Weighted Average Loan Age - WALA

What Does it Mean?
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A dollar-weighted average measuring the age of the individual loans in a mortgage pass-through or pooled security, such as Ginnie Mae or a Freddie Mac security. The WALA is measured as the time in months since the origination of the loans, with the weighting based on each loan's size in proportion to the aggregate total of the pool.

Investopedia Says:
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The weighted average age will change over time as some mortgages get paid off faster than others. Based on the issuer of the mortgage-backed securities (MBS), the WALA may be weighted on the remaining principal balance dollar figure, or the beginning notional value of the loan.

The flip side of the WALA is the weighted average maturity (WAM), which is a dollar-weighted measure of the months remaining until the principal amounts are completely repaid on each loan in the pool.

What Does it Mean?
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A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, which contributes to further pessimism. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

Investopedia Says:
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A bear market should not be confused with a correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.

Capital Gains Tax

What Does it Mean?
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A type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.

Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.

Investopedia Says:
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Most countries' tax laws provide for some form of capital gains taxes on investors' capital gains, although capital gains tax laws vary from country to country. In the U.S., individuals and corporations are subject to capital gains taxes on their annual net capital gains.

It is important to note that it is net capital gains that are subject to tax because if an investor sells two stocks during the year, one for a profit and an equal one for a loss, the amount of the capital loss incurred on the losing investment will counteract the capital gains from the winning investment.

Depreciation Recapture

What Does it Mean?
The amount of gain received from the sale of depreciable capital property that must be reported as income. Depreciation Recapture is assessed when the tax basis of an asset exceeds the sale price. The difference between these figures is thus "recaptured" by being reported as income.
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Investopedia Says...
When property is depreciated, the basis of the property is reduced by the amount of depreciation taken. If the sale price is larger than amount of depreciation that has been taken, then the difference will be reported as either ordinary income or capital gain, depending on the type of property that is sold.

For example, suppose that Frank buys business equipment for $10,000 and uses it for eight years. The total depreciation deduction is $6,000. Then he sells the equipment for $6,000. He must declare a "recaptured" gain of $2,000, the difference between the actual sales price and the depreciated tax basis of $4,000 ($10,000-$6,000).

Warren Buffett

What Does it Mean?
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Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire Hathaway and arguably the greatest investor of all time. His wealth fluctuates with the performance of the market but as of 2008 his net worth was estimated at $62 billion, making him the richest man in the world.

Investopedia Says:
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Buffett is a value investor. His company Berkshire Hathaway is basically a holding company for his investments. Major holdings he has had at some point include Coca-Cola, American Express and Gillette. Critics predicted an end to his success when his conservative investing style meant missing out on the dotcom bull market. Of course, he had the last laugh after the dotcom crash because, once again, Buffett's time tested strategy proved successful.

Stop Loss Order

What Does it Mean?
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An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. 

Also known as a "stop order" or "stop-market order".

Investopedia Says:
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In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%. 

It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time.

Short Selling

What Does it Mean?
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The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Investopedia Says:
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Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price. 

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales..

Chartered Financial Analyst - CFA

What Does it Mean?
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A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas such as accounting, economics, ethics, money management and security analysis.

Investopedia Says:
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Before you can become a CFA charterholder, you must have a minimum of three years of investment/financial experience. To enroll in the program, you must hold a bachelor's degree.

Earnings Per Share - EPS

What Does it Mean?
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The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Investopedia Says:
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Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. 

For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

Generally Accepted Accounting Principles - GAAP

What Does it Mean?
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The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Investopedia Says:
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GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary!

That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to scrutinize its financial statements.

Bo Derek

What Does it Mean?
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A slang term used to describe a perfect stock or investment. In the 1979 hit movie "10", actress Bo Derek portrayed the "perfect woman", or "the perfect 10". Investopedia Says: ------------------------------------------------------------ This term was used more often in the early 1980s, after the movie "10" first came out. Nowadays, the name of a more current celebrity, like Jennifer Lopez, might be used in finance jargon.

Price-Earnings Ratio - P/E Ratio

What Does it Mean?
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A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

 

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). 

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
 
Also sometimes known as "price multiple" or "earnings multiple". 

Investopedia Says:
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In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. 

 
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of  current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Compound Annual Growth Rate - CAGR

What Does it Mean?
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The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

This can be written as follows:



Investopedia Says:
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CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Don't worry if this concept is still fuzzy to you - CAGR is one of those terms best defined by example. Suppose you invested $10,000 in a portfolio on Jan 1, 2005. Let's say by Jan 1, 2006, your portfolio had grown to $13,000, then $14,000 by 2007, and finally ended up at $19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value ($19,500 / $10,000 = 1.95) raised to the power of 1/3 (since 1/# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).
1.2493 - 1 = 0.2493
Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.

Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA

What Does it Mean?
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An indicator of a company's financial performance which is calculated as follows:
EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.

Investopedia Says:
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EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't warranted.

A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.

How To Set A Forex Trading Schedule

Many first-time forex traders hit the market running. They watch various economic calendars and trade voraciously on every release of data, viewing the 24-hours-a-day, five-days-a-week foreign exchange market as a convenient way to trade all day long. Not only can this strategy deplete a trader's reserves quickly, but it can burn out even the most persistent trader. Unlike Wall Street, which runs on normal business hours, the forex market runs on the normal business hours of four different parts of the world and their respective time zones, which means the trading day lasts all day and night. So what's the alternative to staying up all night long? If traders can gain an understanding of the market hours and set appropriate goals, they will have a much stronger chance at realizing profits within a workable schedule.

Know the Markets
Currency trading is unique because of its hours of operation. The week begins at 6pm EST on Sunday and runs until 4pm on Friday.

But not all hours of the day are equally good for trading. The best time to trade is when the market is most active. When more than one of the four markets are open simultaneously, there will be a heightened trading atmosphere, which means there will be greater fluctuation in currency pairs. When only one market is open, currency pairs tend to get locked in a tight pip spread of roughly 30 pips of movement. Two markets open at once can easily see movement north of 70 pips, particularly when big news is released. (Need a refresher on forex concepts? Common Questions About Currency Trading covers the basics.)

First, here is a brief overview of the four markets (hours in EST):
New York (open 8am to 5pm): According to "Day Trading the Currency Markets" (2005) by Kathy Lien, New York is the second largest forex platform in the world and is watched heavily by foreign investors because the U.S. dollar is involved in 90% of all trades. Movements in the New York Stock Exchange (NYSE) can have an immediate and powerful effect on the dollar. When companies merge and acquisitions are finalized, the dollar can gain or lose value instantly. (Learn one way to predict movements in the NYSE in Which Direction Is The Market Heading?)

Tokyo (open 7pm to 4am): Tokyo takes in the largest bulk of Asian trading, just ahead of Hong Kong and Singapore. It was the first Asian trading center to open. The best currency pairs to aim for (for traders looking for a lot of action) are USD/JPY, GBP/CHF and GBP/JPY. The USD/JPY is an especially good pair to watch when the Tokyo market is the only market open because of the heavy influence the Bank of Japan has over the market. (Learn about this influence in Profiting From Interventions In Forex Markets, and about currency pairs in Using Currency Correlations To Your Advantage.)

Sydney (open 5pm to 2am): Sydney is where the trading day officially begins, and while it is the smallest of the mega-markets, it sees a lot of initial action when the markets reopen on Sunday afternoon because individual traders and financial institutions try to stabilize after all the action that may have happened since Friday afternoon.

London (open 3am to noon): The United Kingdom dominates the currency markets worldwide, and London is its main component. London, known as the trading capital of the world, accounts for roughly 34% of global trading, according to a report by IFS London. The city also has a big impact on currency fluctuations because the Bank of England, which sets interest rates and controls the monetary policy of the GBP, has set up shop in London. Forex trends often originate in London as well, which is a great thing for technical traders to keep in mind. (Learn more about how the central banks impact currency pairs in Interest Rates Matter For Forex Traders.)

Consumables

Consumables
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Goods used by individuals and businesses that must be replaced
regularly because they wear out or are used up. Consumables
can also be defined as the components of an end product that
are used up or permanently altered in the process of
manufacturing, such as semiconductor wafers and basic chemicals.


Investopedia Says:
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Stocks of companies that make consumables are considered to
be relative safe harbors for equity investors when the economy
shows signs of weakness. The reasoning is simple: people will
always need to purchase groceries, clothes and gas no matter
what is going on in the broad economy.

Many of the items measured in the basket of goods used to
calculate the Consumer Price Index (CPI) are consumables;
inflation in these items is closely watched because it can
lower the discretionary income people have to spend on items
such as cars, vacations and entertainment.

Baby Boomer

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A person who was born between 1946 and 1964. The baby boomer
generation makes up a substantial portion of the North American
population. Representing nearly 20% of the American public,
baby boomers have a significant impact on the economy. As a
result, baby boomers are often the focus of marketing campaigns
and business plans.


Investopedia Says:
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After the end of World War II, birth rates across the world
spiked. The explosion of new infants became known as the baby
boom. During the boom, an estimated 77 million babies were born
in the United States alone! The large increase in population
produced a substantial rise in demand for consumer goods,
stimulating the post-war economy.

Peak Oil

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A hypothetical date referring to the world's peak crude oil
production, whereby following this day, production rates will
begin to diminish. This concept is derived from geophysicist
Marion King Hubbert's "peak theory", which proclaims that oil
production follows a bell-shaped curve.


Investopedia Says:
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Because oil is a non-replenishing resource, there is a
limit to how much the world can extract and refine. Peak
oil is the day that oil production reaches a maximum and
will subsequently begin to decline until full depletion is
ultimately reached.

Fair Trade Investing

What Does it Mean?

Investing in companies or projects that promote fair trade with producers in developing nations. Basic fair trade philosophies call for equal pay for suppliers of raw goods and materials as well as respect for strong environmental practices and a focus on the trading relationships between advanced economies and developing nations

Prenuptial Agreement

What Does it Mean?

A type of contract created by two people before entering into marriage. This contract could outline each party's responsibilities and property rights for the duration of the marriage. More commonly, prenuptial agreements outline terms and conditions associated with dividing up financial assets and responsibilities if the marriage dissolves.