct asset allocation strategy.

Question 48

Ratio Analysis

Answer 48

A ratio analysis is a quantitative analysis of information contained in a company’s financial statements. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.

Question 49

Beta

Answer 49

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.

Question 50

Depreciation

Answer 50

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken.

Question 51

Roth IRA

Answer 51

Named for Delaware Senator William Roth and established by the Taxpayer Relief Act of 1997, a Roth IRA is an individual retirement plan (a type of qualified retirement plan) that bears many similarities to the traditional IRA. The biggest distinction between the two is how they’re taxed.

Question 52

Portfolio

Answer 52

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds. Portfolios are held directly by investors and/or managed by financial professionals. Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives.

Question 53

Diversification

Answer 53

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Question 54

Liquidity

Answer 54

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.

Question 55

Interest Coverage Ratio

Answer 55

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio may be calculated by dividing a company's earnings before interest and taxes (EBIT) during a given period by the company's interest payments due within the same period.

Question 56

Federal Funds Rate

Answer 56

The federal funds rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis. Reserves are excess balances held at the Federal Reserve to maintain reserve requirements.

Question 57

Call Option

Answer 57

A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period.

Question 58

Standard Deviation

Answer 58

Standard deviation is a measure of the dispersion of a set of data from its mean. It is calculated as the square root of variance by determining the variation between each data point relative to the mean. If the data points are further from the mean, there is higher deviation within the data set.

Question 59

Entrepreneur

Answer 59

An entrepreneur is an individual who, rather than working as an employee, founds and runs a small business, assuming all the risks and rewards of the venture. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services and business/or procedures.

Question 60

Money Market

Answer 60

The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. Among the most common money market instruments are eurodollar deposits, negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Question 61

Perfect Competition

Answer 61

Pure or perfect competition is a theoretical market structure in which the following criteria are met: all firms sell an identical product (the product is a "commodity" or "homogeneous"); all firms are price takers (they cannot influence the market price of their product); market share has no influence on price; buyers have complete or "perfect" information – in the past, present and future – about the product being sold and the prices charged by each firm; resources such as labor are perfectly mobile; and firms can enter or exit the market without cost.

Question 62

Compound Interest

Answer 62

Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period.

Question 63

Income Statement

Answer 63

An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

Question 64

Leverage Ratio

Answer 64

A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet its financial obligations. The leverage ratio is important given that companies rely on a mixture of equity and debt to finance their operations, and knowing the amount of debt held by a company is useful in evaluating whether it can pay its debts off as they come due.

Question 65

Annuity

Answer 65

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Question 66

Restricted Stock Unit - RSU

Answer 66

Restricted stock units (RSUs) are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time. RSUs give an employee interest in company stock but have no tangible value until vesting is complete. The restricted stock units are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at their discretion.

Question 67

Monero

Answer 67

Monero is a digital currency that offers a high level of anonymity for users and their transactions. Like Bitcoin, Monero is a decentralized peer-to-peer cryptocurrency, but unlike Bitcoin, Monero is characterized as a private digital cash.

Question 68

Initial Coin Offering - ICO

Answer 68

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.

Question 69

Etherium

Answer 69

Launched in 2015, Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. Ethereum is not just a platform but also a programming language (Turing complete) running on a blockchain, helping developers to build and publish distributed applications. The potential applications of Ethereum are wide ranging.

Question 70

Bitcoin

Answer 70

Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.

Question 71

Hedge Fund

Answer 71

Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). It is important to note that hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds. One aspect that has set the hedge fund industry apart is the fact that hedge funds face less regulation than mutual funds and other investment vehicles.

Question 72

Preferred Stock

Answer 72

``` A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue. ```

Question 73

Amortization

Answer 73

Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific duration (usually over the asset's useful life) for accounting and tax purposes.

Question 74

Retained Earnings

Answer 74

Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. The formula calculates retained earnings by adding net income to, or subtracting any net losses from, beginning retained earnings, and subtracting any dividends paid to shareholders.

Question 75

Enterprise Value - EV

Answer 75

The Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

Question 76

Tariff

Answer 76

A tariff is a tax imposed on imported goods and services.

Question 77

Derivative

Answer 77

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

Question 78

Current Assets

Answer 78

Current assets is a balance sheet account that represents the value of all assets that can reasonably expect to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be readily converted to cash.

Question 79

Cost of Debt

Answer 79

Cost of debt refers to the effective rate a company pays on its current debt. In most cases, this phrase refers to after-tax cost of debt, but it also refers to a company's cost of debt before taking taxes into account. The difference in cost of debt before and after taxes lies in the fact that interest expenses are deductible.

Question 80

Stock Option

Answer 80

A stock option is a privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a certain period of time. American options, which make up most of the public exchange-traded stock options, can be exercised any time between the date of purchase and the expiration date of the option. On the other hand, European options, also known as "share options" in the United Kingdom, are slightly less common and can only be redeemed at the expiration date.

Question 81

Intrinsic Value

Answer 81

The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Additionally, intrinsic value is primarily used in options pricing to indicate the amount an option is in the money.

Question 82

Bubble

Answer 82

A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.

Question 83

Swap

Answer 83

A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to. Usually, the principal does not change hands. Each cash flow comprises of one leg of the swap. One cash flow is generally fixed, while the other is variable, that is, based on a a benchmark interest rate, floating currency exchange rate, or index price.

Question 84

Yield Curve

Answer 84

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.

Question 85

Gross Profit

Answer 85

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.

Question 86

Risk Tolerance

Answer 86

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of his investments; if you take on too much risk, you might panic and sell at the wrong time.

Question 87

Donchian Channels

Answer 87

A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time intervals.

Question 88

Consumer Price Index - CPI

Answer 88

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

Question 89

Moving Average

Answer 89

A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.

Question 90

Stop Order

Answer 90

A stop order is an order to buy or sell a security when its price increases past a particular point, thus, ensuring a higher probability of achieving a predetermined entry or exit price, limiting the investor's loss, or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

Question 91

Inflation

Answer 91

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

Question 92

Candlestick

Answer 92

A candlestick is a chart that displays the high, low, opening and closing prices of a security for a specific period. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price. Black/red indicates that the stock closed lower and white/green indicates that the stock closed higher.

Question 93

Indicator

Answer 93

Indicators are statistics used to measure current conditions as well as to forecast financial or economic trends. Economic indicators are statistical metrics used to measure the growth or contraction of the economy as a whole or sectors within the economy. Technical indicators are used extensively in technical analysis to predict changes in stock trends or price patterns in any traded asset. In fundamental analysis, economic indicators that quantify current economic and industry conditions are used to provide insight into the future profitability potential of public companies.

Question 94

Liability

Answer 94

A liability is a company's financial debt or obligations that arise during the course of its business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, in most cases, if a wine supplier sells a case of wine to a restaurant, it does not demand payment when it delivers the goods. Rather, it invoices the restaurant for the purchase to streamline the dropoff and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. In contrast, the wine supplier considers the money it is owed to be an asset.

Question 95

Security

Answer 95

A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity's bond), or rights to ownership as represented by an option.

Question 96

Volatility

Answer 96

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Question 97

Correction

Answer 97

A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

Question 98

Market Capitalization

Answer 98

Market capitalization refers to the total dollar market value of a company's outstanding shares. Commonly referred to as "market cap," it is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to using sales or total asset figures.

Question 99

Gross Margin

Answer 99

Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales, to service its other costs and debt obligations.

Question 100

Financial Plan

Answer 100

A financial plan is a comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. Most individuals work in conjunction with a financial planner and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans. These metrics are used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what steps need to be taken to ensure that they are.

Question 101

Discount Rate

Answer 101

The discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve's discount window.

Question 102

Short Selling

Answer 102

Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one. Since the risk of loss on a short sale is theoretically infinite, short selling should only be used by experienced traders, who are familiar with the risks.