Financial Terms Glossary

Abritrage: A trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

Capital markets: Money, which can be raised for all kinds of ventures through primarily buying and selling of financial instruments.

Collateralized debt obligation (CDO):

Is an artificial security created by financial engineers. It bundles together a pool of similar loans into securities that can be bought or sold. An investor that buys into a CDO owns a right to a part of its pool’s interest income and principal.

CDO squared: Risky equity tranches from a bunch of different pools of debt. A CDO- squared faces more risk than a normal CDO.

CDO cubed: Takes the riskiest tranches from a bunch of CDO-squared pools and puts them into a new pool.

Community Reinvestment Act of 1977: Where banks were rated based on how much lending they did in low-income neighborhoods.

Credit ABX Index: The Average Directional Index (ADX) was developed by J. Welles Wilder to evaluate the strength of a trend and to define a period of sideway trading.

Credit default swap (CDS): A derivative security that shifts risk from a party that doesn’t want the risk to a party that is willing to accept it…for a price.

Credit rating agencies: There are three primary rating agencies in the United States: Moody’s, Standard and Poor’s and Fitch’s. They assign ratings that measure the credit worthiness of stocks, bonds, and other forms of debt.

Debt pool: To spread out risk, mortgages, credit cards, auto loans, etc. are put into large groupings called pools.

Derivatives: A type of financial instrument whose value is derived from another financial instrument.

Economic bubble: An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a balloon) is trading in high volumes at prices that are considerably at variance with intrinsic values.

EDGAR System: It stands for Electronic Data Gathering and Retrieval (a database available on the SECs website at www.sec.gov).
Equity: In a brokerage account, equity is what shares are worth if sold right now (minus any money borrowed to buy them).

Federal Reserve Bank: There are 12 Federal Reserve banks that serve as the central banking system for the United States government and depository institutions.

Financial crises: The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value.

Financial securities: Financial instruments representing financial value that can be bought or sold.
Glass-Steagall Act: The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation.

 
Government bond: A bond issued by a national government denominated in the country's own currency.

Hedge fund: Uses sophisticated methods and lots of leverage to accumulate income.

Hyman Minsky: Hyman Philip Minsky was an early American economist and professor at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises.

Interest: The birth of money from money.

Investment bank: A financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities.

Klio Funding: An entity that sells Commercial Paper (CP) short-term loans and uses them to buy higher-yielding long-term investments.

Leverage: Use of financial instruments to borrow money to increase size of investments.
Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.

MBS: Mortgage Back Securities

Options: Are contracts that allow option buyers to purchase, at a fraction of the price each share would cost, or sell a security at a certain price on or before a specified day.

OTC: A trade in the Over the Counter market.

Pay to play: Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets and similar government investment accounts.

PERLS: Principal Exchange Rate Linked Security (leveraged bets on foreign exchange rates)
Prime, Subprime, and Alt-A loans: Three types of borrowers: prime (good credit histories); subprime (poor credit histories), and Alt-A (borrowers who don’t want to document their income on loan applications).

Principal sum: The money originally invested or loaned, on which basis interest and returns are calculated.

Prospectus: A legal document that institutions and businesses use to describe the securities they are offering for participants and buyers.

REMICs: Real Estate Mortgage Investment Conduits create customized structuring of mortgage pass-through securities to redistribute cash flows and cater to a variety of market demands.

Repo market: Repos are used for investing surplus funds or for borrowing short-term against collateral (an ungoverned and unregulated market).

Speculation: Speculation is a financial action that does not promise the safety of initial investment along with the return on the principal sum.

Synthetic collateralized debt obligation: Is a combination of a collateralized debt obligation and a credit default swap that creates an artificial CDO without assembling or owning the underlying debt pool.

Tender offer: Is a type of takeover bid by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price.

Tranche: Uses the French word for “slice” and refers to different slices of collateralized debt obligations that are based on a debt pool.

Usury: The art of lending money at an interest rate higher than that permitted by law.

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