INVESTMENT TERMS & CONCEPTS

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35 terms available

Active Management

Investment Strategy Beginner
Investment approach involving frequent trading to outperform benchmarks
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Detailed Explanation

Investment approach involving frequent trading to outperform benchmarks.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with active management as part of their financial education.

Understanding active management helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

ADRs

General Finance Beginner
ADRs, or American Depositary Receipts, are securities designed to simplify the process of investing in foreign securities. They are generally issued through a partnership with a custodian bank, which operates in the United States and issues the ADR, and a depository bank, which holds shares of the underlying company in trust within its country of origin.
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Detailed Explanation

ADRs, or American Depositary Receipts, are securities designed to simplify the process of investing in foreign securities. They are generally issued through a partnership with a custodian bank, which operates in the United States and issues the ADR, and a depository bank, which holds shares of the underlying company in trust within its country of origin. Though these facilitate access to overseas investments, they also come with associated fees and may not be formally affiliated with the underlying company. We carefully consider the risks and benefits of such investments when designing investment strategies.

Asset Allocation

Investment Strategy Beginner
Strategic distribution of investments across asset classes
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Detailed Explanation

Strategic distribution of investments across asset classes.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with asset allocation as part of their financial education.

Understanding asset allocation helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Beta

Analysis & Research Beginner
Measure of a security's volatility relative to the market
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Detailed Explanation

Measure of a security's volatility relative to the market.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with beta as part of their financial education.

Understanding beta helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Bond Duration

Financial Instruments Beginner
Sensitivity of bond prices to interest rate changes
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Detailed Explanation

Sensitivity of bond prices to interest rate changes.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with bond duration as part of their financial education.

Understanding bond duration helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Capital Preservation

Investment Strategy Beginner
Investment strategy focused on protecting principal
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Detailed Explanation

Investment strategy focused on protecting principal.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with capital preservation as part of their financial education.

Understanding capital preservation helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Catastrophic Risk

General Finance Beginner
Natural or man-made catastrophes can disrupt financial markets and impact securities prices. Examples include terrorist attacks, natural disasters, war, and so forth. Investment companies can use "exigent circumstances" or "force majeure" as a defense against claims of loss by investors.
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Detailed Explanation

Natural or man-made catastrophes can disrupt financial markets and impact securities prices. Examples include terrorist attacks, natural disasters, war, and so forth. Investment companies can use "exigent circumstances" or "force majeure" as a defense against claims of loss by investors.

Company Risk

General Finance Beginner
When investing in securities, such as stocks, there is always a certain level of company or industry-specific risk that is inherent to each company or issuer. 
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Detailed Explanation

When investing in securities, such as stocks, there is always a certain level of company or industry-specific risk that is inherent to each company or issuer.  These include the risk that the company will perform poorly or have its value reduced based on factors specific to the company or its industry. This is also referred to as unsystematic risk and can be reduced or mitigated through diversification. To learn more about the role of diversification in investment strategies, click here.

Correlation

Analysis & Research Beginner
Statistical measure of how investments move together
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Detailed Explanation

Statistical measure of how investments move together.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with correlation as part of their financial education.

Understanding correlation helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Currency Risk

General Finance Beginner
The risk of loss from fluctuating foreign exchange rates when a portfolio has exposure to foreign currency or in foreign currency traded investments.
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Detailed Explanation

The risk of loss from fluctuating foreign exchange rates when a portfolio has exposure to foreign currency or in foreign currency traded investments.

Data Sources

General Finance Beginner
Most investment firms rely on commercially available software or services to design and implement their investment strategies. Over-reliance on these vendors can lead to risks, as a firm is relying on the accuracy and validity of the information or capabilities provided by selected vendors, rating services, market data, and the issuers themselves.
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Detailed Explanation

Most investment firms rely on commercially available software or services to design and implement their investment strategies. Over-reliance on these vendors can lead to risks, as a firm is relying on the accuracy and validity of the information or capabilities provided by selected vendors, rating services, market data, and the issuers themselves. As described in our process, the investment strategies managed by Ethical Capital are primarily based on internal research. This may reduce the risk of receiving incomplete information from third parties, but also comes with the risk that our own research processes will miss key factors, which may lead to worse investment outcomes. Our philosophy on this is described in this essay.

Dividend Yield

Analysis & Research Beginner
Annual dividends as percentage of stock price
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Detailed Explanation

Annual dividends as percentage of stock price.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with dividend yield as part of their financial education.

Understanding dividend yield helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Dollar Cost Averaging

Investment Strategy Beginner
Investing fixed amounts at regular intervals
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Detailed Explanation

Investing fixed amounts at regular intervals.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with dollar cost averaging as part of their financial education.

Understanding dollar cost averaging helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Equity (Stock) Risk

General Finance Beginner
Stocks are susceptible to general market fluctuations, which may include volatile increases or decreases in value as market confidence in and perceptions of their issuers change. 
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Detailed Explanation

Stocks are susceptible to general market fluctuations, which may include volatile increases or decreases in value as market confidence in and perceptions of their issuers change.  If an investor held common stock or common stock equivalents of any given issuer, these instruments may be exposed to greater risk than if the investor held preferred stocks and debt obligations of the issuer. Preferred stocks can be affected by interest rate and liquidity risks (described in adjacent glossary entries). Also note that preferred stock dividend payments are not guaranteed; some are subject to a call provision, meaning the issuer can redeem its preferred shares on demand, and usually when interest rates have fallen.

ESG Investing

Investment Strategy Beginner
Environmental, social, governance focused investing
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Detailed Explanation

Environmental, social, governance focused investing.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with esg investing as part of their financial education.

Understanding esg investing helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

ESG Risk

General Finance Beginner
Our portfolio construction methods are predicated on our ability to make accurate assessments of whether a company’s practices are aligned with the ethical principles that we use to determine our investable universe. Such determinations are necessarily based on the use of nonfinancial, nonstandardized, and unstructured data which is prone to gaps in coverage, inconsistent calculation methods, and “greenwashing” by company management.
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Detailed Explanation

Our portfolio construction methods are predicated on our ability to make accurate assessments of whether a company’s practices are aligned with the ethical principles that we use to determine our investable universe. Such determinations are necessarily based on the use of nonfinancial, nonstandardized, and unstructured data which is prone to gaps in coverage, inconsistent calculation methods, and “greenwashing” by company management. As a result, our techniques, analyses, and assessments may miss material ethical issues, leading the portfolio to temporarily hold securities that are inconsistent with established ethical criteria. We may also inaccurately exclude a security from our investable universe based on these incomplete or inaccurate data, which may lead to overlooking a potentially attractive investment opportunity which would have been permissible under our ethical covenant. Additionally, the composition of an ESG focused portfolio could differ significantly from its index in terms of sector composition, company weightings, and industry exposure. This could cause the portfolio to underperform portfolios that are not constructed with a similar focus.

ETFs/ETNs

General Finance Beginner
Exchange-traded funds and exchange-traded note risks include risks due to their underlying securities (e.g., stocks, bonds, derivatives, etc.), and can be affected by risks such as market, currency, credit, political, interest rate, etc., that are described in other glossary entry.
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Detailed Explanation

Exchange-traded funds and exchange-traded note risks include risks due to their underlying securities (e.g., stocks, bonds, derivatives, etc.), and can be affected by risks such as market, currency, credit, political, interest rate, etc., that are described in other glossary entry. The liquidity of the underlying stocks in the index can affect their liquidity. Liquidity risk can result from an insufficient number of “active participants” performing their duties as intermediaries and liquidity providers in the market. “Spread risk” may also occur, which is the difference between the bid and the ask price of a security. Since ETF/ETN transactions are priced throughout the day and are traded on the exchanges like stocks, widening spreads may occur and have an impact on certain portfolios or transactions. As with any security, if the ETF/ETN “fails,” the investor may lose their gains and invested principal. ETFs and ETNs can carry additional expenses based on their share of operating expenses and certain brokerage fees. Some ETFs and ETNs have the potential to be affected by “active risk;” a deviation from its stated index.

Expense Ratio

General Finance Beginner
Annual fee charged by funds as percentage of assets
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Detailed Explanation

Annual fee charged by funds as percentage of assets.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with expense ratio as part of their financial education.

Understanding expense ratio helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Fiduciary Duty

General Finance Beginner
Legal obligation to act in client's best interest
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Detailed Explanation

Legal obligation to act in client's best interest.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with fiduciary duty as part of their financial education.

Understanding fiduciary duty helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Financial Risk

General Finance Beginner
Excessive borrowing to finance a business operation increases profitability risk because the company must meet the terms of its obligations in good times and bad. 
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Detailed Explanation

Excessive borrowing to finance a business operation increases profitability risk because the company must meet the terms of its obligations in good times and bad.  This activity can also be defined as “leverage” (or leverage risk). During periods of financial stress, the inability to meet loan obligations can result in bankruptcy and/or a declining market value.

Foreign Securities Risk

General Finance Beginner
Investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends
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Detailed Explanation

Investments in securities of foreign companies (including direct investments as well as investments through ADRs) can be more volatile than investments in U.S. companies. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign companies. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from these securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Financial statements of foreign issuers are governed by different accounting, auditing, and financial reporting standards than the financial statements of U.S. issuers and may be less transparent and uniform than in the United States. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. Transaction costs generally are higher than those in the United States and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising an account’s portfolio.

Fundamental Analysis

General Finance Beginner
Fundamental analysis involves scrutinizing company filings and financial performance to derive insights about the health of a business and the future prospects of the securities it issues, like stocks and bonds.  
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Detailed Explanation

Fundamental analysis involves scrutinizing company filings and financial performance to derive insights about the health of a business and the future prospects of the securities it issues, like stocks and bonds.   The challenge involving fundamental analysis is that information obtained may be incorrect; the analysis may not provide an accurate estimate of earnings, which may be the basis for a security’s value. If analytical processes are informed by incorrect information, a fundamental analysis may result in unfavorable performance.

Growth Investing

Investment Strategy Beginner
Strategy focusing on companies with high growth potential
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Detailed Explanation

Strategy focusing on companies with high growth potential.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with growth investing as part of their financial education.

Understanding growth investing helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Hedge

Risk Management Beginner
Investment to reduce risk of adverse price movements
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Detailed Explanation

Investment to reduce risk of adverse price movements.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with hedge as part of their financial education.

Understanding hedge helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Index Investing

Investment Strategy Beginner
Passive strategy tracking market indices
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Detailed Explanation

Passive strategy tracking market indices.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with index investing as part of their financial education.

Understanding index investing helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Market Capitalization

Analysis & Research Beginner
Total value of company's outstanding shares
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Detailed Explanation

Total value of company's outstanding shares.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with market capitalization as part of their financial education.

Understanding market capitalization helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Modern Portfolio Theory

Analysis & Research Beginner
Framework for building optimal portfolios
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Detailed Explanation

Framework for building optimal portfolios.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with modern portfolio theory as part of their financial education.

Understanding modern portfolio theory helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Rebalancing

Investment Strategy Beginner
Adjusting portfolio to maintain target allocation
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Detailed Explanation

Adjusting portfolio to maintain target allocation.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with rebalancing as part of their financial education.

Understanding rebalancing helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Risk Tolerance

Risk Management Beginner
Investor's ability to handle investment volatility
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Detailed Explanation

Investor's ability to handle investment volatility.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with risk tolerance as part of their financial education.

Understanding risk tolerance helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Sharpe Ratio

Analysis & Research Beginner
Risk-adjusted return measurement
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Detailed Explanation

Risk-adjusted return measurement.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with sharpe ratio as part of their financial education.

Understanding sharpe ratio helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Tax Loss Harvesting

Investment Strategy Beginner
Selling losses to offset capital gains
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Detailed Explanation

Selling losses to offset capital gains.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with tax loss harvesting as part of their financial education.

Understanding tax loss harvesting helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Value Investing

Investment Strategy Beginner
Strategy seeking undervalued securities
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Detailed Explanation

Strategy seeking undervalued securities.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with value investing as part of their financial education.

Understanding value investing helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Volatility

Risk Management Beginner
Degree of price fluctuation in investments
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Detailed Explanation

Degree of price fluctuation in investments.

This concept is fundamental to understanding modern investment management and portfolio construction. Investors should familiarize themselves with volatility as part of their financial education.

Understanding volatility helps investors make more informed decisions and better manage their portfolios in alignment with their financial goals and risk tolerance.

Yield Curve

Markets & Trading Intermediate
Graph of bond yields across maturities
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Detailed Explanation

The yield curve illustrates the different yields investors can earn for investing in bonds at different maturities.

Resources like ustreasuryyieldcurve.com illustrate the entire curve, while professionals more commonly use "spreads" like this series from FRED which relate specific points on the yeild curve to each other, to visualize changes in the relationship between short and long term interest rates over time.

Related Terms

Bonds, Fixed Income, Term Premium,

Zero-Coupon Bond

Financial Instruments Beginner
Bond sold at discount with no periodic interest
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Detailed Explanation

Bond sold at discount with no periodic interest.