What Does Stock Exchange Mean?

These exchanges are frequently private entities that, in modern days, have built a digital trading platform supported by other institutions, such as a clearing house and they are regulated by government laws.

There are two ways to participate in a stock exchange, either through the primary or the secondary market. The primary market is where companies place their securities directly and the secondary one is where investors exchange these securities with each other. Stock exchanges also have certain requirements for a company to participate and gather funds trough them. These are frequently called listing rules.

They constitute the minimum conditions established by the exchange to approve any security being issued and companies must comply with them not only at the beginning, but also throughout the whole time they are actively participating in the exchange. Finally, a broker is an individual or a company that facilitates the trade of financial instruments within the stock exchange, charging a commission in return for their services.

Example

A hypothetic example would be the following: the Dallas Stock Exchange was formed in 1914 by the International Trading Company of Texas. Back then, the exchange functioned in a big building with different floors and each floor was assigned to the trade of a different financial instrument such as bonds or stocks.

After many years passed and financial technologies were further developed, the exchange came to be a virtual place where brokers place their client’s orders and companies gather funds through public offerings within the digital platform.

This exchange has an average daily trading volume of 122 million dollars and more than 250 companies participate in it. Its listing rules are very strict and the exchange is only accessible for companies based in Texas.

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What Does Portfolio Analysis Mean?

When a company markets a range of different product or services it is required to conduct portfolio analysis periodically. This means to analyze each product separately in terms of profitability, contribution to the company’s income and growth potential. This analysis facilitates the identification of products that are not profitable at all or play poorly within the group.

The products are categorized by pre-defined criteria such as sales value, market share, gross profitability, contribution margin and life cycle. The results could clearly point to products that should be taken out of the market or simply receive fewer resources. It might also indicate that the company must increase its investments and efforts to some star products that have a higher potential. The analysis is made to improve the global portfolio’s performance since the ultimate objective is maximizing profit for shareholders.

Example

Shine Shoes manufactures and markets 55 models of women shoes. The General Manager realized that sales increased but profitability steadily decreased over the past two years. He did not know what happened and he asked a consultant to conduct a portfolio analysis. The study provided some interesting results. The top five models represented 17% of total sales. However, those five were not profitable at all because production costs were too high.

At the same time other models were highly profitable but their sales were negligible within the overall portfolio. The Manager decided that higher investment in marketing and sales effort should be made in the most profitable models and thus to push the overall profit up. The results were positive and the company improved notably its finances thanks to the insights obtained by the portfolio analysis.

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What Does White Paper Mean?

This term was initially employed to define government or politics-related documents that aimed to convince the population about certain ideas, normally to promote an agenda or a political campaign. Nevertheless, the term has been adopted by the marketing community as a way to identify a sales or marketing document that comprehensively describes a solution, a product or a service.

There are basically three types of marketing-related white papers: backgrounders, numbered lists and problem/solution papers. Each of them have a different purpose but they all contain factual information to support the benefits and applications of what is being sold.

Backgrounders have a deeper technical description that contains the main attributes, components and parts of the product.

Numbered lists often include tips and frequently asked questions answered accordingly to increase customer’s acceptance.

Finally, problem/solution white papers are normally presented to deal with specific needs of certain target groups by describing the way the company wants to deal with it through its product or service proposal.

Example

Extreme Audio Co. is a company that manufactures professional audio devices such as microphones, amplifiers and musical instruments among other products. The Marketing Department was recently formed to create white papers for each of the products sold by the company. Since many of them are designed for professional sound engineers, the company requires backgrounders to describe all the technical specifications of the products they sell.

The Marketing Department conveyed a meeting with the Engineering Department to fully understand what each of these products does, how does it do it and what are the components employed and what are the main competitive advantages each product has compared to the competition. The company’s executives believe that this will help the Sales Team to address and respond to many of the customer’s questions easily.

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What Does Buying on Margin Mean?

In order to buy on margin a person must hold a margin account with his broker. These accounts have different conditions and operational characteristics than regular accounts. When a person buys certain security on margin it means that the broker finances a part of the transaction. The account holder places a down payment, which means a portion of the total amount invested and the broker pays for the rest. The securities being bought are held as collateral for the loan and there are elements like maintenance margins, minimum margins, interest expenses and operational expenses that are also charged to the holder to sustain the margin account.

As any other loan, the financial institution will assess the person’s or institution’s creditworthiness before the margin account is actually approved. Also, there are certain procedures such as “margin calls” that can be employed if the margin account balance is reduced by adverse results. These calls are measures that allow the broker to liquidate investment positions in order to maintain the minimum equity portion required for the margin account.

Example

Let’s say Mr. Lambert has a margin account with an initial investment of $20,000 coming from his savings. He decided to design his own investment portfolio and he is enthusiastic about its potential. In order to increase the portfolio results he took a $10,000 margin, which means his current portfolio is worth $30,000.

He went on and bought many different stocks, bonds and ETFs and according to his margin account agreement the maintenance margin is 25%, he has to pay an annual interest rate of 2% on the loan and there’s a 0.025% operational expense calculated on its margin balance at the end of each month. The securities he purchased serve as collateral for the loan. Mr. Lambert is confident about his portfolio and that’s the reason why he wanted to boost its results through a margin operation.

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What Does Bid Mean in Business?

Bidding processes are very common in government procurement. They are often used to improve transparency and guarantee better quality. However, a bid solicitor can be any private or public institution or even an individual that requires a product or a service. The solicitor commonly notifies about the specific procurement requirements to potential suppliers and provides bid terms, which are minimum requisites to participate in the selection process.

The bidders are interested companies that present their bids according to conditions and time previously defined by the solicitor. A typical bid should include evidence about past successful jobs performed, past and current clients, available resources to execute the required work and any other information proving that requisites are not only met but even exceeded.

Example

Efficient Services Inc. is a company that has been operating for five years. It primarily provides maintenance services to roads and highways with an up-to-date technique that minimizes time while achieving excellent results. Efficient Services read in the local newspaper that the municipality would open a bidding process in a month in order to sign a one-year contract for road maintenance.

The company was very interested because there was a large amount of money involved in the contract. It therefore prepared a document where their best qualifications were presented and sent the file to the municipality two days before the deadline. Although other four companies were competing in the process, Efficient Services was the selected one. The employees in charge of the selection admitted that the winner company was the smallest and the youngest within the group.

In cost terms it was in line with the average. However, the company had the best service time because every maintenance work is planned to last 25% less than its competitors. Because of the shorter time, citizens’ daily routines will be less affected. Indeed, the time criterion was the key to grant the contract to Efficient Services.

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What Does Unsecured Loan Mean?

Unsecured loans are issued by financial institutions to both individuals and corporations for many different purposes. These loans are not collateralized, which means that there is no asset backing the loan. By having no collateral, they pose a higher risk for the financial institution issuing them, since in the case the client defaults the payment, there’s nothing that ensures the institution that they will get at least some of its money back.

Unsecured loans are backed by the positive credit record of the borrower; this means the financial institution backs the loan with just a promise of payment signed by the client. In the event of a default, the institution will have to write off the loan as a loss since there is no collateral to be sold to fulfill the financial commitment. Credit cards are a good example of an unsecured loan, since they have no collateral attached.

Let’s look at a practical example.

Example

Mr. White is an account holder at Big Money Bank LLC. He is currently applying for a loan to make some purchases to remodel his home. He has an excellent credit rating and he thinks he can get $5,000 for the project. The bank is offering him a loan for a period of 48 months with an interest rate of 3% a year. The bank’s representative informed Mr. White that he doesn’t need a guarantor and there’s also no collateral required to get the loan approved. Which kind of loan is this?

According to our previous definition, an unsecured loan is a debt issued with no collateral attached. As we can see in this situation, by not requiring a guarantee or a guarantor the bank is actually lending the money to Mr. White trough an unsecured loan.

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What Does Bond Rating Mean?

Rating agencies are in charge of evaluating and assessing a bond’s rating. These entities evaluate a bond issuer’s financial strength and its ability to pay a bond’s principal and interest by thoroughly reviewing its financial statements and business conditions. Bond ratings are very important for investors because they inform them about the stability and quality of the bond; thus, ratings affect a bond’s price, its yield, and its appeal for investors.

These ratings are often classified using three letters from AAA to D. The highest graded bonds are called investment grade bonds and are usually graded from AAA to BBB- ratings. These bonds are of the highest quality and are the least likely to default on a principal or interest payment during their life.

The more risky bonds, also known as junk bonds, are given a C or D rating. These junk bonds will have to pay more interest to investors to compensate them for the risk associated with the companies’ poor financial performance.

Some rating services use the same letter grades but use upper and lower-case letters. This rating system is taken into consideration by almost all investors since it indicates the likelihood that the issuer will default in a given period of time, either on interest or principal payment.

Example

Marlo Studios is a company that films commercial pieces for advertising agencies and individual companies. The company recently issued a series of bonds that were rated as BBB+. This means that the bonds are rated as investment quality bonds carrying relatively low risk.

This rating allows institutional investors to include Marlo Studio’s bond issue as part of their portfolios, as the rating show that the probability of a default is very low. This also means that Marlo will be not be required to pay as much interest on his bonds because the risk relatively low to investors.

On the other hand, if Marlo’s financial situation were to deteriorate, rating agencies will reevaluate this assessment and probably downgrade the bond to compensate for the additional risk. This downgraded rating would not only affect the market price of the bonds, it could also affect the interest associated with them on secondary markets.

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Definition: Binary trading is a type of investing where investors have to predict the result of a yes/no situation by the end of a determined period. Binary trading indicates that investors can choose from only two investment possibilities, in which the payoff is either a fixed amount of money as compensation or nothing at all.

What Does Binary Trading Mean?

In binary trading, buying the binary indicates that, for the investor, the outcome will be true, while selling it shows that the investor is guessing the result will be false. The only two pay-offs are a total dollar amount at the end of a pre-established time period or losing the entire investment. In financial markets, investors predict, for example, the fluctuation of the value of a certain asset during a defined period of time.

If he manages to forecasts the asset’s price trend, he obtains a set dollar amount for his investment according to the binary agreement. But if he guesses wrong, the entire investment is lost. Binary trading alternatives have two main classifications: the cash-or-nothing type, which pays some fixed amount, and the asset-or-nothing kind, that pays the value of the underlying asset according to the investment contract. Investors use binary trading to invest in commodities, stocks, and currency exchanges.

Let’s look at an example.

Example

Mr. Jones enters in an online binary trading where he purchases a cash-or-nothing binary call option on Orange Company for $200 with a final pay-off of $2,000. The call option implies that the value of the asset was above $200 at the end of the agreed investment period.

If the investment rose above $200, Mr. Jones will receive a pay-off of $2,000. If the investment fell below $200, the investor loses all his money. At the end of the time period, the shares final price went up to $210, entitling Mr. Jones to $2,000 in cash.

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What Does Drawdown Mean?

This method is commonly used to manage investment’s risks in terms of money and also time. The magnitude (how low the price gets) and the duration (how long a drawdown lasts) are two specific factors that define this metric. Investors usually calculate the time a security spends on recovering to its previous high.

The time–under–water term is also employed to identify how long it took the security to reach the amount of its previous peak. The highest value achieved will be the peak, so any subsequent balance below the peak will be part of the drawdown.

Also, there is a maximum drawdown or Max DD, which is related to the largest difference between the highest and lowest point of the variable involved without subsequent points.

Bankers use this concept slightly differently than investors. For banks, a gradual access to a line of credit is also known as a drawdown. Let’s look at an example.

Example

Charles is an experienced investor. He has been trading in the market for ten years and he has just opened a new account with $50,000. After a few days, he lost $5,000 due to a gradual decline in the price of several of his stocks. Nevertheless, he quickly recovered from this situation and his portfolio grew to $70,000.

Two months later his account went down to $55,000, but it recovered after a few weeks to $75,000. During this later stage, Charles experienced a drawdown of $15,000 ($70,000 – $55,000).

Further analysis of his account’s drawdown might reveal the actual risk profile of its portfolio.

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What does yield to maturity mean?

What is the definition of yield to maturity? The yield to maturity of a bond is the total annual return on the bond if it is held until the maturity date. When a bond is purchased, it can either be sold at a discount or at a premium.

Let’s take a look at an example of both.

Example

If a bond is sold at a discount, the sale price of the bond is actually lower than the face amount or the amount printed on the bond itself. For instance a $1,000 bond might only sell for $900. Conversely, if a bond is sold at a premium, the sale price of the bond is actually higher than the face value of the bond. In this case, a $1,000 might sell for $1,100.

So the YTM on a bond purchased at a discount would include the annual interest from the bond as well as the gain on the appreciation of the bond. Remember, a bond sold at a discount slowly appreciates over its life until the value of the bond equals the face amount. This appreciation is included in the YTM.

The YTM of a bond that is purchased at a premium is the opposite. Since the original purchase price was greater than the face amount, this bond will slowly depreciate (amortize) until the value is equal to face amount on the bond. So the YTM on a bond purchased at a premium includes the annual interest minus the loss from the bond decrease in value.

Summary Definition

Define Yield to Maturity: Yield to maturity represents the total return a bondholder will receive if he holds the investment until it matures. This is usually expressed in an annual rate like the internal rate of return.

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