Investor Dictionary

Accredited Investor – must have an individual net worth or a joint net worth in excess of $1,000,000, or an individual income in excess of $200,000 or a joint income in excess of $300,000 in each of the 2 previous calendar years.

Alpha – the premium an investment portfolio earns above a certain benchmark (such as Standard and Poor’s 500).  A positive alpha indicates the investor earned a premium over the index used for comparison.     

Annualized Return – usually quoted as a percentage, the gain or loss in value of an investment over a twelve-monthly period.

Average Annual Total Return – the amount of profits an investment yields (through dividends, interest or other means) combined with that investment’s gain or loss in value, averaged over a given number of years.

Beta – a measure of risk; the higher the beta, the higher the risk.  Beta represents the average percentage change in the price of a stock compared to the percentage change of the market index.

Buy-Write (also called Covered Calls and Covered Writing) – the process of simultaneously buying stock and selling (or writing) call options.  The buy-writer sells to the purchaser all of the profit potential of the underlying instrument above the exercise price of the option.  

Correlation Risk – the potential for a hedging instrument to fail to deliver its objective, as when an individual stock or a market index is hedged by a similar, though not identical, stock or index.

Call Option – a financial instrument that provides the purchaser the right (but not the obligation) to buy a stated number of shares of a given company or index at an agreed-upon price on or before a specific date.  

Cumulative Return – the rate of return that has compounded for more than one year.

Fair Market Value –  the amount at which the buyer and seller, both with all available information, decide to complete a transaction, with neither having any leverage over the other, and with neither exerting any unfair influence upon the other.

Feeder Fund – a fund that conducts virtually all of its investing through another fund called the master fund. This is similar to a fund-of-funds arrangement, except that the master fund manager is responsible for managing the underlying investments.

Hedge – the purchase or sale of a security to reduce the risk of adverse price movements in another, related security.

Implied Volatility – one of several components that determines an option’s price (also called  “premium”). Implied volatility is determined by the market price based on the expected range of price movement of the underlying stock or index.

Index – a statistical composite that tracks changes in the economy or in the financial market.

Listed Option – a put or call option that a particular securities exchange has approved for trading.

Long Position – an investor achieves a long position through buying a security based on the expectation of an expected price increase.

Mid-cap Equities – stock or any other security representing an ownership interest in a company with a market capitalization between $2 and $10 billion, which is calculated by multiplying the number of a company's shares outstanding by its stock price.

Option Premium – the price that is paid to the seller (or “writer”) of the option for the right to exercise that option.

Overvalued – describes a security with a current market price that is too high (considering the company’s earnings, history, and price-earnings ration). A security that is overvalued will probably drop in price.

Premium – the Price a buyer will pay to a seller for an options contract. The premium is determined by supply and demand forces.

Put Option – a financial instrument that provides the purchaser the right (but not the obligation) to sell a stated number of shares of a given company or index at an agreed-upon price on or before a specific date.        

Qualified Purchaser – under Section 3(c)(7) of the 1940 act a Qualified Purchaser must own not less than $5,000,000 in investments, including investments held jointly with his or her spouse.

Security – an instrument representing ownership (stocks), a debt agreement (bonds), or the rights to ownership (derivatives).  A security is essentially a contract that can be assigned a value and traded.

Sharpe Ratio – a ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe Ratio tells whether the returns of a portfolio are due to smart investment decisions or a result of excess risk.

Short Position – an investor’s situation after selling (shorting) a security.  

Spread – the difference between bid price and asking price.

Standard Deviation – a measure of the degree to which an individual probability value varies from the distribution mean.  The higher the number, the greater the risk. For example a volatile stock would have high standard deviation a less volatile stock would have lower standard deviation.  

Undervalued – occurs when a security’s price is lower than its liquidation price or the market value placed on it by analysts an undervalued stock justifies a higher market price and price/earnings ratio.

Value Investing – the strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.