Financial Glossary a-b

GLOSSARY OF FINANCIAL & INVESTMENT TERMS

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3(c)(7) Fund	A hedge fund that accepts only “superaccredited” investors—i.e., institutional (or VERY high net worth) investors. This restriction enables a 3(c)(7) fund to accept up to 499 investors and still be exempt from the need to file with the SEC as an investment company under the 1940 Act.
Accredited Investor	Security regulations limit participation in certain risky or unregulated investments to what are referred to as sophisticated or accredited investors. These generally include institutional investors like corporations, endowment funds, labor unions or retirement plans and wealthy individuals who either have a net worth of at least $1,000,000 or have made at least $200,000 ($300,000 for a married couple) each year for the last two years.
Alpha	A measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive Alpha figure indicates the portfolio has performed better than its Beta would predict. A negative Alpha indicates that the portfolio has underperformed, given the expectations established by the portfolio’s Beta.
Annuity	An annuity contract is an agreement between an individual—who agrees to make one or more payments (premiums)—and an insurance company—who in turn agrees to invest the premiums and provide the individual with a stream of income payments (annuity distributions) at a specified time. Because an annuity is an insurance contract, any interest or investment return the premiums earn is tax deferred until withdrawn or distributed.
Arbitrage Strategies	Actions that attempt to exploit temporary price discrepancies between securities by buying the cheaper one and selling short the more expensive one. Investment managers use historical relationships between instruments in different markets to predict future trends of movements in price. An example of risk arbitrage is the purchase of equity instruments from a company that is to be acquired by another, and offsetting this with a short sale of the equity instruments of the acquiring company.
Asset Class	A broadly defined group of securities that have similar risk and return characteristics. The universe of investable securities is often divided into the following categories (or asset classes): domestic equities; international equities; domestic fixed income; global fixed income; real estate; venture capital; alternative investments/special situations; and cash & equivalents.
Bear Market	The origin of the phrase lies in the way this animal attacks its adversaries. A bear pulls its prey down to the ground. Thus, a "bear market" is one that is following a downward trend: relatively few investors are interested in buying stocks, and stock prices remain flat or decline without many bids to drive the market upwards. A bear market generally means that investors feel cautious or believe that economic problems lie ahead
Benchmark	A standard by which investment performance can be judged. For example, a widely used equity performance benchmark is the total return of the S&P500. Every asset class or style of investing generally has some type of benchmark that can be used to evaluate risk, return, and other relevant investment characteristics.
Beta	A measure of a portfolio’s sensitivity to market movements. By definition, the beta of the benchmark index is 1.00. A portfolio with a 1.50 beta can be expected to perform 50% better than the index in a rising market, and 50% worse in a down market environment.
Blue Chip Stocks	Stocks issued by large companies are called blue chip stocks. Because the companies are well established, with somewhat predictable earnings, their stock prices tend to fluctuate less than other equities and thus have relatively stable prices. These companies often pay steady dividends, giving the investor income in addition to the potential for capital appreciation. Dividends often increase with growth in company earnings.
Bond Ratings	See Credit Ratings
Bonds	Fixed income investments, more commonly referred to as bonds, are IOUs issued by businesses and public entities to investors who provide the funds needed to finance major expenditures to keep their organizations operating effectively. Under a bond agreement, an investor agrees to loan an amount of money, typically referred to as the principal, to a borrower. The borrower, in turn, agrees to pay the investor interest on the principal and to return the principal at an agreed upon future maturity, an agreed upon date in the future.
Bull Market	The origin of the phrase lies in the way this animal attacks its adversaries. A bull tosses its prey up into the air and the bear pulling it down to the ground. Thus, a "bull market" is a stock market that is in an upswing. During a bullish phase, the prices of most (though not necessarily all) individual stocks rise. The S&P 500 rises with them. Trading volumes are likely to be heavy. The action of many investors buying stocks pushes overall prices up. Bull markets are usually a signal of investor optimism about the country's economy and the performance of its corporations.
Buyout	Buyouts involve the purchase of a controlling interest in the stock of a mature company by investors who believe they can create value by making changes in the company’s management or financing. In leveraged buyouts, the acquisition is often financed with a significant amount of money borrowed by the company.