Capital Market Line
A graph relating risk (as represented by the market portfolio’s beta) and the required return for the market portfolio. This is a positive, linear relationship that originates from the Capital Market Asset Pricing theory which states that all investors will own the market portfolio (as opposed to single securities). However, the amount of risk they will take on is positively correlated to expected return, where expected return = risk-free rate + portfolio beta * (the difference between the expected return on the market as a whole and the risk-free rate).
A brokerage account in which the customer is required by Regulation T to pay the full amount due by the settlement date for securities purchased; buying on margin and borrowed money are not permitted. also called special cash account. Some types of accounts, such as Individual Retirement Accounts and Custodian for Minor accounts, must be cash accounts.
A cash management technique employed by companies holding funds at financial institutions. Cash pooling allows companies to combine their credit and debit positions in various accounts into one account, and includes techniques like notional cash pooling and cash concentration. Notional cash pooling has the company combine the balances of several accounts in order to limit low balance or transaction fees. Cash concentration or zero balancing has the company physically combining various accounts into one single account.
An account which allows the holder to write checks against deposited funds. Checking accounts which pay interest are sometimes referred to as negotiable order of withdrawal (NOW) accounts. The interest rate often depends on how large the balance in the account is, and most charge a monthly service fee if the account balance falls below a preset level.
Chartered Financial Consultant. A financial planning designation for the insurance industry awarded by the American College of Bryn Mawr. ChFCs must meet experience requirements and pass exams covering finance and investing. They must have at least three years of experience in the financial industry, and have studied and passed an examination on the fundamentals of financial planning, including income tax, insurance, investment and estate planning.
Chicago Mercantile Exchange
CME. An exchange where financial futures, foreign currency futures, commodity futures, and futures options are traded. also called Merc.
An organization which works with the exchanges to handle confirmation, delivery and settlement of transactions. Such corporations play a key role in ensuring that executed trades are settled within a specified period of time and in an efficient manner. also called clearing corporation or clearing house.
Closed-End Investment Company
A fund with a fixed number of shares outstanding, and one which does not redeem shares the way a typical mutual fund does. Closed-end investment companies behave more like stock than open-end funds: closed-end investment companies issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange, and they are not obligated to issue new shares or redeem outstanding shares as open-end funds are. The price of a share in a closed-end investment company is determined entirely by market demand, so shares can either trade below their net asset value (“at a discount”) or above it (“at a premium”). also called closed-end fund or publicly-traded fund.
A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn’t know what the selling price will be.
The state of being in accordance with the relevant Federal or regional authorities and their requirements. In the context of financial services, the most important compliance rules come from the Securities and Exchange Commission. Most large financial services companies have compliance teams whose role is to take an independent stance in making sure that the company is following all the necessary rules and regulations.
The combining of separate companies, functional areas, or product lines, into a single one. Differs from a merger in that a new entity is created in the consolidation.
The process of maturation in some markets whereby smaller companies are acquired or run out of business, leaving only a few dominant players; here also called shakeout.
An order that is executed only if one or more specified conditions are met. Possible conditions may include the price of another security or the completion of another order. Brokerages do not have to accept contingency orders, but some do.
The selling of a call option while simultaneously holding an equivalent position in the underlier. This is an attempt to take advantage of a neutral or declining stock. If the option expires unexercised, the writer keeps the premium. If the holder exercises the option, the stock must be delivered, but, because the writer already owns the stock, risk is limited. This is the opposite of an uncovered call, when the writer sells a call for a stock that he/she does not already own, a dangerous strategy with unlimited risk.
A report containing detailed information on a person’s credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her creditworthiness.
A measure of credit risk calculated from a credit report using a standardized formula. Factors that can damage a credit score include late payments, absence of credit references, and unfavorable credit card use. Lenders may use a credit score to determine whether to provide a loan and what rate to charge.
The ability to exchange money for gold or other currencies. Some governments which do not have large reserves of hard currency foreign reserves try to restrict currency convertibility, since they are not in a position to handle large currency market operations to support their currency when necessary.
The risk that a business’ operations or an investment’s value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments. also called exchange rate risk.
A nine-character number that uniquely identifies a particular security. CUSIP is an acronym for the Committee on Uniform Securities and Identification Procedures, the standards body which created and maintains the classification system. Foreign securities have a similar number, called the CINS number.