Knall-Cohen Glossary

Long

Having a "Long" position on a security means that an individual is holding the security for a sustained period in hope for it to rise in value in the future

Short

Short selling is when a trader borrows shares from a broker and immediately sells them with the expectation that the stock price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the brokerage and keep the difference as profit. However, for the period that the trader is "borrowing" the shares, the trader must pay interest on the shares

Bull

A Bull market is one in which securities are on the rise for a sustained period

Bear

A Bear market is one in which securities are on the fall for a sustained period

Dovish

Dove refers to an economic policy adviser who advocates for monetary policies involving low-interest rates. The doves argue that inflation isn't bad and that it is bound to have few negative effects on the economy

Hawkish

Hawks are policymakers and advisors who favor higher interest rates to keep inflation in check

Buy-side

The buy-side is a segment of financial markets made up of investing institutions that buy securities for money-management purposes

Sell-side

Sell-side refers to the part of the financial industry that is involved in the creation, promotion, and sale of stocks, bonds, foreign exchange, and other financial instruments. Sell-side individuals and firms work to create and service products that are made available to the buy-side of the financial industry

Passive

Passive investing's goal is to build wealth gradually. Also known as a buy-and-hold strategy, passive investing means buying a security to own it long-term

Active

Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.

5 Asset Classes

Equities, Fixed Income, Currencies, Commodities, Derivatives

Equity

Commonly known as "Stocks", equities are ownership shares of a company

Fixed Income

Also known as "Bonds", These investments make income on a principal investment, with the principal returned at a specific future date.

Currencies

Standardization of money as a use of exchange

Commodities

Raw materials such as Oil, Wheat, or gold

Derivative Structures

Swaps (CDS, Interest Rate Swaps, Equity Swaps)

CDS

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period, such as six months, one year, or five years, and in exchange, the issuing bank pays interest.

Interest Rate Swaps

An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period. For example, one company may have a bond that pays the London Interbank Offered Rate (LIBOR), while the other party holds a bond that provides a fixed payment of 5%

Equity Swaps

An equity swap is an exchange of future cash flows between two parties that allows each party to diversify its income for a specified period while still holding its original assets. An example would be if a client (one party) is paying interest (LIBOR), whereas the bank (another party) is agreeing to pay the return on the S&P 500 index. The outcome of this swap is that the client is in a position of having effectively borrowed money to invest in the securities of the S&P 500 index

Reops

A repurchase agreement (repo) is a short-term secured loan: one party sells securities to another and agrees to repurchase those securities later at a higher price

Forward/Futures

Futures/Forwards contracts involve the agreement to buy or sell a commodity at a set price in the future.

Types of Options

Options (Calls and Puts)

Calls

A call is an option contract giving the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time. A call option buyer stands to make a profit if the underlying asset, let's say a stock, rises above the strike price before expiry

Puts

A put option is the right to sell the underlying stock at a predetermined price until a fixed expiry date. A put option buyer makes a profit if the price falls below the strike price before the expiration.

Securitized Products

(MBS, CLO, CMO, ABS, CDO)

MBS

A mortgage-backed security (MBS) is a type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy

CLO

A collateralized loan obligation (CLO) is a single security backed by a pool of debt. CLOs are often corporate loans with low credit ratings or loans taken out by private equity firms to conduct leveraged buyouts

CMO

A collateralized mortgage obligation (CMO) refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. Organized by maturity and level of risk, CMOs receive cash flows as borrowers repay the mortgages that act as collateral on these securities

ABS

An asset-backed security (ABS) is a type of financial investment that is collateralized by an underlying pool of assets—usually ones that generate a cash flow from debt, such as loans, leases, credit card balances, or receivables. It takes the form of a bond or note, paying income at a fixed rate for a set amount of time, until maturity

CDO

A Collateralized debt obligation (CDO) is a financial tool that bundles individual loans (e.g., mortgages, auto loans, credit card debt, corporate debt) into a product that can be sold on the secondary market. The product is called an "asset-backed security" if the loans are corporate debt and "mortgage-backed security" if they are mortgages

Fixed Income Duration

Used to manage the risk exposure of fixed income investments. Duration measures the bond's sensitivity to interest rate changes

Fixed Income Convexity

Used to manage the risk exposure of fixed income investments. Convexity relates to the interaction between a bond's price and its yield as it experiences changes in interest rates

Nominal Rates

A nominal interest rate refers to the interest rate before taking inflation into account

Real Interest Rates

A real interest rate is adjusted to remove the effects of inflation and reflects the real cost of funds to the borrower and the real yield to the lender or to an investor

Basis Point

A unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

Investment Grade Bonds

(Rating BBB- and above) These bonds are known as Investment grade bonds and are considered reliable. Because these bonds are more reliable and less risky, they have a lower yield.

Non-Investment Grade Bonds

These bonds are sometimes referred to as junk bonds because of their high risk. However, with high risk comes a higher yield. (BB+ and Below)

Distressed Debt

Distressed Debt refers to bonds bought from companies that are either in bankruptcy or on the verge of it. These companies simply have too much debt to continue operating, which is a major cause of failure for many businesses

Municipal Debt

Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems

Leveraged Loan (Broadly Syndicated, Middle Market)

Broadly syndicated loans are floating rate loans made to corporate borrowers that generally have greater than $50 million in EBITDA (in most cases, at least $100 million). They are senior in the capital structure and have a first claim on the assets of the borrower

5 C's of Credit

Character, capacity, capital, collateral, and conditions

Treasuries

Treasury bills (or T-bills) are short-term securities that mature in one year or less from their issue date. T-bills are purchased for a price less than or equal to their par (face) value, and when they mature, Treasury pays their par value. T-bills are issued by the US government which makes them one of the safest investments.

Other countries debt

Other countries raise debt much like the US through borrowing to enable them to spend more than their revenue generated

FNMA

The Federal National Mortgage Association, commonly known as Fannie Mae, is a United States government-sponsored enterprise and, since 1968, a publicly traded company. Fannie Mae provides liquidity to the single-family market by purchasing and guaranteeing mortgage loans made by lenders and issuing debt securities and mortgage-backed securities that attract global investors to finance U.S. housing

FHLMC

The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise. The role of Freddie Mac is to buy many loans from mortgage lenders, then combine them and sell them as mortgage-backed securities

SLM

SLM Corporation, also known as Sallie Mae, is a publicly traded financial services company specializing in education, whose operations include originating and servicing student loans

GNMA

Ginnie Mae, or the Government National Mortgage Association (GNMA), is a government agency that guarantees timely payments on mortgage-backed securities (MBS). In doing this, Ginnie Mae works with other government agencies to make affordable housing widely available through mortgage loans

Syndication

Loan syndication refers to a group of lenders who collaborate to provide a single (usually large) loan to a borrower

Underwriting

Underwriting simply means that your lender verifies your income, assets, debt and property details in order to issue final approval for your loan. An underwriter is a financial expert who looks at your finances and assesses how much risk a lender will take on if they decide to give you a loan

Sectors

Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Information Technology, Financials, Healthcare, Utilities, Telecom, Real Estate

Energy

The energy sector covers the companies that explore, produce, refine, market, store, and transport oil and gas, coal, and other consumable fuels. Companies offering oil and gas equipment are also considered part of the energy sector

Materials

The Materials Sector encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel

Industrials

The Industrials Sector includes companies whose businesses are dominated by one of the following activities: The manufacture and distribution of capital goods, including aerospace & defense, construction, engineering & building products, electrical equipment, and industrial machinery

Consumer Discretionary

Cars, household appliances, specialty items, luxury, and leisure are all considered part of the consumer discretionary sector

Consumer Staples

The term consumer staples refers to a set of essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco

Information Technology

The Information Technology Sector covers Technology Software & Services, including companies that primarily develop software, and Technology Hardware & Equipment, including manufacturers and distributors of communications equipment

Financials

The financial sector is a section of the economy made up of firms and institutions that provide financial services to commercial and retail customers. This sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms

Healthcare

The healthcare sector consists of businesses that provide medical services, manufacture medical equipment or drugs, provide medical insurance, or otherwise facilitate the provision of healthcare to patients

Utilities

The Utilities sector comprises of the following utility services: electric power, natural gas, steam supply, water supply, and sewage removal

Telecommunications

The Telecommunications sector is primarily engaged in operating, and/or providing access to facilities for the transmission of voice, data, text, sound, and video. Transmission facilities may be based on a single technology or a combination of technologies

Real Estate

The main segments of the real estate sector are residential real estate, commercial real estate, and industrial real estate

FNMA (Federal National Mortgage Association)

They loaded up on subprime, interest-only, or negative amortization mortgages (High risk loans from low-income housing owners)—loans more typical of banks and unregulated mortgage brokers and then when the financial crisis hit, the low-income owners were unable to pay back their mortgages and Fannie Mae and Freddie Mac lost tons of money. Because of all of this, the government had to take over Fannie Mae and Freddie Mac.

FHLMC (Federal Home Loan Mortgage Corporation)

They loaded up on subprime, interest-only, or negative amortization mortgages (High risk loans from low-income housing owners)—loans more typical of banks and unregulated mortgage brokers and then when the financial crisis hit, the low-income owners were unable to pay back their mortgages and Fannie Mae and Freddie Mac lost tons of money. Because of all of this, the government had to take over Fannie Mae and Freddie Mac.

SLM (Sallie Mae)

After the recession of 2008, student loan debt greatly increased, and less funding was given out to students

GNMA (Ginnie Mae)

As opposed to Fannie and Freddie, who served as purchasers of conventional loans, in the "secondary mortgage market," Ginnie only purchases government-backed loans (Because they are backed by the Fed). Being backed by the government greatly helped them and while Fannie and Freddie teetered on the brink of collapse in 2008, Ginnie quietly filled the void, providing housing opportunities to folks who would never have had the opportunity

MBS/CDO and Structured Securities

Securitization, specifically packaging debt instruments such as mortgages and other debt items are packaged into bond like instruments and then sold to buyers. This fueled the 2008 financial crisis by packaging bad debt and selling it to other buyers.

Role of CDS

The CDS was hit hard dropping to 26.3T in 2010 and 25.5T in 2012 due to high levels of default.

Role of SIFI and degree of interdependence of financial institutions

SIFI is the Systemically important financial institution which is based off how many deposits and how large a banks balance sheet is relative to others. From this, they are then placed into groups in which they are required to have liquidity values higher than other smaller banks to mitigate the risks of future financial downturns. (GSIB) This essentially puts greater limitations on banks that have more influence with larget balance sheets.

Volcker Rule

The Volcker rule is a federal regulation that prohibits banks from conducting certain investments with their own accounts and limits their dealings with hedge funds and PE funds, which are also called covered funds.

Dodd-Frank Act

Dodd-Frank Act was a law passed in 2012 in response to the r 200 crisis and established regulatory measures in the financial services industry. Dodd-Frank keeps consumers and the economy safe from risky behavior by insurance companies and banks.

Market Microstructure

Decimalization, Bid-Ask Dynamic, Market Making, Floating vs Fixed Rates, Ways to quote debt instruments (yield vs spread)

Decimalization

Decimalization is a price quoting system where security prices are represented using decimals instead of fractions. This is an example of a decimal trading quote: $25.75; this same quote under a fractional quote system would be $25 ¾. (Stock prices used to be listed as fractions and now they are decimals).

Bid-Ask Dynamic

The difference between the buyer's and seller's prices—or what the buyer is willing to pay for something versus what the seller is willing to get in order to sell it.

Market Making

A market maker is an individual participant or member firm of an exchange that buys and sells securities for its own account. Market makers provide the market with liquidity and depth while profiting from the difference in the bid-ask spread

Floating

A floating interest rate is one that changes periodically, as opposed to a fixed (or unchanging) interest rate. Floating rates are carried by credit card companies and commonly seen with mortgages. Floating rates follow the market or track an index or another benchmark interest rate

Fixed

A fixed interest rate is an unchanging rate charged on a liability, such as a loan or mortgage. It might apply during the entire term of the loan or for just part of the term, but it remains the same throughout a set period

Yield

The amount of interest that a bond pays as a percentage of its price

Spread

The amount of interest that a bond pays over Treasuries (also known as the risk-free rate, because the U.S. government isn't at risk of default as some companies are)

Spread vs. Commission-based compensation

Whilst you will have access to very tight spreads, you only pay spreads once per round trip while commissions are charged for both entry and exit.

Spread

A bank sends a buy price, the broker then sends back a price in which the broker spreads between the buy and sell prices in the market so the broker is able to obtain a profit via spread compensation for work done.

Commission

Commission-based compensation is based off the amount of work completed; in a broker-dealer case, they may add a flat rate fee to every trade so they can profit off of their services provided.

Payment for order flow

Payment for order flow (PFOF) is a form of compensation, usually in terms of fractions of a penny per share, that a brokerage firm receives for directing orders for trade execution to a particular market maker or exchange

Liquidity

Liquidity generally refers to how easily or quickly a security can be bought or sold in a secondary market. Liquid investments can be sold readily and without paying a hefty fee to get money when it is needed

Order depth

The robustness of an order book, itself a record of buy and sell orders that are waiting to be placed

Volume

Volume refers to the number of contracts traded in a given period

Open interest

Open interest denotes the number of contracts that are active, or not settled

Market Orders

A market order is an order to buy or sell a stock at the best available price

Limit Orders

A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher

Market Participants

Universal Banks, Commercial Banks, Investment Banks, Asset Management and Mutual Funds, Hedge Funds, Prime Brokers, Family Office, Private Banks, Treasury Services, Brokerage and Exchanges, Insurance Agencies, Private Equity, Pension Funds

Universal Banks

Universal banking combines the services of a commercial bank and an investment bank, providing all services from within one entity. The services can include deposit accounts, a variety of investment services, and may even provide insurance services

Commercial Banks

The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, credit creation is the most significant function of commercial banks

Investment banks

(bulge brackets, boutiques)

Bulge

The group of bulge bracket banks comprises the world's largest multi-national investment banks whose investment banking clients are usually large corporations, institutional investors, and governments

Boutiques

Boutique investment banks generally work on smaller deals involving middle-market companies, and usually assist on the sell or buy-side in mergers and acquisitions transactions. In addition, they often specialize in certain industries such as media, healthcare, industrials, technology, or energy

Asset management and Mutual Funds

Asset management firms pool investor money and provide a wide range of assets for them to put that capital to work. These firms often build and administer mutual funds, exchange traded funds (ETFs), provide access to bond markets, real estate, private equity and more

Hedge Fund

Hedge funds are actively managed investment pools whose managers use a wide range of strategies, often including buying with borrowed money and trading esoteric assets, in an effort to beat average investment returns for their clients

Long/Short

Long/short funds use an investment strategy that seeks to take a long position in underpriced stocks while selling short, overpriced shares. Long/short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both under-valued and over-valued

Global macro

A global macro strategy is a hedge fund or mutual fund strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles

Risk parity

Risk Parity is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. Risk Parity funds are classified by main volatility targets

Event-driven

Event-driven investing or Event-driven trading is a hedge fund investment strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as an earnings call, bankruptcy, merger, acquisition, or spinoff