Term of the day

[ROHAN KACHALIA]

TERM OF THE DAY

Discounted Cash Flow

DCF. A method of evaluating an investment by estimating future cash flows and taking into consideration the time value of money. also called capitalization of income.

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TERM OF THE DAY

UPTICK

A stock market transaction (or sometimes, a quote) at a price higher than the preceding one for the same security. also called plus tick.

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TERM OF THE DAY

COST OF CAPITAL

The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock.

[ROHAN KACHALIA]

TERM OF THE DAY

CIRCUIT BREAKER


Any of a number of procedures implemented by a major stock or commodity exchange when a certain index falls a predetermined amount in a session, to prevent further losses. Examples include trading halts and restrictions on program trading.

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TERM OF THE DAY

MARKET CAPITALIZATION

MCAP. Market capitalization represents the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share. For example, if XYZ company has 15,000,000 shares outstanding and a share price of $20 per share then the market capitalization is 15,000,000 x $20 = $300,000,000. Generally, the U.S. market recognizes three market cap divisions: large cap (usually $5 billion and above), mid cap (usually $1 billion to $5 billion), and small cap (usually less than $1 billion), although the cutoffs between the categories are not precise or fixed. In our example above, XYZ would be considered a small cap company. also called market cap.

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TERM OF THE DAY

DIRECT QUOTE

A foreign exchange rate of one currency, usually the domestic currency, per unit of a different currency. In terms of U.S. dollars, a direct quote is the number of a foreign currency that one dollar could buy. For example, a direct quote for the Euro could be US$1.50 = 1 Euro.

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TERM OF THE DAY

TICK

The smallest possible movement (up or down) in the price of a security. also called minimum fluctuation.

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TERM OF THE DAY

Operating Leverage

The percentage of fixed costs in a company's cost structure. Generally, the higher the operating leverage, the more a company's income is affected by fluctuation in sales volume. The higher income vs. sales ratio results from a smaller portion of variable costs, which means the company does not have to pay as much additional money for each unit produced or sold. The more significant the volume of sales, the more beneficial the investment in fixed costs becomes.

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TERM OF THE DAY

Reinvestment Risk

The risk resulting from the fact that interest or dividends earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. For example, falling interest rates may prevent bond coupon payments from earning the same rate of return as the original bond.

[ROHAN KACHALIA]

TERM OF THE DAY

Netting

The settlement of obligations between two parties that processes the combined value of transactions. It is designed to lower the number of transactions required. For example, if Bank A owed Bank B $100,000, and Bank B owed Bank A $25,000, the value after netting would be a $75,000 transfer from Bank A to Bank B ($100,000 - $25,000).