A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.
A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
Repos are classified as a money-market instrument. They are usually used to raise short-term capital.
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.
A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty.
For example, let’s say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year’s end, the CD will have grown to $10,500 ($10,000 * 1.05).
CDs of less than $100,000 are called “small CDs”; CDs for more than $100,000 are called “large CDs” or “jumbo CDs”. Almost all large CDs, as well as some small CDs, are negotiable.
A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.
Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.
A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.
The term “outrights” is used in the forex (FX) market to describe a type of transaction in which two parties agree to buy or sell a given amount of currency at a predetermined rate at some point in the future. This type of transaction is also known as a forward outright, an FX forward or a currency forward. A forward outright transaction is mainly used by parties who are seeking to hedge against adverse currency fluctuations or to stabilize a stream of future cash flows by taking advantage of the current rate.
For example, let’s say a U.S company known as ZXY imports most of its materials from the U.K. every six months and the executives believe that the value of the domestic currency is going to decrease. If the domestic currency’s value does decrease, it will take more U.S. dollars to buy the same amount of materials. In this case, a forward outright transaction would be appropriate: the two parties involved can agree on a certain exchange rate today, and when ZXY needs to purchase materials in six months, it will not be affected by adverse changes in the exchange rate.
An outright rate differs from the rate used in the spot market because the parties factor in characteristics such as the volatility of the currencies and their mutual opinion of where they think the exchange rate will be in the future. The disadvantage of using a forward outright is seen when the exchange rate moves in what would have been a favorable direction had the hedge not been implemented. Because the investor agreed to pay a predetermined exchange rate – regardless of what the rate ends up being when the investor makes the purchase – the investor doesn’t stand to gain from favorable changes in the exchange rate.
An increase in the number of outstanding shares of a company’s stock, such that proportionate equity of each shareholder remains the same. This requires approval from the board of directors and shareholders. A corporation whose stock is performing well may choose to split its shares, distributing additional shares to existing shareholders. The most common stock split is two-for-one, in which each share becomes two shares. The price per share immediately adjusts to reflect the stock split, since buyers and sellers of the stock all know about the stock split (in this example, the share price would be cut in half). Some companies decide to split their stock if the price of the stock rises significantly and is perceived to be too expensive for small investors to afford. also called split.
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A stock symbol or ticker symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. “Ticker symbol” refers to the symbols that were printed on the ticker tape of a ticker tape machine.
By Nicola Sargeant
Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the amount that a buyer is willing to pay for a particular security; the ask price is the amount that a seller wants for that security – it is always a little higher than the bid price. The difference between the bid and ask prices is what is called the bid-ask spread and this difference represents a profit for the broker or specialist handling the transaction.
There are several factors that contribute to the difference between the bid and ask prices. The most evident factor is a security’s liquidity. This refers to the volume or amount of stocks that are traded on a daily basis. Some stocks are traded regularly, while others are only traded a few times a day. The stocks and indexes that have large trading volumes will have narrower bid-ask spreads than those that are infrequently traded. When a stock has a low trading volume, it is considered illiquid because it is not easily converted to cash. As a result, a broker will require more compensation for handling the transaction, accounting for the larger spread.
Another important aspect that affects the bid-ask spread is volatility. Volatility usually increases during periods of rapid market decline or advancement. At these times, the bid-ask spread is much wider because market makers want to take advantage of – and profit from – the change. When securities are increasing in value, investors are willing to pay more, giving market makers the opportunity to charge higher premiums. When volatility is low and uncertainty and risk are at a minimum, the bid-ask spread is narrow.
A stock’s price also influences the bid-ask spread. If the price is low, the bid-ask spread will tend to be larger. The reason for this is linked to the idea of liquidity. Most low-priced securities are either new or are small in size. Therefore, the number of these securities that can be traded is limited, making the them less liquid.
The bid-ask spread can say a lot about a security and, therefore, you should be aware of all the reasons that are contributing to the bid-ask spread of a security you are following. Your investment strategy and the amount of risk that you are willing to take on may affect what bid-ask spread you find acceptable.
A swap which comes into effect at a forward start date. In this swap the effective date is not the usual one or two business days after the trade date, but longer time afterwards. For example, a forward-starting swap may take effect 3 months after trade date. This swap is mainly useful for investors seeking to fixe a hedge or cost of borrowing today (on the expectation that rates are set to rise in the future), but without effectively having to start the transaction right away. The calculation of the swap rate for such a swap is not different from that for a standard swap.