Financial Lexicon 101: Summary Of Key Terms

Even as Bank of America is preparing to restart securitization and thus provide the single greatest gift to creditors the world over, as this is merely the first step in wiping out/transferring yet more trillions in private sector debt, it has done the public a bigger favor by compiling the following list of key terms for all those lost in the current labyrinth of definitions, acronyms and euphemisms. Since following the Goldman legal plight will require a facility with some heretofore quite complex constructs, the following catalog is a must read for all financial novices.

We invite readers to add their own definitions, humorous or otherwise.


ABS – asset-backed securities

A type of note, bond or certificate backed by a pool of financial assets that are transferred to a bankruptcy-remote vehicle or special purpose vehicle (SPV). The SPV issues the notes, bonds or certificates. The cash flows related to the financial assets are used to make payments of the notes, bonds or certificates. The ratings of the notes, bonds or certificates depend upon the expected performance of the transferred financial assets and the structure of the notes (i.e., subordination, reserve accounts and/or third-party guarantees).

ARM - adjustable rate mortgage

A mortgage loan whose interest rate varies over time and is tied to a floating rate, such as LIBOR or MTA.


A classification of mortgage borrower according to creditworthiness and other characteristics. Alt-A borrowers are typically comparable or slightly less creditworthy than prime borrowers, and also have other characteristics that make assessment less straightforward, such as low documentation with a mortgage
loan application.

Auto ABS

A type of ABS backed by a pool of retail auto loans, retail auto leases, commercial floorplan loans, or commercial fleet leases. Transactions can be structured as closed pools (no additional loans/leases added to the pool) or revolving pools (additional loans added to pool). Most auto ABS make principal payments to the senior then the subordinated classes. The first retail auto loan ABS was issued in 1985 and represents the largest subsector in auto ABS.

Auto loans

Second largest and oldest subsector in ABS. Auto finance companies issue securities backed by underlying pools of auto-related loans. Three categories: prime, nonprime, subprime. Most auto ABS are supported by prime loans – those made to borrowers with very strong credit histories. But some auto ABS are collateralized by loans to subprime (also called B, C and D) borrowers. Loans to individual car buyers are amortizing assets.

Bid-ask spread

The difference between the highest price a buyer of a security or other asset will pay, and the lowest price a seller is willing to offer. Usually, the more liquid an asset, the lower the bid-ask spread.

Call option

An option contract or agreement giving the investor the right (but not obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period (the expiration date of the call).

CDO - collateralized debt obligation

A structured credit product backed by a pool of bonds, loans, or other assets.

CMO - collateralized mortgage obligation

A set of securities backed by a pool of mortgage pass-through securities or mortgage loans, with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.

CMBS - commercial mortgage-backed security

A bond secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and commercial lenders. Usually demonstrate less prepayment risk than other types of MBS due to the structure of commercial mortgage loans.

CDR - conditional default rate

A rate equal to the proportion of principal balance paid off involuntarily over a certain period of time on an annualized basis

CPR - conditional prepayment rate

A rate equal to the proportion of principal balance paid off over a certain period of time on an annualized basis. Depending on the use, CPR represents voluntary prepayments alone or, more rigorously, combined voluntary and involuntary prepayments.

CRR - conditional repayment rate

A rate equal to the proportion of principal balance paid off voluntarily over a certain period of time on an annualized basis

CV - convertible bond

A bond that can be converted into common stock, usually at the discretion of the bondholder.

Credit card ABS

A type of ABS backed by a pool of credit card receivables arising under specified accounts. Cardholder principal payments related to these and subsequently purchased receivables are used to make required payment on the credit card ABS. In addition, after all required payments, cardholder payments are used to purchase new receivables or revolve balances. Cardholder finance charge payments cover trust expenses and defaults related to the receivables.

Credit card receivables

Securities backed by credit card receivables have been benchmarked for the ABS market since they were first introduced in 1987. Credit card holders may borrow funds on a revolving basis up to an assigned credit limit. The borrowers then pay principal and interest as desired, along with the required minimum monthly payments. Because principal repayment is not scheduled, credit card debt does not have an actual maturity date and is considered a nonamortizing loan.

DQ - delinquent

The state of having missed payments on a loan. A borrower who has missed two months’ worth of payments is labeled 60, or 60-89, days delinquent, for instance.


A financial product that derives its value from an underlying security.


Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. Generally speaking, a bond with a duration of 2.0 is expected to move 2% higher (or lower) for a 100 basis point parallel shift down (or up) in the yield curve.

There are various duration measures. Duration to maturity assumes that the bond will be redeemed at its final stated maturity regardless of future changes in interest rates. Duration to worst assumes that the bond will be redeemed at the workout date that corresponds to its current yield to worst regardless of future changes in interest rates. Effective duration uses an option model to adjust anticipated price changes for the changing value of embedded options (such as call and put features) in a rising or falling interest rate environment.

Excess return

The total return of a bond (or index) minus the total return of a risk-matched basket of governments, both measured in local currency terms. Excess return is also often measured relative to a risk matched basket of interest rate swaps.

FFELP - Federal Family Education Loan Program

Most common student loan program and is guaranteed by the US Department of Education (DOE) at rates ranging from 95-98%.

FICO score

A score that attempts to grade the likelihood that a borrower will pay his or her debts, based on information on the borrower’s credit report information. FICO scores are used as a measure of borrower credit-worthiness by lending institutions and primary and secondary market participants.

FRM - fixed rate mortgage

A mortgage loan whose interest rate is fixed over time.

GSEs - government sponsored enterprises

A group of several finance corporations created by the US Congress in order to increase the availability of credit to certain sectors of the economy. Fannie Mae and Freddie Mac are GSEs in the mortgage loan sector. While the debt issued and guaranteed by GSEs is not explicitly backed by the US government, it is often treated as if it has an “implicit guarantee.”


The margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction or the value lent by the lending side.

HG - high grade bond

An investment grade bond (or corporate bond) with a particularly high rating and a low risk of default. S&P rates these bonds BBB and above, and Moody's gives these a rating of Baa3 and above.

HY - high yield bond

A non-investment-grade bond (or junk bond) that has a higher risk of default, thus typically pays higher yields than better quality bonds, to make them more attractive to investors. These bonds carry a Standard & Poor’s rating of BB+ or lower and a Moody's rating of Ba1 or lower.

HAMP - Home Affordable Modification Program

Part of the government’s Making Home Affordable program, HAMP provides a set of guidelines to mortgage loan servicers in implementing loan modifications. Broadly, servicers are to follow a waterfall of steps to reduce a borrower’s monthly mortgage loan payment to 31% of their pretax monthly income, and compare this with the alternative of liquidating the home.

HARP - Home Affordable Refinance Program

 Part of the government’s Making Home Affordable program, HARP is designed to support the flow of lending by streamlining the refinancing process for eligible borrowers.

HELOC - home equity line of credit

A line of credit extended to a borrower, backed by the equity in the borrower’s home.

HELs - home equity loans

A loan backed by the equity in the borrower’s property as collateral. Home equity loans are classically second-lien loans, as distinct from the first mortgage on a property. The secondary MBS market sometimes uses the term HEL MBS to refer to MBS backed by subprime mortgages.

HPA - home price appreciation

The amount by which home prices have increased (or decreased, if negative) over a certain period of time. Typically, home price appreciation on a property is measured by comparison with a representative home price index.

LTV - loan to value ratio

A measure of how leveraged a loan is. Calculated by dividing the mortgage loan amount by the value of the property, given in percentage form.

MBS – mortgage backed securities

Securities backed by a collection of mortgages. In MBS, payments of interest and principal from the borrower flow through to MBS investors. MBS increase credit availability to borrowers by allowing institutions that may not have direct access to lending funds to lend mortgages via liquidity provided by primary and secondary market investor funds.

Media effect

For mortgage loans, a drop in mortgage rates typically results in a wave of borrower refinancing. The effect may be exacerbated by the advertisement of lower rates in the media.

MSA - Metropolitan Statistical Area

A US geographical region defined by the US Office of Management and Budget for use in collecting and tabulating Federal statistics. MSAs are often used as a geographical unit by which to group borrowers for analysis or homes for price changes.

Mezzanine debt

Debts that incorporate equity-based options, such as warrants, with a lowerequity debt. It is actually closer to equity than debt, because the debt is only important in the event of bankruptcy. Mezzanine debt is frequently associated with acquisitions and buyouts where it may be used to prioritize new owners ahead of existing owners in the event of bankruptcy.

Negative convexity

A bond characteristic where the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. Most mortgage bonds are negatively convex.


Private student loans. Students borrow non-FFELP to supplement educational costs if FFELP loans do not cover all fees.

OAS - option adjusted spread

The amount that the yield curve is shifted in order to match the present value of a bond’s discounted cash flows to its price while taking account of any embedded optionality such as call and put features. For MBS, the option adjustment takes account of the fact that borrowers have the option to prepay their loans and are more inclined to do so when rates are low and less so when rates are high. The OAS calculation uses the entire yield curve to discount cash flows (ie, each cash flow is discounted at a rate from the corresponding point on the yield curve). OAS is typically measured relative to either the government or the swap curve.

OC - overcollateralization

The difference between the amount of securities and the amount of related collateral. OC acts as a form of credit enhancement.

Par value

The amount the issuer agrees to pay at the maturity date; also called the maturity value or face value.

Pass-through rate

The yield paid to the investors of a mortgage-backed security. The pass-through rate is lower than the average interest rate paid on the underlying mortgage loans, because guarantee and management fees also must be paid out of the interest income generated by them.

PIK - payment in kind

A bond that gives the issuer an option (during an initial period) either to make coupon payments in cash or in the form of additional bonds, as opposed to cash payouts.

Prepayment risk

The risk that a borrower will repay a loan before its maturity.

PPIP - Public Private Investment Program

A government program designed to support the functioning of secondary securities markets and to aid in the repair of bank balance sheets. The first component, the Legacy Securities PPIP, is designed to support the secondary markets for CMBS and non-agency RMBS via Treasury lending and profit sharing with nine money managers. The second, the Legacy Loans PPIP, is designed to provide lending and profit sharing toward the purchase of assets from distressed banks.

Put bond

A bond that the holder may choose to either exchange for par value at some date or to extend for a given number of years. If the price is above par, the put is a premium put.

REIT - real estate investment trust

Publicly traded companies that pool investors' capital to invest in various real estate ventures. There are three types of REITS: equity REITs buy properties that produce income; Mortgage REITs invest in real estate loans; Hybrid REITs usually make both types of investments. REITs receive special tax considerations and typically offer investors high yields.

REMIC - real estate mortgage investment conduit

An SPV used to pool mortgage loans and issue MBS, which hold commercial and residential mortgages in trust, and issue interests in these mortgages to investors.

REO - real estate owned

Properties are labeled REO after a lending bank takes control of the property after mortgage distress. For instance, if bank declares foreclosure on a property, puts the property up for auction, and no third party bids are offered, the bank itself will take the property onto its books.

RMBS - residential mortgage-backed security

A type of bond backed by mortgages on residential debt such as mortgages, HELs, and subprime mortgages. Focuses on residential, not commercial, debt. Holders of an RMBS receive interest and principal payments that come from the holders of the residential debt.


The process of creating a security backed by a pool of financial assets. The process begins by transferring a pool of assets to a special purpose vehicle (SPV). The SPV funds the purchase of the assets by issuing securities. Cash flows related to the assets are used to make principal and interest payments on the securities issued by the SPV.

Senior convertible note

A debt security that contains an option where the note will be converted into a predefined amount of the issuer's shares. It has priority over all other debt securities issued by the same organization.

Short sale

The sale of a home in which the borrower is unable to pay the mortgage loan on the property, and the borrower and the lender agree to a sale at some loss as an alternative to the foreclosure process.

Short selling

Selling a security the seller does not own but is committed to repurchasing eventually. It is assumed short sellers will be able to buy the stock at a lower cost than the price at which they sold short.

SPV - special purpose vehicle

Financial institutions sell pools of loans to a special-purpose vehicle (SPV), whose sole function is to buy such assets in order to securitize them. The SPV, which is usually a corporation, then sells them to a trust, which repackages the loans as interest-bearing securities and then issues them.

Spread to worst

The yield to worst of a bond minus the rate at the point on the government yield curve that corresponds to the bond’s workout date

SIV - structured investment vehicle

Assets to profit from credit spreads between short-term debt and long-term structured finance products such as (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns.

Student loan ABS

A type of asset-backed security (ABS) backed by loans obtained by students or their parents to fund post-secondary educations. There are two types of student loan ABS; FFELP and private. FFELP loans carry at least a 97% Federal  Government guarantee via the Department of Education. Private student loans supplement FFELP loans but do not benefit  from a Government guarantee. Most student loan ABS fund a closed pool of loans and make principal payments on  a sequential basis to senior and subordinated classes.

Student loans

As a group, student borrowers have relatively high default rates, but this is largely neutralized by government guarantee programs that cover most student loans. However, a small but growing number of student loans do not benefit from government guarantee programs; lenders therefore bear the risk on such loans directly. Student loans are amortizing assets; that is, they must be paid off according to a predetermined schedule.

Subordinated debt

A loan (or security) that ranks below other loans (securities) with regard to claims on assets or earnings. Known also as junior security or subordinated loan.

Subprime loan

A loan offered at a higher interest rate to borrowers of lower credit quality who do not qualify for prime rate loans.

TALF - Term Asset-backed Loan Facility

A Federal Reserve program designed to aid the credit markets by supporting the issuance of consumer ABS and CMBS.

TBA - to be announced

In the MBS market, securities trade on a forward basis before they are actually outstanding. Trading TBA securities refers to the fact that the specifications of pools involved in these forward trades are not announced until 48 hours before trade settlement.

Total return

The percentage change in the economic value of a bond (or index) resulting from changes in the bond’s price as well as the growth in value due to interest income earned during the period. For fixed rate bonds, total return is equal to the bond’s ending price plus accrued interest plus coupon payments received during the measurement period, divided by its starting price plus accrued interest.


A class of bonds in a CMO offering referring to one of several related securitized bonds offered as part of the same deal. Usually referred to as "classes" of notes identified by letter (Class A, Class B, Class C securities, etc.)

T-bill - Treasury bill

A short-term debt obligation backed by the US government with a maturity of less than one year. Maturities are usually 91 days, 182 days, or 52 weeks.

Unsubordinated debt

A loan or security that ranks above other loans or securities regarding claims on assets or earnings. Known as senior security.


A statistical measure of risk based on the deviation of an underlier over time. For example, volatility is low if a price does not change much in the short term, and high if price change is frequent.

Yield curve

The term structure of interest rates across a range of maturities derived from a defined group of financial instruments such as government bonds, interest rate swaps or segments of the credit markets (eg, AA Industrials).

Yield to call

The percentage rate of a bond or note if the investor buys and holds the security until a specific call date. This yield will ultimately be realized only if the security is redeemed on that date.

YTM - yield to maturity

The rate of return anticipated on a bond if it is held until the maturity date assuming that payments received over the life of the bond are reinvested at the same rate. It is essentially the discount rate at which the present value of future payments (investment income and return of principal) equals the price of the security.

YTW - yield to worst

The lowest potential yield that can be received on a callable bond without the issuer actually defaulting. For a callable bond, yield to call is determined by calculating the yield to each potential redemption date and selecting the lowest result.

Zero-coupon bond

A debt security that does not pay interest (a coupon) but is traded at a deep discount and paid in full at face value upon maturity. It is also known as an accrual bond.


American Association of Individual Investors

The American Association of Individual Investors polls a sample of its members and publishes its results weekly. The data derived from these polls are used in a contrary fashion. Typically, a reading of 65% or greater shows excessive optimism and a reading of 40% or lower shows excessive pessimism.

Asset swap

A fixed investment such as a bond with guaranteed coupon payments is being swapped for a floating investment such as an index.

AMLF - Asset-backed commercial paper money market fund liquidity facility

Provides funding at a discount rate to institutions to purchase ABCP from money market funds to allow money market funds to meet redemptions.

At the market

An order to buy or sell a futures contract at the best available price upon entrance into the exchange for execution.


The abbreviation for the Australian dollar and US dollar currency pair or cross. The currency pair indicates how many US dollars (the quote currency) are needed to purchase one Australian dollar (the base currency).

Bank for International Settlements

An international organization fostering the cooperation of central banks and international monetary policy makers. Established in 1930, its main goals are to promote information sharing and to be a key center for economic research.

Base currency

First currency quoted in a currency pair on FX, which is also considered the domestic currency or accounting currency.


Breadth is the ratio of the number of stocks in an index that have positive performance versus the number that have negative performance.

Buying forward

Investment strategy that involves the buying of money market instruments or currencies in anticipation of a price rise or a future increase in demand; looks to take advantage of future and potential profits by buying at a lower price.

Commodity block currency

A currency that belongs to a country whose economy is strongly correlated with the price fluctuations of a particular commodity (eg, Canada and oil, Australian/New Zealand and precious metals, etc.).

Commodity pairs

The three forex pairs that include currencies from countries with large amounts of commodities (ie, USD/CAD, USD/AUD, USD/NZD) and that are highly correlated to changes in commodity prices.

Consensus Bullish Sentiment Indexes

Polls are regularly conducted by various agencies that ask investment industry and trading professionals about their evaluation of various markets. The data derived from these polls are used in a contrary fashion. Typically, a reading of 70% or greater, indicates excessive optimism and the potential for a downward reversal. A reading of 30% or lower usually indicates excessive pessimism and the potential for a bounce.

Consolidation patterns

Prices hardly ever continue straight up or straight down for very long. There are usually corrections within the major trend, which carry prices either sideways or slightly against the trend. These interruptions are known as consolidations.

Core inflation

A measure of inflation that eliminates certain products that can have temporary price shocks that can diverge from the overall trend of inflation and give a false measure of inflation; most often calculated based on Consumer Price Index and excluding certain items from the index that face volatile price movements, usually energy and food products.

Country basket

A derivative security designed to mimic the major index of an international exchange; allows investors to invest in specific foreign markets without restrictive costs.

Country risk

A collection of risks associated with investing in a foreign country, including political, exchange rate, economic, sovereign and transfer risk; varies from one country to the next.

Cross currency

A pair of currencies in FX that does not include the US dollar; one foreign currency is traded for another without first having to exchange currencies into US dollars.

Cross rate

 The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given.

Cumulative advance-decline line (A-D Line)

The most popular measure of market breadth, the cumulative A-D Line is defined as the sum of the daily differences between advancing issues minus declining issues, plotted daily.

Currency basket
A selected group of currencies in which the weighted average is used as a
measure of the value or the amount of an obligation; functions as a benchmark
for regional currency movements.

Currency forward

A forward contract in the FX market that locks in the price at which an entity can buy or sell a currency on a future date.

Currency pairs

Two currencies with exchange rates that are traded in the retail FX market. The rates of exchange between foreign currency pairs are calculated as the factor by which a base currency is multiplied to yield an equivalent value or purchasing power of foreign currency.

Currency swap

A swap that involves the exchange of principal and interest in one currency for the same in another currency; it is considered to be an FX transaction and is not required to be shown on the balance sheet.

Current account deficit

Occurs when a country's total import of goods, services and transfers is greater than the country's total export of goods, services and transfers; this situation makes a country a net debtor to the rest of the world.


Measurement of time between regularly recurring price highs and lows.


A reduction in the level of national income and output, usually accompanied by a fall in the general price level.


A time of economic crisis or bad times in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, many bankruptcies, and a high level of unemployment. A less severe crisis is usually known as a recession.


The supplying of goods and services to retailers and others.

Double tops and bottoms

Double tops (bottoms) are bearish (bullish) reversal patterns. Double tops (bottoms) are usually thought of as two tops (bottoms) at approximately the same price level. To complete the pattern, prices must decline (advance) below (above), and preferably close below (above), the low (high) point established between the two tops. Price projections using this formation are made by measuring the distance between the high (low) area and the low (high) point between the two tops, and projecting that distance below (above) the violation line for a downside (upside) objective.

Dutch disease

A term originating from a crisis in the Netherlands in the 1960s resulting from discoveries of vast natural gas deposits in the North Sea; an economic condition that refers to negative consequences arising from large increases to a country's income.

Either-way market

In the eurodollar interbank deposit market when the bid and offer rates for a particular period are equal; increasing levels of liquidity can narrow the spread between bid and offer rates until the two values are identical, resulting in an either-way market.

Earnings revision ratio

The earnings revision ratio is the breadth measure of earnings expectations that measures the number of stocks for which the consensus EPS estimates have risen versus the number for which they have fallen.


The abbreviation for the euro and US dollar pair or cross for the currencies of the European Union (EU) and the United States (USD); the currency pair tells the reader how many US dollars (the quote currency) are needed to purchase one euro (the base currency).


the official currency of the European Union (EU), currently in use in 16 of the 27 Member States. Participating in the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The euro is printed and managed by the Eurosystem, comprising the European Central Bank (ECB) and the national central banks of those countries that have adopted the euro. Other member states of the EU are: Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom.

European Central Bank

Central bank responsible for the monetary system of the EU and the euro.


The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects against the loss of deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

FDIC: Temporary Liquidity Guarantee Program

A two part program, which fully insures non-interest-bearing accounts and also provides a government guarantee of newly issued bank debt. Both are fee-based programs.

Fed: Commercial Paper Funding Facility (CPFF)

Fed funded SIV to facilitate issuance of commercial paper by banks and corporations by providing a buyer of last resort to organizations for a fee.

Fed: discount window affiliated

Fed: Money Market Investor Funding Facility (MMIFF)

SIV structured with leverage provided by Fed to purchase commercial paper, CDs and bank notes with maturity of 90 days or less.

Forward contract

A cash market transaction in which delivery of the commodity is deferred until after the contract has been made; although the delivery is made in the future, the price is determined on the initial trade date.

Forward discount

A situation where the domestic current spot exchange rate is trading at a higher level than the current domestic futures spot rate for a maturity period; a forward discount is an indication by the market that the current domestic exchange rate is expected to trade lower.

Forward premium

A situation where the spot futures exchange rate, with respect to the domestic  currency, is trading at a higher spot exchange rate than it is currently; a forward premium is frequently measured as the difference between the current spot rate
and the forward rate.


A price gap occurs when there is clearly no overlap between successive trading periods. Gaps indicate enthusiastic buying or selling and can serve as a very powerful trend-validating tool.

Global Wave

The Global Wave quantifies trends in global economic activity. It is an amalgamation of seven components: global industrial confidence, global consumer confidence, global capacity utilization, global unemployment, global producer prices, global credit spreads and the global earnings revision ratio.

Gross Domestic Product (GDP)

The total of goods and services produced by a nation over a given period, usually one year. Gross Domestic Product measures the total output from all the resources located in a country, wherever the owners of the resources live.

Gross National Product (GNP)

The value of all final goods and services produced within a nation in a given year, plus income earned by its citizens abroad, minus income earned by foreigners from domestic production. GNP equals GDP plus net property income from abroad.

Growth investing

Growth investing refers to an investment strategy that emphasizes stocks that are considered to have strong and above-average earnings and/or revenue growth potential. Our Quantessential Growth portfolios provide exposure to a benchmark-aware portfolio of stocks with an optimal tilt toward growth factors (eg, earnings growth, trend earnings growth, forecast earnings growth).

Hard currency

A currency, usually from a highly industrialized country, that is widely accepted around the world as a form of payment for goods and services; a hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid.

Head and shoulders

The head and shoulders price pattern is the most reliable reversal pattern, resembling a person's head and shoulders. The trigger for entering a trade using this formation is the violation of the neckline, preferably with a close. Price projections using this formation are usually made by measuring the distance between the head and neckline, and projecting that value from the breakpoint on the neckline.

Index of industrial production

A quantity index that is designed to measure changes in the physical volume or production levels of industrial goods over time.


Increase in the overall level of prices over an extended period of time.

Interbank market

The financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties; most interbank trading takes place from the banks' own accounts.

Interbank rate

The rate of interest charged on short-term loans made between banks.

Long-dated forward

Refers to contracts that typically involve positions that have settlement dates longer than a year away; sometimes used by companies to hedge certain currency exposures.


The study of the sum total of economic activity, dealing with the issues of growth, inflation and unemployment and with national economic policies relating to these issues.

Major pairs

The four pairs considered to be the most heavily traded in the FX market (ie, EUR/USD, USD/JPY, GBP/USD, USD/CHF).

Market breadth

Breadth is a comparison of advancing stocks versus declining stocks. Positive breadth indicates that more stocks are advancing than declining, and vice versa.

Market sentiment

Sentiment indicators attempt to assess the prevailing psychological tendencies of the general marketplace. They are known as contrary indicators and are most useful when they reach extreme levels.

McClellan Oscillator

The McClellan Oscillator is a short-term breadth momentum indicator that manipulates advancers minus decliners data by calculating the difference between a 19-day and a 39-day exponential moving average. As a general rule, the oscillator reaches an overbought condition as it climbs toward 70 to 100. Conversely, it reaches an oversold condition as it declines toward -70 to -100.

McClellan Summation Index

The McClellan Summation Index is a cumulative sum of the daily McClellan Oscillator readings. The result is a smoother indicator less prone to volatile swings. The Summation Index is not an oscillator, for practical purposes. Rather, it is used as a change-in-trend indicator, ie, when the index begins to turn higher, it triggers a buy signal, and vice versa.

Micro cap

We define stocks with market caps under $200 million as micro caps.


The study of the individual parts of the economy, the household and the firm, how prices are determined and how prices determine the production, distribution and use of goods and services.

Mid cap

We define stocks with market caps between $2 billion and $12 billion as mid caps.

Minimum wage

A wage below which employers may not legally pay employees for specific kinds of employment.


A leading indicator used to gauge the rate of advance or decline of a price pattern in order to make a better assessment of the trend’s strength.

Momentum investing

Momentum investing refers to an investment approach based on the belief that stock price trends are likely to continue. Momentum investing advocates buying stocks that have been outperforming the market irrespective of companies’ underlying value or fundamentals. Our Quantessential Momentum portfolio gives investors exposure to benchmark-aware stocks with an optimal tilt toward momentum factors (eg, 12-month trend price, 6-month price return, 5-week and 30-week price return, etc.).

Monetary base

The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves; typically only includes the most liquid currencies.

Monetary policy

The regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. If the economy is heating up, a central bank can withdraw money from the banking system, raise the reserve requirement or raise the discount rate to make it cool down. If growth is slowing, it can reverse the process - increase the money supply, lower the reserve requirement and decrease the discount rate. The monetary policy influences interest rates and money supply.

Monetary reserve

A nation's assets in foreign currency and/or commodities like gold and silver, which are used to back up the national currency; also provides a cushion for executing central banking functions like adding to the money supply and settling foreign exchange contracts.

Money supply

The total stock of money in the economy; currency held by the public plus money in accounts in banks. It consists primarily of currency in circulation and deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push inflation up; too little money tends to push rates up and prices down, causing unemployment and idle plant capacity. The central bank manages the money supply by raising and lowering the reserves banks are required to hold and the discount rate at which they can borrow money from the central bank. The central bank also trades governmentsecurities (called repurchase agreements) to take money out of the system or put it in. In the US there are various measures of money supply, including M1, M2, M3 and L; these are referred to as monetary aggregates.


A market with only one supplier.

Moving average

Moving averages help smooth a data series to better spot prevailing trends. There are different types of moving averages, the most complicated of them using mathematical formulations to weight more recent data over older data. The simple moving average is constructed by calculating the average price of a security over a specified interval of time, and assigning that value to the last observation in that time interval.

Moving Average Convergence-Divergence (MACD)

The MACD is a price momentum oscillator that is based on the difference between two exponential moving averages (EMA) of the security’s closing price, a 26-period EMA and a faster 12-period EMA. The difference between these two lines (differential) is itself smoothed by an even faster 9-period EMA, which is called the signal line. If the signal line crosses above (below) the differential, the interpretation is made that the price pattern is entering the new phase of positive (negative) acceleration.


National Association of Securities Dealers Automated Quotation System The stock exchange that is concerned heavily with technology stocks.


An unadjusted rate, value or change in value type of measure often reflects the current situation and does not make adjustments to reflect factors such as seasonality or inflation, which provide a more accurate measure in real terms.

Nominal effective exchange rate

The unadjusted weighted average value of a country's currency relative to all major currencies being traded within an index or pool of currencies; weights are determined by the importance a home country places on all other currencies traded within the pool.


We define nonearners as the companies that are forecast to have negative EPS in the current fiscal year.

Outside-range day

An outside-range day is defined as a widely swinging market, resulting in a price range where the high is higher and the low is lower than the previous day’s activity.

Percentage of stocks above their 200-day moving average

An intermediate term gauge of market breadth. As the name implies, the indicator accounts for the number of stocks currently trading above their 200-day moving average and expresses this value as a percentage of all the stocks surveyed.

Primary Dealer Credit Facility (PDCF)

Discount window-type facility for Primary Dealers. Two key differences are: no term facility, the loans are overnight only and eligible collateral is limited to investment-grade securities. The opening of the discount window to organizations other than commercial banks by the Board of Governors of the Federal Reserve marked the first time since the 1930s that lending was made available to noncommercial banks.

Put/call ratio

The ratio is calculated by dividing put volume by call volume. A high ratio indicates relatively more put-buying, which indicates greater market pessimism. Conversely, a lower ratio indicates relatively more call-buying, which indicates greater market optimism. Probably the most widely used sentiment indicator.

Quote currency

The second currency quoted in a currency pair. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.

ROC - rate of change

One of the simplest methods of measuring price momentum is to calculate the rate at which a price pattern changes over a specified period of time. For example, when constructing a 20-day rate of change (ROC) indicator, the current price is divided by the price 20 days ago and the result is expressed as a percentage change over that length of time.

Real effective exchange rate

The weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation; weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other.

Relative Strength Index

The relative strength indicator (RSI) measures the relative internal strength of a price pattern. It attempts to measure the same thing as the ROC indicator, but tries to filter out the erratic swings that the ROC indicator is sometimes prone to exhibit. RSI values range from 0 to 100. Traditionally, a reading of 30 or less indicates an oversold condition, while a reading of 70 or more indicates an overbought condition.


The process of converting a foreign currency into the currency of one's own country; amount that the investor will receive depends on the exchange rate between the two currencies being traded at the settlement time.

Repo rate

Discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash), to contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate.

Reserve currency

A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate; US dollar is currently the primary reserve currency used by many countries.


An area that typically represents a concentration of supply of a security. At this price area, traders are willing to sell. This selling pressure appears to stop an uptrend, at least temporarily, and could serve to move prices lower.


A calculated adjustment to a country's official exchange rate relative to a chosen baseline; the baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (ie, central bank) can alter the official value of the currency.

Reversal day

Typically a new high and a lower close in the same day. For a reversal high, the basic premise is the loss of buying power following a sustained uptrend. The opposite can be said for reversal lows.

Reversal patterns

Reversal patterns are transition areas in which market tendencies begin to shift from bullish to bearish in topping formations, and from bearish to bullish in bottoming formations. Volume usually helps to identify the phase of the reversal formation.

Revision ratio

The revision ratio is the ratio of the number of upward estimate revisions versus the number of downward estimate revisions.

Rounding tops and bottoms (saucers)

Rounding tops and bottoms are very gradual patterns that do not have the obvious, defined breakpoints that characterize other major reversal patterns. The rounding bottom takes on the shape of an elongated "U" or saucer shape. As the pattern drifts to the lowest point of the saucer, the volume dissipates significantly, indicating a lack of investor interest. As the pattern works through the low point and begins to rise, so does the volume, indicating renewed interest. The price pattern for the rounding top is the exact inverse, but the volume pattern remains the same.

Russell 1000 or R1

The Russell 1000 is a large cap index that consists of approximately 1000 names that are generally above $2 billion in market capitalization. This index has a very close correlation to the S&P 500.

Russell 2000 or R2

The Russell 2000 is a small cap index that consists of approximately 2000 names that range from about $80 million to about $2 billion in market capitalization.

Russell Midcap

The Russell Midcap is a mid cap index that consists of approximately 800 names that are generally between $2 billion and $15 billion in market capitalization.

Russell reconstitution or Russell rebalance

Refers to the annual rebalancing of the Russell index family that occurs at the end of June each year. This rebalancing can result in sector shifts in the underlying indexes as stocks move up to the Russell 1000 or down to the Russell 2000.


Insufficient supply or amount of something needed, a shortage of goods or services that are needed.

Single-tranche Open Market Operations (OMOs)

Extension of the Fed’s normal OMOs providing dealers with easier financing for Agency MBS positions. In normal OMOs, dealers would submit distinct bids for Treasury, Agency and Agency MBS financing. In a single-tranche OMO, only one rate is offered, ensuring that the majority of assets financed via this facility are Agency MBS, which typically finance at a higher rate.

Small cap

We define stocks with market caps between $200 million and $2 billion as small caps.

Soft currency

The values of soft currencies fluctuate often, and countries tend not want to hold these currencies due to political or economic uncertainty within the country with the soft currency.

Sovereign bond

A debt security issued by a national government within a given country and denominated in a foreign currency; the foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder.

Sovereign risk

The risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees.

Stock mutual fund cash/assets ratio

Mutual funds typically keep a portion of their assets in liquid securities to answer potential customer redemptions over the short term. The amount of liquid assets (cash) and its proportion to total assets changes depending on market conditions.

Style investing

Style investing is an investment philosophy where rotation within various “styles” is deemed to be important for successful investing. Our Style reports provide recommendations on style rotation based on the direction of the global economic cycle. The reports include style portfolios, which provide exposure to these individual styles.

Supply and demand

Supply is the amount of goods available at a given price at any time. Demand is how many consumers desire the goods that are in supply.


An area that typically represents a concentration of demand for a security. At this price area, traders are willing to buy. This buying interest appears to stop a downtrend, at least temporarily, and possibly serves to move prices higher.


A term used when the quantity of a good supplied exceeds the quantity demanded at the existing price.

Swap dealer

An individual who acts as the counterparty in a swap agreement for the fee (called a spread); these are the market makers for the swap market. Because swap arrangements are not actively traded, swap dealers allow brokers to standardize swap contracts to some extent.


A tax on imports.


A contribution for the support of a government required of persons, groups, or businesses. There are many different kinds of taxes including income, sales, state. local, federal taxes.

Term Auction Facility (TAF)

Derivative of the discount window, the TAF program allows commercial banks to bid on term financing (either 28- or 84-day) using the same collateral allowed for the discount window. Designed to improve a commercial bank’s ability to fund loans and security holdings.

Term discount window

Term version of the discount window. Allows commercial banks to obtain 90-day financing using a broad range of collateral types rather than the overnight loans that traditionally were done via the discount window.

Term Securities Lending Facility (TSLF)/Term Option Program (TOP)

Derivative of the securities lending function. Unlike the normal securities lending function the bond swap that occurs is not overnight but for a 28-day term. The key difference is that dealers are allowed to post non-Treasury collateral and obtain Treasuries in return where the normal program only allowed for a Treasury-to-Treasury swap. The program goal is to improve the ability of dealers to finance non-Treasury positions. The TSLF program now has an attached option facility,
the Term Option Program, or TOP.

Terms of trade

The ratio of a country's average export price to its average import price; also known as the commodity terms of trade. A country's terms of trade are said to improve when this ratio increases, and to worsen when it decreases, that is, when import prices rise at a relatively faster rate than export prices (the experience of most LDCs in recent decades).

The Fibonacci Concept

Number sequence constructed by summing the first two numbers to arrive at the third (1,2,3,5,8,13,21…n). The ratio between any two consecutive integers in the series converges toward 61.8%, which is considered a key retracement level, as is the square of this ratio 38.2%. Fibonacci interpretation of price patterns makes the assumption that important movements will come about in increments of 1.618.

Treasury bill

A short-term debt issued by a national government with a maximum maturity of one year. Treasury bills are sold at discount, such that the difference between purchase price and the value at maturity is the amount of interest.

Treasury: Guaranty Program for Money Market Funds

Extends FDIC-like insurance to certain money market funds for a fee.

Treasury: Supplemental Financing Program (SFP)

Off-cycle Treasury bill program. Bills are issued to public with proceeds deposited at Fed. Allows the Fed to drain liquidity from banking system without selling assets.

Treasury: Troubled Asset Reduction Program (TARP)

Originally designed as a $700 billion asset purchase vehicle this program has morphed into a combined capital injection ($250 billion) and asset purchase program (now $450bn).


Refers to the general direction in which a price is heading. Typically, there are three types: positive/advancing trend, negative/declining trend, or neutral/sideways trading range. Trends are usually classified as being short-term (typically lasting a few weeks), intermediate-term (typically lasting a few months) or long-term (typically lasting a year or more).

Trend lines

Drawing lines through relevant highs or lows gives rise to a trend line. A trend line is among the simplest of technical momentum indicators, but serves a very important function. It is usually an indication of potential support in the price pattern, and its violation is one of the first indications that the prevailing trend might be coming to an end.

Two-way quote

A type of quote that gives both the bid and the ask price of a security, informing would-be traders of the current price at which they could buy or sell the security; also shows the spread between the bid and the ask, giving traders an idea of the current liquidity in the security (a smaller spread indicates more liquidity).

Value investing

Value investing is an investment methodology of selecting stocks that are undervalued or trading far below their “intrinsic” value. Our Quantessential Value regional portfolios give investors exposure to a benchmark-aware selection of stocks with the best value factors (ie, P/E, P/B, EV/EBITDA, P/FCF, etc) within each region.


Volume is a measure of the strength of the current price trend. Volume measures how anxious traders are to establish or close out their positions. Volume should increase in the direction of the major price trend.

Weak dollar

US dollar's value is decreasing relative to one or a basket of foreign currencies; a weak dollar means that a US dollar is exchanged for lower amounts of a foreign currency. The dollar may weaken due to changes in the interest rate and outlook
on the US economy.