The language of investing used to be fairly simple. A limited vocabulary of investing terms gave you enough understanding to successfully navigate the markets.
Those days are gone.
Things like 24-hour media coverage and analysis, computer-driven trading systems that affect prices within minutes of breaking news, complicated macroeconomic issues, and sophisticated investment products have created an increasingly complex market environment.
This means investors must understand a variety of sometimes strange or seemingly unrelated terms if they hope to prosper - or, at the least, hold their own - in these treacherous economic times.
Failing to become familiar with these investing terms could damage to your portfolio.
The following 11 investing terms have become commonplace in today's market and economy. Study these and you'll have a much better chance of not just surviving, but profiting:
Volatility measures the range of potential returns for a specific security or market index over a given period of time. It reflects the degree of risk surrounding how much a stock's price could move. Highly volatile stocks can change value significantly in either direction in very little time, while one with low volatility probably won't fluctuate much in the short term, instead changing gradually (i.e., trending) over time. Past price patterns are used to calculate the likely amount returns will rise or fall - their expected "variance" from the norm.
But when recovery is weak - like we're seeing now - there's a higher chance that after a limited period of expansion the economy will again turn down. In other words, a dip, followed by a small bounce, followed by another dip - a "double dip."
The U.S. government has employed many of these moves over the past few years, like the $787 billion American Recovery and Reinvestment Act of 2009 and U.S. President Barack Obama's recently proposed $447 billion jobs plan.
Bernanke said rolling maturing Treasuries into longer-term debt securities would lower the Fed funds rate by 50 basis points and drop long-term rates by 20 basis points. Interest rates were already so low that reducing them further to boost the economy was essentially impossible, so the Fed needed an alternative - but market consensus is that the move will do more long-term economic harm than good.
The debt ceiling originally served as a means of supporting the value of U.S. Treasury debt securities - i.e., T-bonds, T-notes and T-bills - to make them more attractive to both domestic and foreign investors. The government should not spend more than where the debt ceiling is pegged, but since it was originally set it's been repeatedly increased, most recently in August.
In a last-minute compromise to prevent a government default, Congress approved a short-term debt-ceiling increase of $400 billion (from $14.3 trillion to $14.7 trillion), pending longer-term negotiations on debt-reduction measures. Congress hoped the move would prevent a credit-rating downgrade by rating service Standard and Poor's, but U.S. debt was still lowered to AA+ from AAA.
As the name implies, "real unemployment" is often higher than a country's reported unemployment rate. The U.S. official unemployment rate determined by the U.S. Department of Labor is currently 9.1%, but it masks the economy's true weakness because the real unemployment rate is estimated to be at least 16.7%.
However, as we've learned from Europe's ongoing debt crisis, that's not always the case. Poor economic policies and overspending can threaten the solvency of even long-standing nations and governments, like Greece.
Here's how they work: Credit-default swaps are designed to transfer the risk of debt instruments from one party to another. Investors buy CDS as a type of insurance to protect them if the issuer of a debt security fails to make promised payments, and defaults. Sellers of CDS collect a premium for ensuring the debt obligation will be fulfilled.
Complicated credit-default swaps related to pools of mortgage debt contributed to the housing market collapse in 2008. Now more investors are buying CDS against Greece and other Eurozone countries, betting that they will fail to meet payments and default on their debt.
With many companies recovering from the financial crisis but facing weak growth prospects, beware of those with low solvency. A number of businesses are on the verge of bankruptcy and you should avoid their stocks.
A trailing stop is a protective trading order designed to both limit risk and lock in profits on positions, most generally used in the stock market. The order features a "stop" price - either below the current market price for long positions or above it for short positions - used close the position should the market price hit that level.
The stop can be set either a fixed-dollar amount or a fixed percentage below (or above for shorts) the current market price. It is then adjusted upward as the price of the long security rises, or downward as the price of a short security falls, reducing your possible loss or locking in a greater portion of your profits. Trailing stops should never be lowered on long positions and never be raised on short positions.
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