Investment Glossary

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Second mortgage

a real estate mortgage with a subordinate claim to another mortgage on the same property. The second mortgage is more risky than the first mortgage, thus it carries a higher rate of interest.

Secondary market

the market in which existing securities are traded among investors through an intermediary. Organised exchanges such as the New York Stock Exchange and iExhange facilitate the trading of securities in the secondary market.

Sector fund

an investment company that concentrates its holdings among securities or other assets of a common type. For example, a sector fund (eg Korea Fund or Pacific Fund) may limit its holdings to foreign securities from a particular country or geographic region. Likewise, it may specialise in the securities of technology firms or in companies that produce precious metals. Sector funds permit investors to concentrate on a specific investment segment and yet diversify their investments among various issuers. Sector funds entail more risk but offer greater potential returns than funds that diversify their portfolios.

Secured creditor

a line used to illustrate the relationship between risk and return for individual securities. The security market line shows a positive linear relationship between returns and systematic risk as measured by beta.

Security market line

a market in which the demand for an asset swamps supply to the point that prices rise above the level that would have been expected under more normal circumstances. A new issue in great demand by investors is an example of a sellers' market.

Sellers' market

a component of the theory of efficient markets holding that security prices adjust nearly instantaneously to publicly available information relevant to valuation of securities. If security markets are efficient in the semistrong form, investors cannot earn extraordinary returns by activities such as perusing financial reports, investigating financial ratios, or reading investment newsletters. - See also Strong form; Weak form

Semistrong form

a class of debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer. In the event of financial difficulties or liquidation of the borrowers assets, holders of senior debt will have a priority claim. Most loans from financial institutions and certain high-grade debt securities are senior debt. Because senior debt has a relatively secure claim, it is less risky from the point of view of the lender and it pays a lower rate of interest compared with debt of the same issuer having a subordinate claim.

Senior debt

transfer of the security (for the seller) and cash (for a buyer) in order to complete a security transaction.

Settlement

the date on which either cash (for a buyer) and a security (for a seller) must be in the hands of the broker in order to satisfy the conditions of a security transaction.

Settlement date

an individual or organisation owning ordinary or preference shares in a corporation.

Share option

a corporation's plan for buying back a predetermined number of its own shares in the open market. Institution of a share repurchase plan derives from management's view that the company has limited outside investment opportunities and that its shares are undervalued. Repurchase of the shares will decrease the amount of outstanding shares, will increase earnings per share, and, it is hoped, will result in an increase in the price of the share.

Share repurchase plan

A ratio developed by Bill Sharpe that is calculated by dividing the rate of return for a portfolio that is above the risk free rate and dividing it by the standard deviation of the returns. See also Risk adjusted returns

Shareholder

an option to buy or sell a specific number of shares at a fixed price until a specified date.

Short coupon

the first interest payment on a newly issued bond that includes less than the normal period of interest. For example, a bond issued on February 1 with interest payment dates of June 1 and December 1 (six monthly coupon) would make an initial payment equal to four months' interest.

Short position

1 - a net investment position in a security in which the security has been borrowed and sold but not yet replaced. Essentially, it is a short sale that has not been covered. - See also Long Postition. 2 - an investment position in which the investor either has written an option or has sold a commodity contract, with the obligation remaining outstanding.

Short sale

the sale of a security that must be borrowed to make delivery. Short sales normally, but not always, entail the sale of securities that are not owned by the seller in anticipation of profiting from a decline in the price of the securities. - Also called selling short.

Simple interest

interest paid on an initial investment only. Simple interest is calculated by multiplying the principal times the annual rate of interest times the number of years involved. See also Compound interest.

Speculator

a person who is willing to take large risks and sacrifice the safety of principal in return for potentially large gains. Certain decisions regarding securities clearly characterise a speculator. For example, purchasing a very volatile share in hopes of making a half a point in profit is speculation, but buying a government bond to hold for retirement is an investment. The difference is often subjective.

Spread

1 - a position taken in two or more options or futures contracts to profit through a change in the relative price relationships. Purchasing an option to expire in October and selling an option on the same asset expiring three months earlier is one example of a spread. 2 - the difference in price between two futures contracts that are identical except for delivery date. 3 - the difference between the bid and ask prices for a particular security. - Also called markup. 4 - the difference in yields between two fixed-income securities. - See also Basis Point.

Staggered maturities

bonds with differing maturity dates in an investor's portfolio. For example, an investor may accumulate a $200,000 portfolio of bonds such that $20,000 face value of bonds matures each year for 10 years.

Standard deviation

a statistical measure of the dispersion of outcomes around the mean (average). For investment analysis it is used as a measure of risk. The higher the standard deviation of an investment's returns, the greater the relative riskiness because the investment shows greater uncertainty of returns - at least in the short term.

Strike price

exercise price at which the owner of a call option can purchase the underlying shares or the owner of a put option can sell the underlying shares.

Strong form

a component of the theory of efficient markets holding that security prices fully incorporate all public and most private information relevant to valuation of securities. The strong form component, if true, implies that professional portfolio managers and insiders are consistently unable to earn extraordinary returns in the security markets. See also Semi-strong form; Weak form.

Synthetic asset

the combination of securities and/or assets in such a way that they produce the same financial effect as the ownership of an entirely different asset would. For example, selling a put option and buying a call option on a commodity produce the same financial effect as actually owning the underlying commodity.

Systematic risk

risk caused by factors that affect the prices of virtually all securities, although in different proportions. Examples include changes in interest rates and consumer prices. Although it is not possible to eliminate systematic risk through diversification, it is possible to reduce it by acquiring an appropriate number and type of securities. - Also called market risk; nondiversifiable risk.

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