Asset allocation means the purposeful spreading of investments from different types of assets, such as money market instruments, bonds or stocks. Allocations are made to various markets, sectors and currencies. Risk and investment strategies are optimized through correct allocation of assets.
Investment portfolio strategies are tested on historical data. Such tests help determine portfolio volatility and expected returns.
The basic interest rate is the interest rate set by the European Central Bank. All interest rates on loans and deposits for clients are derived from this rate.
Bear markets are generally financial markets characterized by a decline in asset prices and general pessimism among investors. Specific levels may vary by financial instrument type. For stock indices, a 20% drop from the two-month maximum is considered a bear market. There were 32 bear markets between 1900 and 2015, or an average one every 3.5 years on average. The last bear market lasted from October 2007 until March 2009 when Dow Jones dropped by 54%.
A benchmark is a standard by which performance, volatility and other indicators of stocks, mutual funds and managed portfolios are measured. It can be an index that includes several types of assets.
Beta measures the relative degree of volatility or systematic risk associated with a portfolio against a benchmark. A beta equal to 1 means an asset is moving in respect with the benchmark index. When beta equals 2, the asset is twice as volatile as the benchmark. On the other hand, a beta of 0.65 means the portfolio is 35% less volatile than the benchmark.
Blue-chip companies are widely known and respected in capital markets. These companies tend to be among the largest and most stable in the market. Their stocks are highly liquid and volatility is generally lower.
A bull market is a financial market where the price of a selected group of assets is rising and a further increase is expected. The term is primarily used for stock markets, but it also often refers to markets in bonds and commodities. In general, if a market has not experienced a greater than 20% decline and become a bear market, it is called a bull market.
The capital market is part of the financial market and is also referred to as a long-term money market. It is a mechanism and a group of institutions creating a platform where supply and demand for medium-term or long-term monetary capital meet. These instruments have a maturity of more than one year or no maturity date. Capital market instruments are bonds, units, mortgage bonds and stocks.
A central bank is an institution that manages its country’s monetary policy, oversees its money supply and sets interest rates. Central banks also supervise financial markets. In contrast to commercial banks, they have a monopoly over the country’s monetary base and may print the national currency. The ECB (European Central Bank) is the central bank of the 19 European countries that have adopted euro as their currency. The ECB’s main role is to maintain stability within the Eurozone and preserve the Eurosystem’s purchasing power. Each Eurozone country has its own central bank that participates in the Eurosystem. One governor from each member country is a member of the Board of Governors (Monetary Board) headed by its president.
Correlation is the price dependence between two or more assets (or between one instrument and a benchmark). Correlation values range from -1 up to 1. A value of 1 means absolute correlation, i.e. identical price movements between two measured assets. A value of 0 indicates no price dependence and a value of -1 for two assets means their prices are moving in opposite directions. Asset correlation is monitored in portfolios for diversification purposes. Portfolio managers seek assets with a negative correlation to diversify portfolio-related risks.
Counterparty risk is related to when the settlement of a trade does not take place as expected due to the counterparty having failed to pay or deliver financial instruments or to deliver them at an agreed time.
Credit risk is the risk of an issuer failing to comply with their obligations. Funds may adopt various approaches to credit risk that is assessed based on securities´ ratings. In general, a bond or other debt security with a higher yield is also riskier (the issuer pays a risk premium).
Foreign exchange (FX) hedging mitigates currency risk. A fund hedges purchased assets denominated in another currency against currency fluctuations.
Currency risk is the risk of a change in the value of an asset expressed in euros because of movement in the exchange rate of the euro against another currency in which the asset is denominated. The value of an asset denominated in a currency other than the euro and expressed in euros increases when the currency’s exchange strengthens against the euro. The value of an asset denominated in a currency other than the euro and expressed in euros decreases when the currency’s exchange rate weakens against the euro. The currency risk rate depends primarily on the current share in the portfolio of the assets invested in a currency other than the euro.
Defensive stocks include those that tend to pay a regular dividend and generate stable income regardless of the economic cycle. There is constant demand for the products or services from the companies that issued them and that is the reason why they are able to generate relatively stable income during different phases of the economic cycle. The volatility of this group of stocks is usually lower and investors prefer them when anticipating negative developments in the stock market.
A financial instrument whose price is based on the underlying asset or group of assets (stocks, bonds or currency). Financial derivatives always originate from an agreement between two or several parties (a client and dealer). Basic types of financial derivatives include forwards, futures, swaps, options, warrants, and CFDs.
Less developed markets include countries with relatively high levels of economic growth and security. The common criteria for assessing a country’s development level are HDP per capita, industrialization level, living standard, legal system and technological advancement. For instance, those countries include the US, Canada, Great Britain, France, Germany and Japan.
Diversification is a risk management strategy adopted by investors to mitigate the risks associated with their portfolio by investing in various types of assets. Different asset types have their own risks, which is why diversification is a key tool for spreading the exposure to them across the portfolio.
A dividend is a part of a company’s net profit distributed by its Board of Directors after approved at the shareholders’ meeting. Dividends may be paid out in cash, stocks, obligations or assets. Dividends may be paid out at various intervals, for instance once a year, once every six months or on a quarterly basis. Dividends may be paid out regularly or exceptionally. Companies traded on a stock market that pay regular dividends are considered so-called dividend companies.
A rate of bond price sensitivity to interest rate fluctuations, duration denotes the average portfolio maturity for investments in debt securities or in a money market. For instance, duration equal to 2 means that if the interest rate rises by 1%, the bond price will drop by 2%.
“History doesn’t repeat itself, but it often rhymes”, Mark Twain. The economic growth in the last 150 years has been the greatest in the history of the mankind. The global GDP has multiplied several times. The global economy (as well as individual countries) has recorded periods of stagnation and decline. Economists have found expansion and subsequent correction cycles to be relatively frequent. The economic cycle has two basic phases: expansion during which the economy grows and contraction (recession) when the economy declines. The market cycle behaves similarly to the economic cycle. Generally, financial market developments can predict the end of the economic cycle and the beginning of a recession. On the other hand, the stock market has historically given many false signals.
The countries in this category are undergoing socioeconomic changes that should place them among developed countries. EM economies are reforming their financial systems so their capital markets meet regulatory requirements and provide sufficient liquidity for investors at the level of the U.S.A., Japan or Europe. These economies sometimes have great economic and human potential. Economies falling under this category: Brazil, Chile, China, Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand and Turkey. Some organizations, such as the MSCI and S&P, also include these countries: Czech Republic, Egypt, UAE, Qatar, Greece, Bulgaria, Romania, Ukraine and Venezuela.
Earnings per share is a ratio indicator of a company’s net profit per share. This indicator is used in business valuation and it is one of the most commonly used variables in fundamental analysis.
Environmental, social and corporate controls are three factors that measure suitability and the ethical dimension of a company’s investment strategy. These criteria should help find and select appropriate tools for the portfolio.
Exchange-traded funds (ETFs) copy development of indices, commodities, bonds, or a basket of selected assets. Unlike mutual funds, ETFs are traded on a stock exchange as ordinary shares. Their advantages include cost and tax efficiency. Since ETFs are traded as shares, they do not have the NAV typical for mutual funds.
EURIBOR is the average interbank rate at which selected banks provide funds. Such loans have different maturities, for instance one week, one month, 3 months, 9 months and 12 months. The 3-month EURIBOR is an important benchmark as it is applied to several financial products denominated in EUR such as mortgages, current accounts and derivatives. EURIBOR is determined by 20 selected banks: Belfius, BNP-Paribas, HSBC France, Natixis, Credit Agricole, Societe General, Deutsche Bank, DZ Bank, National Bank of Greece, Intesa Sanpaolo, Monte dei Paschi di Siena, Unicredit, Banque et Caisse, ING Bank, Caixa, Banco Bibao, Banco Santander, CECABANK, CaixaBank and Barclays.
The term is used mainly in connection with the stock market. The ex-dividend date is the date when an investor is no longer entitled to dividends. It means that if an investor buys stock on an ex-dividend date or after that date, they are not entitled to a dividend.
The Federal Reserve System is the central bank of the U.S.A. It consists of twelve Federal Reserve Banks, whose presidents sit on the Federal Open Market Committee (FOMC). The Federal Open Market Operations Committee sets interest rates, oversees the money supply and manages the central bank’s balance sheet, which means it can buy or sell various securities (government bonds for example).
Leverage is the ratio between total assets and equity. Leverage trading is often used in financial markets, primarily in connection with financial derivatives. Financial instruments using financial leverage are considered riskier than where the trader has only their own assets.
Fundamental analysis is an asset valuation method that determines the intrinsic value of a stock, focusing on its economic, financial, quality and quantity factors. This method strives to analyze macroeconomic (economy, situation in the sector) and microeconomic factors (company management and financial situation). The objective is to value stock and compare it with the current market price. Results from the analysis should indicate whether the stock is overvalued or undervalued compared to the market.
Futures are a financial contract for the purchase or sale of a financial instrument or commodity under pre-arranged conditions. The buyer and the seller agree on the time of sale, delivery and the price. Futures contracts are derivatives negotiable through a stock exchange. Their conditions are standardized, they make use of leverage and they can be used for hedging. Futures contracts have various underlying assets, such as commodities to be delivered physically, stock indices, and currency pairs.
Hedging reduces the market risk resulting from significant financial market fluctuations. Financial derivatives such as futures, options and CDS are commonly used as hedges. For portfolios, the most frequently hedged risk is currency risk. The portfolio may purchase assets that are denominated in various currencies. Portfolio managers hedge currency risk to prevent lower returns in the event of significant foreign exchange movements or to purchase already hedged instruments.
A strategy is a recommended holding period or the minimum period an investor should follow the investment strategy selected by them. In general, riskier investment strategies have longer holding periods. Clients not complying with the holding period face a higher risk of a failure of to achieve a return on their investment, and may even incur a loss.
Interest rate risk is the risk of loss due to market interest rate fluctuations. Those may affect primarily bond components of portfolios.
An initial public offering (IPO) of a company’s stock takes place when the company decides to raise capital for the first time by issuing its stock on a capital market. Companies are looking for ways to raise capital and, in general, they can do so by borrowing, issuing bonds or entering the stock market. Where a company decides for the last option, an IPO is the most frequently used method.
ISIN (International Securities Identification Number) is an international identification of a security. It is a twelve-digit alphanumeric code that indicates the country of the issuer and specifies the security. For example, ISINs are allocated by central depositories.
An issuer is a natural or legal person who has issued a security in order to obtain financial resources.
The KIID contains information about the financial instrument or investment product concerned. The document is not used for marketing purposes and contains the statutory information intended to facilitate understanding of the risks, costs, nature, loss and income related to the given financial instrument or investment product.
The Key Investor Information Document is a part of the basic documentation of every standard mutual fund (KIID is regulated by UCIST IV). KIID should be available to each investor prior to entering into a contract. The Key Investor Information Document describes the fund’s investment policy, objectives, risk profile, fees and past performance and provides other practical information. It should be on two A4 pages.
It primarily means the risk of change in tax systems or legislation in the countries where issuers of the financial instruments included in the portfolio operate.
A leverage effect takes place when an investor uses borrowed funds to trade. The investor can thus invest several times more, but they have to pay back the party that lent them the funds. Profits or losses from the trade are borne only by the investor. Leverage trading is used for many derivatives (for instance, options and futures) and is associated with high risks.
London Interbank Offered Rate is the average interbank rate calculated every day as at 11:30 am. This fixed rate is set by 12 banks and expresses the interest rate at which they are willing to lend to each other. LIBOR is used as a reference rate within calculations concerning a number of financial instruments covering estimated $350 trillion.
Liquidity describes the extent to which an asset or financial instrument can be sold or bought without significantly affecting the market price.
Liquidity risk means the risk that, in the event of an extraordinary market situation or a reduction in the issuer’s credit rating, the financial instrument invested in compliance with the statute cannot be sold, redeemed or used for another trade at the company’s discretion or at its price indicated in the portfolio’s assets valuation without additional costs and in a sufficiently short time.
Long selling is an investment or trading strategy that speculates on the rise in a financial instrument’s price.
Market capitalization expresses the total value of a company’s stocks. It is the product of the current market price and the number of the company’s stocks. Companies classified by market capitalization are ranked as small caps (up to $2 billion ), mid-caps ($2-10 billion ), large caps ($10-100 billion ) and mega caps ($100+ billion ).
Market gap risk is the risk of loss as a consequence of the impossibility of carrying out trades in financial instruments during a specific and very short period of time.
Market risk relates to the global development on financial markets, immediately affecting values of individual asset types included in the portfolio. A specific form of market risk is interest rate risk, which is based on interest rates moving over time because of changes in economic conditions on markets. An increase in financial market interest rates causes the value of financial debt instruments in a portfolio to drop. On the other hand, a fall in financial market interest rates increases the value of financial debt instruments in a portfolio. In addition to interest rate risk, performance of a financial debt instrument is also affected by credit risk, which means the risk of loss due to a debtor’s failure to meet their obligations under agreed terms and conditions. The rate of risk depends on how the developing economic situation affects each issuer. The portfolio’s interest and credit risks are mitigated by managing portfolio duration, the portfolio’s average maturity, and limiting riskier asset types through investment limits.
Momentum measures the speed of changes in the price or volume of a security. In a technical analysis, momentum is considered an oscillator and serves to identify the strength of a trend.
The money market is a short-term money market where financial institutions and banks meet to sell or buy short-term financial instruments with maturities up to one year. Examples include borrowings and short-term loans, currencies, foreign exchange and securities.
The price stated when a security is issued (for stocks, it is the price at IPO, and for a unit, it is the price during the subscription period). The price may differ from the current market price.
Operational risk closely relates to portfolio administration errors caused by a securities dealer or external business partners.
Options are the right to purchase an underlying instrument at a determined time and for the price agreed in advance. As a financial instrument, they are classified as derivatives. An option seller is also called option issuer, while an option buyer is also called option holder/owner. The holder of an option has the right to buy or sell it and to exercise or not this right. In other words, they have the right of option. The issuer of an option is obliged to sell or buy the underlying instrument if the option holder decides to exercise their option.
Over-the-counter refers to a decentralized market, there is no specific physical location. Since it is an unregulated market, individual trades and their conditions are agreed directly between parties. FX, derivatives, bonds and structured investment products are primarily traded in this market. OTCs also include the OTC Bulletin Board and Pink Sheet, where stocks are traded too.
Market price - book value per share ratio (P/B ratio) is also known as Price to Equity. Like P/E, it is used in company valuation. If P/B is lower than 1, it means that the company’s book value is lower than its market value. It may indicate that the company is undervalued.
It indicates the ratio between the market price and the company’s net profit per share. Leverage is used to value companies. P/E is a relative valuation model where investors and traders usually compare several companies in the same industry or sector.
A portfolio is a set of all financial instruments held by an investor, which may include bonds, stocks, commodities, money market instruments and units. It may also include other assets such as real estate, valuables and alternative investments. Portfolios are usually managed directly by investors or by professionals (natural or legal persons) who take care of investments. An investment portfolio is created from an investment strategy based on an investor’s specific goal and risk aversion. The investor may have several portfolios with various strategies and goals.
The primary market is part of the capital market and handles new securities issued by corporations, governments, and other entities. Private companies and governments sell securities (stocks or bonds) on the primary market to raise funds to finance their activities. The primary market is chiefly managed by investment banks that set price ranges and oversee sales to investors. Once a sale is completed, further trading continues on the secondary market like a stock exchange, where most trades take place.
The part of the securities market where publicly traded securities are traded, specifically securities allowed access to this market according to special rules.
The risk of investing in the real estate sector means the risk of a change in real estate assets caused by falling values or defaults. Changes in real estate values are mainly a consequence of expected income associated with owning real estate: the risk of not concluding a rental contract or the risk of termination of a lease.
The currency in which an investor measures the return on their investment. As a rule, the reference currency is determined by investors according to the currency in which they plan to use their investment. A majority of Slovak investors use the euro as their reference currency.
In some portfolios, shareholders may either receive directly paid income or they may reinvest returns to achieve compound interest.
A number of investors use the risk/reward ratio. The expected investment return is compared to the risk of loss in case of unexpected market development. The risk/reward ratio varies according to individual strategies. Some investors consider 1:3 an ideal ratio. Investments are always associated with certain risks and, generally speaking, where investors expect higher returns, they have to count with higher risks.
When stocks or bonds are traded or resold, it means that they are sold in the secondary market. Most securities transactions take place on that market.
A security is a negotiable asset that represents some type of financial value, whose type and form are prescribed by legislation and is associated with the rights set out by the Securities Act (566/2001), in particular the right to request specific financial benefits or to exercise specific rights in respect of the persons defined by law.
A transaction within which a person selling securities receives an adequate amount of money on the trading day of the sale, and the person who buys receives the corresponding number of securities.
Speculation on a drop in the price of a financial instrument. Sale of a financial instrument (e.g. commodity) before the investor owns it. Investors borrow a share and undertakes to return it through a regular sale. Should the price at the regular sale be lower than the price when it was initially sold, the investor earns a profit.
Short selling is an investment or trading strategy that speculates on the decline in a financial instrument´s price. As concerns securities, an investor sells, for instance, a stock they do not own, but have borrowed from another investor. In case of a buyback, or covering, the selling investor will return the security. A short-selling investor makes a profit if the price of the asset drops. On the other hand, an investor will incur a loss if the price rises. Short selling is usually not limited in time, and if the price significantly increases, the trader may lose more than they have invested.
The spread between the selling price and the buying price on foreign exchange markets. Spread also expresses the difference in returns between a bond with a risk of default and a risk-free bond with the same maturity. In the Eurozone, for example, German “bunds” are considered risk-free bonds.
It is a synthetic indicator of risk and return. The indicator is used to classify investment funds and portfolios according to their exposure to risk and is calculated in accordance with European legislation. SRRI is an important part of the Key Investor Information Document (KIID) and provides investors with information about the fund’s level of historical volatility, which can range from 1 to 7. A low SRRI means lower price fluctuations and that the investor’s potential loss is lower, too. On the other hand, a higher SRRI entails a higher risk of loss but also a higher profit.
An exchange or bourse is a trading venue where financial instruments (such as stocks and bonds) are traded at a specified time and according to the exchange’s rules. The most famous stock exchanges include the NYSE (New York Stock Exchange), NASDAQ and AMEX. Exchanges in Europe are XETRA (Germany), LSE (Great Britain) and Euronext (Belgium, France and Netherlands).
A stock is a security that represents ownership of a fraction of the issuing company. Investors - shareholders have the right to receive dividends - a share of profits distributed by the company and to participate in the company’s management in accordance with the laws of the country where the company is established and its articles of association. Stocks may be issued as certificates or in a dematerialized form.
A derivative transaction based on an exchange of one currency for another for a certain period of time. It works as a futures trade aimed at achieving profit as a result of exchange rate fluctuations. Swaps also include interest rate swaps.
Technical analysis is aimed at identifying trading opportunities by examining trends, trading activity statistics, price movements and volume development. While fundamental analysis attempts to establish values, technical analysis focuses on price fluctuations.
An indicator expressing total costs associated with the management and operation of a mutual fund/ETF. These costs mainly include management fees, depository fess and other charges such as those paid to banks, depositories, regulated markets, and auditors. The TER percentage rate expresses the share of total ETF costs attributable to total fETF assets.
A short-term debt security issued mainly by governments to cover a temporary shortage of funds.
Volatility describes the interval of price changes. It is the mean deviation of the average return and is calculated as the standard monthly performance deviation. Volatility = systematic risk (β) + non-systematic risk (α) It does not include the entire risk. Extreme values, neither the highest nor the lowest yields, are not included. Results vary by period and the average yield is not constant. Volatility of individual asset classes or a portfolio is broadly stable.
A graphical representation of returns until maturity of fixed interest securities (e.g. bonds). On the horizontal axis, the repayment period ranges from one-day "overnight" deposits through several-month term deposits to long-term bonds. Under normal circumstances, the yield curve is rising, i.e. interest yields on short-term instruments (deposits) are smaller than yields on long-term instruments (obligations). The reverse (descending) inclination of the yield curve signals that the market expects rates to fall. When compiling the revenue curve, it is always necessary to take into account the different tax regimes of the various instruments, factoring in their ratings.
It represents the expected return generated by a bond or portfolio, provided that it will be held until maturity and coupons will be reinvested at an unchanged interest rate.
YTD (year-to-date) covers the performance of a financial instrument from the beginning of the year to the present date.
YTM (yield to maturity) is the yield to maturity of a debt security.