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What is a portfolio of securities? A portfolio is a fancy word for the sum of all the financial ‘things’ you hold, such as stocks, bonds, commodities, currencies and cash (or cash equivalents). [Read More]
What is the best way to build a portfolio? When you’re building a portfolio, the best thing you can do is determine what you’re trying to accomplish and then work backwards. [Read More]
How do I measure risk? How do you feel about risk when it relates to money? You must answer this question first. Click here to learn more. [Read More]
What do you think about money? One of the most important things in you’ll ever do is learn about money. We touch on some high-level concepts regarding money to get you started on your investing journey. [Read More]
Why does risk matter? Risk is a measurement. Fear is a feeling/reaction. They are very different. Learn more by clicking here. [Read More]
What is a yield? Yield refers to the earnings (your payments from a stock you hold) generated and then realized (that you get to keep) on an investment over a period. [Read More]
What is a dividend? A dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company's net profits. [Read More]
What are earnings? Earnings, and the circumstances relating to them, give a barometer/indicator of whether a business will be profitable and successful in the long run. [Read More]
What is ex-dividend date?The ex-dividend date or "ex-date" is the day the stock starts trading without the value of its next dividend payment. [Read More]
What is an Exchange Traded Fund?An exchange-traded fund (ETF) is a basket of securities – stocks, bonds, commodities or a combination of these – that you can buy and sell through a broker. They are as easy to buy as stocks. ETFs offer the best attributes of two popular assets: mutual funds and targeted funds. [Read More]
What is a mutual fund? A mutual fund pools money from multiple investors – often thousands – to invest in a range of stocks, bonds and other assets. [Read More]
What does standard deviation mean? Standard deviation is a measure of how much an investment's returns can vary from its average return. It’s a measure of volatility and in turn, risk. [Read More]
What does volatility mean?Volatility refers to the amount of uncertainty or risk related to the size of changes in a stock's value. [Read More]
What does volatility do to my portfolio? vigtec helps you measure what you’re actually holding (or about to purchase) in terms of historical realized volatility. [Read More]
What is a hedge?You have, whether you know it or not, engaged in hedging in your life – sometimes many times in your life. Click here to see how. [Read More]
Is ‘Hedging’ like buying insurance on my stocks? The simplest way to understand hedging is to think of it as buying insurance. [Read More]
What is Active Management?Active management is one of the few terms in finance that is actually what it says; it means that fund or portfolio is “actively managed” by traders with the intention of generating alpha. [Read More]
What is Passive Management?Passive management is the opposite of active management. Funds that are passively managed are set to mimic specific market indices, relying on gains in the market as a whole to drive gains in the fund. [Read More]
What is a Central Bank? A central bank is a financial institution given privileged control over the production and distribution of money and credit. [Read More]
How do interest rates affect the world and how do Central Banks manipulate them? Interest rates are the prices a bank has to pay to borrow money from the Federal Reserve Bank (or any central bank outside of the United States), in turn affecting the opposite side where banks then lend money to consumers at a higher rate and keep the difference (the ‘spread’). [Read More]
How do interest rates affect my portfolio? The better question is how do interest rates NOT affect your portfolio. [Read More]
What is a futures contract?Futures are derivatives, they base their price on an underlying instrument. [Read More]
What is a forward contract?A forward contract is similar to a futures contract except with a few differences; [Read More]
What is the Multiplier Coefficient? In mathematics, a multiplier is a coefficient that a number or variable is multiplied by to either increase or decrease the size of that original number or variable. In economics and finance, multipliers are economic factors that lead to increases or decreases in other economic or financial variables. [Read More]
What is a SWAP? A SWAP is a derivative because it derives its value from the underlying instruments cash flows and liabilities. [Read More]
What is a mortgage backed security?Mortgage backed securities are derivatives because they derive their value from an underlying basket of mortgages. [Read More]
What is speculating? Speculating is like betting. Speculating is investing with the hope of gain but the risk of loss. [Read More]
What is hedging downside risk?Hedging is the practice of offsetting the downside risk of one instrument with the upside potential of another instrument. [Read More]
What is an asset class?Asset classes are different investment vehicles, and all the securities in a given vehicle are governed by the same laws and regulations. [Read More]
What is a portfolio?A portfolio is a basket of various financial asset classes put together based on the investment strategy of either the trader or investor. [Read More]
What is asset allocation?Asset allocation is the process of deciding what percentage of the portfolio each asset class will hold. [Read More]
What is rebalancing?When it comes to investments, rebalancing refers to periodic process of changing the asset class allocation within a portfolio. [Read More]
What is portfolio insurance?In the trading world, portfolio insurance is the process of protecting one’s portfolio from risk. [Read More]
What is an emerging market?Emerging market is a term that refers to the economy of a developing country that is moving to broader exposure to the world markets. [Read More]
What is a government bond?Government bonds are a type of debt security that is issued by a specific government. [Read More]
What are institutional investors?Institutional investor is the term given to the group of companies that invests capital for other people. They are one of the larger groups of investors, and as such, they have a large amount of influence within financial markets. [Read More]
What is an 'investment policy statement' (IPS)?An investment policy statement is like a contract between a portfolio manager and her client. It explicit states several key items such as the client’s investment goals and risk tolerance as well specific asset allocation guidelines. [Read More]
What are pension funds? Pension funds are a specific type of defined-benefit plan where the size of fund is increased by contributions from companies, unions, and other entities, as well as any gains attained through the fund’s performance. Pension funds are becoming rare in the private sector, but surveys suggest that as much as 90% of public sector employees who are eligible for some type of retirement benefit are covered by a pension fund. [Read More]
What are investment objectives? Investment objectives are the goals that the investor has for either a specific investment or a larger portfolio. They represent the corner stone of trading strategy development, as a plan cannot be put into place without first discussing the goals the investor would like to attain. [Read More]
What is MPT (modern portfolio theory)? Modern portfolio theory (also known as MPT) is a theoretical construct that looks at how investors with a low risk tolerance can build a portfolio that will generate the maximum return given their risk tolerance. At the core of MPT is the philosophy that potential individual investments be evaluated from the standpoint of how they impact the portfolio’s risk profile, and not as a standalone risk assessment. [Read More]
What is an expected return? Expected return is exactly what it sounds like: It is the return that an investor expects to earn at the end of a particular investment. While it does allow investors to account for multiple different outcomes, it does not include any type of risk component, so investors would need to add an additional indicator to expected return to review the potential risk of the investment. [Read More]
What is market risk?Market risk (also known as systemic risk) is the probability that an investor will lose money due to macroeconomic events that affect the entire market as a whole. Unlike specific risk (risk specific to a company or sector), market risk cannot be neutralized through portfolio diversification. [Read More]
What is efficient market theory?One of the key components of modern financial theory, the efficient market theory hypothesizes that all relevant information is included in the price of a share of a security, and therefore, it is impossible to generate alpha consistently. According to the efficient market theory, the only way to generate any type of alpha is to pursue risky investments with the hope that they pay off. [Read More]
What is variance? Variance is a statistical tool that seeks to measure the spread of numbers in a given set of data. When applied to markets, it is utilized to compare different investment options in regard to their volatility, which then can be used to properly balance a portfolio in terms of diversification. [Read More]
What is correlation? Correlation is a statistical tool that seeks to provide a numerical value to the relationship between two different variables. The output of a correlation model is known as the correlation coefficient and will be between -1.0 and 1.0. If a value less than -1.0 or greater than 1.0 is returned, then there was some type of error in the calculation and it needs to be redone. [Read More]
What is equal weighted? Equal weight refers to a type of portfolio weighting where all of the securities or security types have the same percentage in the portfolio. This is in contrast to market-cap weighted, where the percentage of each security in a portfolio is in proportion to its market-cap size versus the other securities, or price-weighted, where the percentage of each security is determined by the security’s price. [Read More]
What is rate of return (RoR)? Rate of return (also known as RoR) is similar to return on investment (ROI) in that it is trying to determine the percentage of loss or gain on a particular investment for a given time period. RoR is a percentage, just like ROI, and is the difference between the current value and the initial value, divided by the initial value of the security in question. That answer is then multiplied by 100% to get the percentage of loss or gain. [Read More]
What is unsystematic risk? Unsystematic risk, also known as specific risk, is the risk that is particular to a specific organization or industry. There are two main types of unsystematic risk: Business risk and financial risk. [Read More]
What are historical returns? The past performance of a security in terms of price, dividend, yield, and other metrics are often referred to as the historical returns of that security. Historical returns play a substantial role in technical analysis, as investors and analysts will review them in an effort to identify any trends that might predict future moves in the security. [Read More]
What is expected value (EV)?Expected value (EV) is one of the few terms in finance that is exactly what its words indicate: It is the expected value of an investment at a specific point in time. Expected value is similar to expected return; instead of multiplying the various return rates by their corresponding probabilities like expected return, expect value multiplies the various values by their corresponding probabilities and then summing those products. [Read More]
What is the fat tail? A fat tail is a term that is used to describe a distribution that is other than normal. A normal distribution is known as a bell curve and is equally distributed about the mean value. A skewed distribution is one that is skewed either to the left or right of the mean, meaning that the bell shape of the distribution is more towards the left or right side of the graph. This large shape is known as the fat tail. [Read More]
What are tail risks? Tail risk is a statistical concept that has been adapted to the world of finance to quantify a specific type of risk. In finance, tail risk is the probability that a substantial loss or gain will occur due to some unforeseen event or cause. For investors, they are more concerned about minimizing the chance of loss in the scenario above. [Read More]
What is the economic cycle? The economic cycle is a description of the different periods that an economy goes through over the course of time. There are four stages in the economic cycle that look like a sine wave, and economies go through multiple cycles over the course of their existence. [Read More]
What is GDP? GDP stands for gross domestic product, which is a key economic metric that analysts and investors use to gauge the size and health of an economy. GDP is the sum monetary value of all the goods produced and services delivered over the course of a specific amount of time, usually expressed as a value per year. [Read More]
What is a recession? Generally speaking, recession is the term that is used to describe a period of time that has prolonged decline in macroeconomic activities. Historically, a recession was declared if there were two consecutive quarters of macroeconomic decline. However, in recent years, several financial research firms have modified that definition to be reduced to a smaller period of time, usually a couple of months. [Read More]
What is a depression? Depression is the term that is used to describe a severe recession. While the criteria for a recession are somewhat broad, the criteria for a depression are specific. In order for a recession to be declared a depression, the gross domestic product of a nation or region must drop by 10% within a specific year OR the recession must last at least three years in length. Due to these specific criteria, there has been only one declared depression in the past 160 years. [Read More]
What is fiscal policy? Fiscal policy is the term given to describe the use of spending and tax policies by governments in an attempt to shape and influence macroeconomic conditions. The concept of fiscal policy is the product of John Maynard Keynes, an economist who believed that governments should exact a more overt influence on the economy to maximize expansion and peaks and minimize contraction and troughs. [Read More]