Investment Glossary

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Capital asset pricing model (CAPM)

a mathematical model that attempts to explain how securities should be priced, based on their relative riskiness in combination with the return on risk-free assets. It is considered a very important element of modern investment and portfolio theory.

Capital gain

the excess by which proceeds from the sale of a capital asset exceed the cost.

Capital gains distribution

payments to a unit trust or investment company based on gains from securities in the firm's portfolio that have been sold. These gains are passed through to the investors and are taxable to the investors.

Capital gains tax

the tax applicable to gains and losses from the sale of capital assets.

Capital Notea

a hybrid security which pays regular interest like a bond (debt security) but the face value may be converted to shares at a specified date in the future (the election date or maturity date). Whether the face value is converted to shares or paid out in cash is often at the discretion of the issuer under terms set at the time of the initial offer. If shares are issued in lieu of cash, the arrangement normally provides that they are issued at a discount to market at the time of issue. Unlike other convertible securities the market price is calculated using the bond price formula. Because of the possibility they may convert to shares and therefore never mature, (perpetual) they have some of the characteristics of shares. They also generally rank behind all other creditors.

Capitalisation

1 total value of a company's issued shares as determined by the market price. 2 the mix of debt / equity that funds a firms assets. 3 As applied to interest. Arrangement where the lender agrees to allow the borrower to borrow additional capital to cover future interest expenses. Usu where there is insufficient free cash flow from a project to meet early interest payments.

Cash basis accounting

a method of accounting in which receipt and payment of cash are the basis for recording transactions. Thus it is not the date on which goods and services are received that matters as in the accrual method, but the dates on which the case changes hands for the transactions. Cash basis accounting is typically used for tax purposes by individuals but not by corporations. - See also Accrual Accounting.

Cash flow

the amount of net cash generated by an investment or a business during a specific period of time. Cash flow is calculated by adding non-cash charges such as depreciation to net income after taxes. Because cash is the fuel that drives a business, many analysts consider cash flow to be a company's most important financial statistic. In addition, firms with big cash flows are frequently takeover targets because acquiring firms know that the cash can be used to help pay off the costs of the acquisition.

Cash settlement

settlement of a futures contract in cash rather than in the asset underlying the contract. For example, share index futures call for cash settlement because it is not feasible actually to deliver an index or the securities constituting an index.

Certified financial planner (CFP)

a professional financial planner who has completed a series of courses and has passed examinations in subject areas such as insurance, securities, taxes investment theory, estate planning and other financial subjects.

Charting

the graphing of market variables - particularly share prices and market averages. Sometimes called technical analysis. Technicians also chart other variables including commodity prices, interest rates, and trading volume in an attempt to determine trends and project future values.

Chartist

a person (as a market technician) who attempts to determine future share price movements by analysing past price movements as recorded on a chart.

Commodity

Commonly traded good. For example gold, soya beans, livestock, and other relatively high volume traded goods.

Compound

To add interest to principle and pay subsequent interest on the total amount.

Compound returns

Returns calculated on the basis of compounding. Mathematically a compound return is known as a geometric mean - a measure of the compound rate of growth including dividends.

Consumer price index (CPI)

a measure of the price change of goods and services purchased by private consumers.

Contrarian

an investor who decides which securities to buy and sell by going against the crowd. For example, a contrarian would tend to purchase the shares of steel companies when steel share prices are depressed and most investment counsellors are advising against them. Contrarians operate on the premise that when shares are very popular they are overbought, and when they are very unpopular they are oversold.

Convertible security

a security that, at the option of the holder, may be exchanged for another asset, generally a fixed number of ordinary shares. Convertible issues frequently are fixed-income securities such as debentures and preference shares. Their prices are influenced by changes in interest rates and the values of the assets into which they may be exchanged.

Corporate bond fund

an investment fund that invests in long-term corporate bonds and passes the income on these securities to its investors. Although these funds vary in value with changes in long-term interest rates, they normally provide a current return in excess of money market funds. Corporate bond funds are of interest primarily to investors seeking high current income or to those predicting a substantial fall in long-term interest rates.

Correlation

a measure of how closely two variables move together through time. For example, shares tend to have a high degree of correlation because their prices are influenced by the same forces. The concept of correlation is an important part of modern portfolio theory (MPT) used for diversifying portfolios.

Cost of capital

the overall percentage cost of the funds used to finance a firm's assets. Cost of capital is a composite cost of the various individual sources of funds including shares (equity), debt, preference shares, and retained earnings. The overall cost of capital depends on the cost of each source and the proportion that the source represents of all capital employed in the firm. The goal of an individual or business is to limit investment to assets providing a higher return that the cost of capital used to finance those assets.

Coupon

1 - the annual interest paid on a dept security. A coupon is normally stated in terms of the rate paid on a bond's face value. For example, a 9% coupon, $1,000 principal amount bond would pay its owner $90 in interest annually. A coupon is set at the time a security is issued and, for most bonds, stays the same until maturity. 2 - the detachable part of a coupon bond that must be presented for payment every six months in order to receive interest (unusual nowadays).

Coupon stripping

the purchase of ordinary bonds that are then repackaged such that the receipts to interest and principal payments are sold separately. The effect is to transform a regular-interest paying security into zero-coupon receipts of varying maturities.

Covariance

a statistical measure of the extent to which two variables move together. Covariance is used by financial analysts to measure the degree to which return on two securities is related. In general, a high covariance indicates similar movements and lack of diversification. See also correlation, a closely related measure.

Cum dividend

used to refer to a share trading such that buyers qualify to receive the next dividend payment.

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